Why is financial planning important and why should I do it?

You may have heard many people talk about financial planning, from investors to financial planners and advisors, and everywhere in between.  Before we get into the meat of this post, I want to start with what is financial planning.

I created a comprehensive course, the Personal Finance Money Method, that teaches entrepreneurs and business owners how to manage their finances and create a financial plan.  Check it out.

What is financial planning?

Financial planning is how you allocate your assets and protect them throughout your life to ensure you can meet your financial goals. 

Financial goals give you direction for your money; it’s what you want to save for and work for throughout your life.  Examples of financial goals include saving for retirement, saving for a house, investing your money and living off the interest, saving for a family vacation, and the list goes on. 

Financial goals are really good to have because they give you a plan and direction for that plan.  It’s what keeps you motivated throughout your financial plan; knowing that you will achieve that goal and be able to create memories is what many people cherish.

Financial goals can be short term (usually within a year or two), mid term (between 3-9 years) and long term is anything over ten years.  It’s always good to have goals that keep you motivated.

Short term goals could be saving for a big screen tv, saving for a vacation, or something similar.  Mid-term goals can be saving for a house renovation, a down payment for a house, or a car, and long-term goals are retirement and paying off a mortgage.

Financial planning is important if you want to live a comfortable and financially secure life.  You can make a high salary but that won’t mean that you are wealthy.  Wealth is in how you manage your money.

It is important to invest in appreciable assets to build that wealth, and this article will tap into some ways you can achieve that.

How to plan financial goals

You need to know what is important to you.  When you set goals that are important to you and you want to achieve them, that will help keep you motivated.  Financial planning isn’t a “set it and forget it” type of task, you need to be involved in it regularly.  I often compare it to a diet and exercise plan.  If you eat well and exercise for a week, then check back again next year, chances are you will not have reached your goals.

You should also have your financial goals aligned with your values.  When your values are out of alignment with how you are building your wealth then that may not work for you.  For example, if it is important to invest in companies that are socially responsible, then do the research to ensure you are supporting those companies.  If it is important to you to save money for your children’s education, then ensure you are putting money aside for their education.

You need to think about what you hope to achieve in the short term, medium term and long term, and plan accordingly.  It may feel overwhelming at first, but it is important to create that plan.  Without a plan you will likely not reach your goals.

What is the importance of financial planning?

Financial planning is the roadmap or blueprint that help you achieve your goals.  It’s the plan on how you will get there.  It lays out the financial strategy that will help you achieve your goals.

Can you imagine taking a road trip without planning out how long it will take you to get there and what route you need to take, and which route will get you there faster?

A financial plan is your financial roadmap that lays out how it is you will achieve your financial goals.  Smart investors make a plan and follow it.  And yes, you may take a wrong turn or get a little lost on your way, but would you pack up and go home?  Not likely.  You just get back on track and keep on going.  That’s the same with following your financial plan.  It may not be perfect, but when you arrive at your destination there is always a feeling of satisfaction.

Financial planning includes creating a personal budget, a debt repayment plan, saving for your emergency fund, mapping out goals, mitigating risks, and understanding how to invest and pay off your mortgage.

It may seem like a lot to think about at first, but when you take it one step at a time and work your way through it, it is very achievable.

Why is personal finance important?

I’m guessing that your personal financial health is important to you, or you wouldn’t be reading this article.  I would say for the majority of us, having our basic needs met of food and shelter is important to us.  That is a financial goal because we have to pay to have those needs met.

Then most of us strive for more in life.  We want nice houses, nice cars to drive, good food to eat, vacations and fancy electronics, nice clothes, and the list goes on.  So if you strive for more than meeting your basic needs, financial planning will be important to you.

If you have financial goals that are important to you, such as a financially comfortable retirement, you need to create a financial plan that will support that.

Learning how to increase your net worth is an important part of your financial plan.

What do I need to consider in a financial plan?

Many factors come at play, but when you are planning your finances, there are a few main points to consider.  To make sure you have all your basics covered in a financial plan, you will need to consider the following.

Creating a personal budget

This will change over the years, so let your budget be flexible.  As you graduate from school, buy a house, start a family and many other life events change, so will your budget. 

The budget is meant to ensure that you account for all the money that you bring in in a month and all the expenses that go out, then ensure that you save some according to your financial plan, then you have money left over for some spending.

Creating a debt repayment plan

When you borrow money, you pay interest on borrowing that money.  The expenses add up.  I love to use a debt repayment spreadsheet that adds up all my debt and each percentage I pay on that debt, then adds up my total amount of interest expense.

Nobody ever built their wealth by borrowing a lot of money.  Carrying balances on credit cards that charge an average of 19.99% interest just eats away at your wealth.  Make sure you aren’t paying banks excessive interest and reduce your spending habits and pay off those credit cards and lines of credit.

Saving for an emergency fund

An emergency fund is a type of insurance to protect us for when we have unexpected situations such as medical emergencies, car repair bills or anything that requires an immediate cash outlay.  These types of urgent issues usually hit us when we are at our most vulnerable, so ensuring that we have money saved to cover us when these things happen is not only being proactive, but it can be very reassuring.

Insure against risks

Just like you purchase car insurance to protect you in an accident, and you purchase house insurance to protect yourself from ugly surprises, you need to consider your own personal insurance situations to protect your biggest asset, which is you.

You generate money from working and that income is depended on to pay bills such as mortgage and food.  If your income were to disappear, your finances would crumble. 

Protecting yourself from incidences such as critical illness or purchasing life insurance to protect family members who depend on your income should be included in your financial plan.  If you depend on income from a spouse or partner, you need to insure that income as well.

Having a wholesome and robust insurance plan protects you and your income.  The Personal Finance Money Method is a course that helps you create a financial plan for your future.

Set value-based goals

Financial goals are really what drives the financial plan.  You have financial goals simply by working and earning an income to pay for your needs and likely wants.  Making sure your financial goals are

Investment and investment plans

Knowing how to invest your money is essential.  Making your money work for you instead of always being in debt and working to pay off your debt makes life far more enjoyable. 

If you have a sum of cash and you have not invested it, you need to understand that if it is just sitting in a low interest bank account your money is doing nothing.  Due to inflation, a dollar today will be worth less tomorrow, so if you have piles of money in a bank account doing nothing for you, you need to invest it in appreciable assets to increase the value of your money.

Become mortgage free

I realize that mortgage interest rates have been so low in the past decade or so, but at some point those rates will go back up and paying that extra interest is going to take a chunk out of your financial plan, in a bad way.

The Personal Finance Money Method is a course that helps you create a financial plan for your future.

Why is financial planning important to a business?

Chances are if you are reading this you are a business owner or entrepreneur, and I say this because you are on The Business Society website.  So just as your personal financial plan is important, if you are a business owner you need to incorporate that business into your financial plan. 

Business financial planning is also important.  You can read more about what business finance is and why it is important.

When you have a financial plan together

I’m a firm believer that good financial planning will get your money working for you.  That is the secret to maintaining wealth – invest your money in appreciable assets and live off the interest.  That is what smart rich people strive for.

The bottom line is that financial planning is an essential skill for entrepreneurs and business owners.  If you know that you need to get a financial plan together but have no idea where to start, sign up for my Personal Finance Money Method program which will take you through intensive online course modules with worksheets and templates provided.

Have questions?  You can reach out at hello@thebusinesssociety.co.  I’d love to hear from you!