Having a concrete financial plan is like creating a roadmap for your finances to help you achieve your financial goals. Financial planning is an ongoing process that needs continuous monitoring while strategically dealing with the inevitable financial barriers that arise over time. This should include all details of your financial cycle like your income, savings, debts, investments, insurance, and others.
Financial planning is not just about managing your account balance. It is more about having plans in place for cash flow management, debt management, budgeting, and risk management while paving your way to accumulate wealth or achieve financial goals. Do-It-Yourself planning is good but collaborating with a financial planner will provide you with a better approach. Professional financial planners will give you an objective perspective and bring expertise to decisions about investing and what your financial priorities should be.
Why Does Financial Planning Matter?
Establishing clarity around your finances will evidently help you in your overall financial success. But that isn’t just it. Financial planning has a net positive impact on every aspect of your life.
- Financial planning helps you set and reach your goals. Setting financial goals is essential to financial success. Whether it is a long-term goal or a short-term goal, those goals will give you direction and purpose. By having a smart financial plan and strategy, you will be able to achieve your goals in the most effective way.
- Financial planning frames crucial choices and addresses important risks. Investment choices, retirement plans, or picking the best insurance are important decisions that directly affect your financial success. Having a strategically well-built financial plan will assist you with these crucial decisions and mitigate the risks that come along with these decisions.
- Financial planning benefits your emotional and mental health. It is proven that individuals who have their finances planned are less stressed and tend to be more optimistic about their future than those who do not practice financial planning.
- Financial planning helps you stay motivated and committed. When you have a clear purpose, you are more likely to work harder toward that goal. A financial plan provides a clear call to action that lets you accomplish milestones towards your success.
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Financial planning improves financial outcomes. Financial plans provide individuals with an established perspective to balance the present vs the future. Individuals who have their finances planned are most likely prepared for financial emergencies and retirement.
Financial Planning Myths
- Financial planning is only for the wealthy. False. If you are earning income or have some level of financial responsibility, then financial planning is necessary. Financial planning is a path for everyone who aspires to build wealth.
- Professional financial planning is expensive and it is better to do it yourself. There are too many risks that come from this mindset. It impudently disregards the value of your own time, as well as the value that professionals provide when it comes to wealth building and financial planning. The assistance offered by professional financial planners can help you save a lot of money. Financial planners act as financial coaches with an objective eye on money-saving opportunities and smart decision-making.
- Financial planning is only for those who are near their retirement. This common misconception can limit someone’s financial outcomes. A lot of critical financial decisions come into play when we are young. Taking advantage of a professional planner while you are still young will give you the best perspective on a wide diversity of financial growth opportunities.
- Financial planning is all about restrictions and limitations. It is a given fact that investing is one of the main goals of financial planning. However, it goes more beyond that. An effective financial plan should tackle your overall financial management including taxes, insurance, budgeting, debts, and more. Professional financial planners help you create an ideal financial plan that suits your financial situation enabling you to do more of what you love, not less.
Investment
Saving and investing have always been important in planning and ensuring a bright future or retirement. Saving and investment, however, are often used interchangeably. The two share similar roles and characteristics that have utmost importance to our current and future financial state. Saving is putting money into a deposit or bank account and is exposed to no risk of loss but also comes with minimal gain. Investing, on the contrary, is risking more in investments for a larger return, but the potential loss can be large as well.
Savings can be grown through investing. An investment is an asset or a property acquired that has the potential of producing income or profit. The difference between an investment and other assets is that investments go high in value over time and are intended to generate a return, while other assets are intended to be consumed over time.
Types of Investments
There are several types of investments to choose from. While some of them are beginner-friendly, others require more experience. Each type of investment offers different levels of risks and gains.
- Stocks
Also known as shares or equities, stocks are units of ownership in one or more companies. Companies sell shares of stock to investors to raise cash. The success of this type of investment depends on the success or failure of the company. Stock investors make profits when the value of the stock they own goes up and sell for profit.
Stock investors may also gain profit through dividends as some stocks pay dividends to their investors. However, the value of stocks can be volatile from time to time. Investing in stocks is best for long-term investors who can withstand the ups and downs.
- Bonds
Bonds are considered fixed-income investments and come with a lower rate of risks. When you invest in bonds, you provide a loan to the bond issuer. Companies and other institutions usually issue bonds to investors to raise money for new projects or to refinance existing debts. A bond comes with an agreement and terms regarding interest payments and the date on which the loan must be paid. Bond investors gain profit through regular interest payments until the maturity date of the loan.
- Mutual Funds
In simple words, mutual fund companies pool money from investors and use the money to invest in other securities like stocks, bonds, and other assets. When mutual funds make profits, investors are distributed a proportion of that. When the mutual fund share’s value goes up, you can also sell it in the market for profit.
Note: When investing in mutual funds, a fee called the expense ratio has to be paid annually.
- Real Estate
Real estate is one of the most popular types of assets. There are many ways a real estate investor can gain profit. Investors can purchase a house, flip and resell it for a higher price, or make money by renting out the property. Real estate investing comes with many advantages and could be rewarding but just like everything, it also has its fallbacks. Investing in real estate may also come with complex tax implications.
Investing can provide solid results over time and is one of the best ways to beat inflation and build long-term wealth. However, making costly mistakes would be easy, especially if you do not pay attention to what you’re doing. According to experts, following bad advice from unvalidated sources like social media is a common mistake of investors, especially new ones. Having a clear investing goal is important before you go into investing. If you are certain that you want to invest but not sure where and how to start, let our experts guide you in the right direction.
