What is Financial Planning? Definition, Tips, & Examples

Save more, spend smarter, and make your money go further

Financial planning is a step-by-step strategy to meet your life goals. A financial plan helps you go through your life’s journey. It enables you to control your expenses, incomes, and investments to manage your finances. Financial planning guides you towards making practical decisions about spending and saving, so you can achieve stability and reach your goals.

Money is a cornerstone of our livelihood, whether that’s ensuring we have food on the table and a roof over our heads, or saving for retirement. As such, managing your money wisely is essential. That’s where the practice of financial planning comes in.

Financial planning can help you reach your financial goals including getting a bigger home, a new car, improved career training, a family vacation abroad, higher education for your children, and most importantly, being independent while working and after retirement. 

Successful financial planning demands identifying and setting up priorities referred to as money management. If you’re not sure where to get started, don’t worry, we have you covered. Keep reading to learn all about financial planning basics, or use the links below to go straight to a specific section.

Financial Planning Definition

By definition, financial planning is the process of assessing your current financial situation and taking that information to manage your money in a way that allows you to achieve your goals and set yourself up for a successful future. 

Financial planning is a multi-step process that requires you to evaluate the big picture of your financial circumstances. You have two options when financial planning, you can do it yourself, or you can get help from a professional financial advisor. Either way, financial planning is an essential aspect of money management and long-term financial security.

What Are the Benefits of Financial Planning?

There are many benefits of financial planning. It allows you to:

• Increase your life savings

Part of any solid financial plan is creating a strategy for your savings. When you make a financial plan, you get a good understanding and insight into your earnings and expenditures. You can track your costs and cut them down knowingly. With this information, you can then decide how much discretionary income you have to save or how you can alter your current budget allocation to increase how much you’re saving.

• Improve your standard of living

Many people think they would have to lower their standard of living if they’re making an effort to make better financial decisions. On the contrary, you typically don’t need to compromise your lifestyle with a good financial plan. Your goals are very much achievable while living in moderate comfort.

Creating an emergency fund is a critical component of financial planning. For many people, the goal is to have at least six months of your monthly earnings stashed away for emergencies. This way, you will not have to worry about scrambling to come up with the funds you need when an unexpected expense arises or you find your financial circumstances have drastically changed overnight . The emergency fund will help you handle various expenses on time and with much less stress.

With readily available sufficient funds, you can cover your monthly costs, invest in your future dreams and goals, and spend a little lavishly on yourself and your loved ones without worrying about money. Financial planning will help you organize your money expeditiously and enjoy peace of mind that your bases are covered. Don’t be upset if you’re not quite there yet—all in good time. Financial peace is not far away once you set your foot on the financial planning route. 

How Do I Make a Financial Plan?

For financial planning to be effective, it’s important to follow the right process. To create a sound financial plan, be sure to:

1. Evaluate your current financial situation

To get started, you need to have a good understanding of the state of your current finances, specifically when it comes to your:

•  Expenses
• Income
• Debt
• Investments
• Savings 

Completing this first step will give you a good understanding of the condition of your finances and ways to improve.

2. Write down your financial objectives

 Write the different financial goals that you wish to achieve—both short term and long term. Ensure that your goals are clear and specific. 

For example, here are some attainable goals: 

• “I want to purchase a car in the next three years”
• “I want to buy a house in the city in the next two years.”
• “I will save 10% of my income to go toward a down payment this year.”

The more specific your goals, the better you can plan for them. These goals will act as a guide for you on how you lay out your plan and how you allocate your money.

3. Look for different investment opportunities

Multiple investment possibilities are available for investors. You can pick from nearly thousands of projects and schemes in the mutual fund market. Various investment avenues allow investors to accomplish different goals. For example, stock or equity funds are suited for long-term plans like retirement planning, education, etc. If you are interested in a fairly steady income and risk-averse, you might want to invest in debt mutual funds. Similarly, the ELSS (Equity Linked Saving Scheme) fund is ideal for saving tax. Financial experts have emphasized the importance of mutual funds when it comes to investing. Investing in these funds regularly over a prolonged period can help you fulfill your goals and objectives.

