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10 Keys to Financial Planning


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Yara Zakharia

Careful financial planning that is mapped-out in a clear and organized fashion can stretch the value of consumer dollars. To achieve long-lasting monetary benefits, individuals should set priorities and financial objectives, as well as evaluate their assets and plan for future financial needs. In sum, personal financial planning involves the 1) determination of wants, 2) fulfillment of requirements to satisfy those wants, and 3) most efficient methods to achieve those goals. It incorporates every aspect of a consumer's life, addressing significant events and issues such as the following:

  • Management of employment benefits
  • Relocation
  • Unemployment
  • Marriage
  • Health matters (i.e. disability insurance)
  • Aging parents (i.e. assisted living facility, cost of care giving)
  • College planning (i.e. financial aid, college savings plans)
  • Purchase of a home
  • Estate planning (inheritances and gifts, estate taxes)
  • Emergencies (i.e. theft, natural disaster)
  • Remarriage
  • Divorce (tax implications, cash flow management, division of assets and liabilities)
  • Retirement planning
  • Death (i.e. planning for a funeral)
  • Purchase of big-ticket items (i.e. new car)
  • Mutual funds
  • Asset allocation.

The fundamental keys to financial planning are as follows:

1.    Calculation of net worth
Net worth is defined as an individual's assets minus his or her liabilities. This pivotal figure takes into account the consumer's credit card balances, debts such as auto or mortgage loans, current property values, investments, and bank account balances. To arrive at this pivotal figure, consumers should prepare a balance sheet. By computing their net worth, they will be able to know where their finances currently stand and if they are utilizing the right approach to reach their goals.
2.    Investment
Another effective key to personal financial planning is early investing. This enables consumers to earn interest and ensure a comfortable retirement. Individuals with savings, regardless of the amount, should consider investing them. It is recommended that surplus moneys be allocated to an investment purpose. Qualified and certified financial planners provide very useful guidance in this domain.
3.    Repayment of debts
One critical personal financial management practice involves tackling existing debt (i.e. education loans, auto loans, home loans) and paying it off first. Consumers with high-interest loans should repay at least a portion of the principal.  Loans with the highest interest rate should receive priority in repayment.
Another main obstacle preventing individuals from achieving their financial objectives is credit card debt, which typically carries a rate of interest ranging from 15 to 18%. Optimally, none of their credit cards should carry an outstanding balance. Before formulating a financial plan, consumers should eliminate their credit card debt. While clearing their credit card debt, they should pay with cash and reduce their expenses. Individuals can save a considerable amount of money in interest charges by not carrying a balance and paying the amount due on their credit cards each month.
4.    Monitoring of spending
Consumers who spend more than they earn should rein in their spending. They can become disciplined spenders by getting a grip on their credit card usage as well as identifying and avoiding wasteful expenditures. They can cut up or avoid charging credit cards. Studies have shown that the majority of individuals can cut their budgets by approximately 10% without impacting their lifestyle. To identify superfluous expenses, consumers may track their spending by utilizing one of numerous computer spreadsheets and online spending management programs.
5.    Budgeting
Another component of personal financial planning is personal budgeting, which consists of prioritizing one's money. It enables individuals to determine the amount of money needed to satisfy periodic expenses properly. To find out where their money is going and how to trim expenses, consumers should make a list of their expenditures and identify the areas where they are spending unnecessarily; drawing a distinction between wants and needs. They should then devise a monthly plan whereby different expenses are allocated a specific amount of funding. Most importantly, consumers should stick to their budget and if necessary, revise and change it.
6.    Emergency funds
A well-funded emergency/crisis fund is a vital aspect of a personal financial plan. Each month, consumers should allocate a certain amount of funds for emergency reasons. Pay day loans can always be used in a pinch for emergency funds as well.
7.    Retirement nest egg
The earlier that individuals prepare for their retirement, the simpler it is. Consumers should keep tabs on their net worth periodically and make adjustments when necessary. By earning interest and keeping a check on their spending, they can grow a prosperous retirement nest egg.
8.    Contributions to a 401k
9.    Insurance
To protect their loved ones from unforeseen circumstances such as illness, accident or death, individuals can purchase a comprehensive insurance policy. Sound financial planning may also be achieved by purchasing medical insurance and/or long-term care insurance, the latter serving to finance the cost of in-home or nursing home care.
10.    Creation of a trust
By establishing a trust, individuals are benefiting in three distinct ways. First, they are able to protect beneficiaries on the former's death. Secondly, by allocating the assets to beneficiaries, they are able to avoid the diversion of most of those funds to the Internal Revenue Service. Finally, by creating a trust, individuals can minimize their estate taxes.
11.    Record-keeping
Consumers should maintain records of all their bills and investments. This facilitates claiming income tax deductions during tax time.

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