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The Importance of a Financial Plan

You can never be sure what’s going to happen to you in life. All you can do is plan for some crisis to arise. And even then, you won’t know if you’ve been able to plan enough. This is where a financial plan comes in.

Of course, there are those out there that say live your life and don’t concern yourself too much with the future. However, you might want to have that plan ready to go when it comes to your finances.

Why a financial plan is important

With the right type of financial plan, you’re able to do two things simultaneously. The first component is that you are building yourself a path to wealth that could take you the whole way through to retirement or even early retirement.

By building out the right type of financial plan, you end up having a guide. One that you can use to achieve financial independence at the bare minimum. Financial independence means you are not financially dependent on anyone else (such as your significant other or your parents). And you can handle all the bills and obligations you may have.

This is the first step of making sure that you pay for everything on time. Meaning you’re heading in the right financial direction.

As you pursue your plan even further, you can go from financial independence to financial security. At this step of the way, you’re working on building your wealth healthily and steadily. Eventually, you have enough money saved up in various financial instruments that you no longer have to generate any type of money and add it to the pool.

Effectively this also means you no longer have to work, and thus you can retire. This is because your money has grown enough to now be safely used with a new financial plan that’s meant to have your funds last.

Financial Freedom

A final step that you can achieve with this financial plan is financial freedom. Whereas the first two options help to build you on a path to no longer work, the final path can help you continue to generate income without a need for you to work.

Financial freedom is where you have minimal to no obligations or debts, and your money is working so hard that it’s producing a comfortable income. This could be seen as passive income through investments of stock that provide dividends to rental income. It can also even be to a business that no longer needs you fully there to run the operation.

As you can see this all starts with a proper design and usage of a financial plan. It’s not just about ‘spending less and saving more,’ but about achieving milestones to help with your wealth growth.

The other item that this helps with is regardless of what stage you’re at in your financial plan, a primary portion of it is to have as a reserve fund for those rainy days, aka emergencies.

So, whether you’re in an accident, hit a recession that led to job loss, or had some form of disability that hampers your ability to work, a financial plan has you start thinking about this sooner than later, with the ability to prepare for this.

Then, whether it happens or not, as you continue to build out your reserve fund, you’re able to build out a nest egg that you can use for emergencies. Helping compound and grow your wealth in the meantime.

What goes into a Financial Plan?

Everything related to money in a nutshell. The initial buildout of your financial plan has you build a personal cash flow statement that helps to show you where you are at financially.

Next, you factor in items such as your current income or inflow and what goes out, which is your expenses. Then you do a deep dive into those expenses and check which ones are necessary (such as rent). Also deciding which ones can be passed up (such as that expensive daily cappuccino).

This helps to visualize just how much you’re able to save. Or if you’re literally living paycheck to paycheck and cannot grow that wealth.

Once you have your financial reality in place, you can start to see what your financials will look like down the line. You can factor in everything from income increases to building out target goals.

These can include saving enough funds for that home deposit or down payment. A good financial plan will separate your funds into savings. Also, things such as reserve funds for emergencies, growth funds for homes, investments, etc.

By building out the visual aspect of this financial plan or even acquiring the expert services of a financial planner, you’ll be able to have goals that you can actually realize if you stick with this plan. That visualization is the first of many steps toward what will go into a financial plan.

Your plan will start to change

You cannot simply have a financial plan and stick to it. It will need constant adjustments. This is especially the case with major changes. These include a job change, marriage or family growth, or property acquisition.

However, each growth in wealth means you can adjust the plan accordingly. Increase what your savings and emergency reserves are and expand what your investment and growth portfolio look like.

As your family wealth starts to grow, you’ll start to build out financial security for your loved ones to protect them as well. Whether you’re setting up separate savings or trust accounts, all of it will need to be included in your financial plan that starts to approach a new level of complexity.

As your plan shifts, you’ll need to also account for different scenarios within your plan. Having three separate ones such as ‘on track,’ ‘better,’ and ‘worse’ is good enough.

This can help to enhance your financial plan to give you forecasts of how long your emergency fund will really last. On the flip side, it’ll say what to do when you’ve fallen into an unexpected windfall. This ensures that you have a consistently reviewed and refined financial plan.

Don’t forget about your health

A big part of financial planning that is often forgotten is your general health and wellbeing. You want to make sure you’ve factored that into your financial planning. You also need to always make sure, as you get older or grow your family, to consider the need for the suitable types of insurance, which can help to supplement your financial plan down the road.

Remember, it’s just a plan

A financial plan is a holistic approach to your current and future finances. The earlier your start, the more time you’ll have to shift and grow and become fiscally responsible. Yet, the bottom line is it’s just a roadmap that you’ve built. If you only build it but don’t fully act on it, then it won’t be of much use to you.

Make sure to take the time and effort to build out a financial plan and keep yourself honest in using that plan and staying on track. You cannot just estimate how much needs to go into your reserve fund. You’ll need to have that amount in there.

Your future self will thank you that you took the time to build out a financial plan with the mindset to achieve that financial freedom you deserve ultimately.