4. Carry out the right plan

When financial planning, there are several factors you should take into consideration, including:

• Your age
• Goals
• Risk tolerance
• Current investments
• Retirement plans

Financial plans are highly customized to your situation, so you shouldn’t follow a one-size-fits-all approach. Instead, take recommendations and tailor them to fit your circumstances. It may take some time and effort to get all the elements of your financial planning figured out, but doing your due diligence will only benefit you in the long run.

5. Monitor your financial plan consistently

Financial planning doesn’t just stop once you’ve put your plan in motion. You need to keep an eye on the progress toward your goals and may need to pivot as your circumstances and desires change. Some important things you should keep an eye on to see how your plan is working out for you are:

• How much you’ve saved 
• How close you are to reaching the goals you’ve set
• How your investments are performing
• Where you’re falling short

Often things like major life changes impact our financial planning and require us to go back and reassess. For example, your financial preferences will likely change if you have a child, so you will need to adjust the expenses and objectives according to that. Or, if you decide you want to make a big purchase—like real estate—you’ll likely need to adjust your previous plan to help you achieve that goal.

What are the Key Elements of a Financial Plan?

Financial plans do not have a set structure or format, although the right ones tend to focus on the same things. Your financial plan should include the following key elements, regardless of the approach used to make it.

• Goals and objectives: These should be documented by priority and must be measurable, specific, and practical.
• Identifying weaknesses: This consists of an analysis of the strengths and weaknesses of your current situation to understand what issues need to be addressed.
• Risk management: This not only means you should consider what types of investments you can afford to take on right now but other risk planning like getting insurance that covers your financial bases. You should consider your life, homeowners, disability, health, collision, and comprehensive insurance. 
• Prioritizing everyday needs: Before you prioritize your long-term financial well-being make sure you pay yourself first and your everyday needs are met.
• Retirement, education, and special needs: Careful thought must be given to education, retirement, and other special needs. Financial estimation should be planned for these needs, along with funding schemes.
• A budget: This will show income from all sources and expenses that occur regularly or are recurring. Update your budget to track progress towards your goals and determine changes in your financial situation.
• Investment planning: An analysis of your investments should decide if the portfolio’s growth, earnings, and diversification are constant.
• Estate planning: Your financial plan must include a review of all your assets to eliminate or lower your estate tax exposure.
• Assumptions: This includes the rate of return on investments, inflation rates, tax bracket, remaining years of work, and longevity. Review these periodically against your financial plan, and adjust accordingly. 

With these elements in mind, you’ll have the right foundation for creating a useful financial plan.

7 Tips for Financial Planning

Below are some tips on how to start saving and investing in your future:

1. Track your spending pattern for better money management and to improve your finances.

2. Create a reasonable monthly budget and stick to it.

3. Make big purchases in cash to avoid credit card debt. While it is convenient to use, it is easy to overlook that it is real money, and you lose track of how much you’ve spent.

4. Build up your savings for unforeseen complications that might come up and have a major impact on your financial stability.

5. Pay your bills on time to avoid late fees and dings on your credit profile.

6. Cancel your unnecessary monthly subscriptions to mobile applications or streaming sites to avoid recurring charges that take away from money you could be saving.

7. Start an investment strategy even if your capacity to invest is restricted. A small investment can help you use your hard-earned money to produce more income.

When Should I Hire an Advisor to Help with Financial Planning?

Financial advisors and financial planners are licensed professionals who guide investors in making the proper investment choices. They also help with retirement planning, estate planning, and taxation. Financial advisors can be helpful when you are overwhelmed, confused, or just uneducated about financial management. Most people struggle to even envision the day they’ll need their retirement, much less plan for it, so professional advice can be very convenient.

Final Notes

A financial plan is not a document; it is a tool to track your development. Once you’ve gotten your financial plan figured out, remember you don’t want to set it and forget it. It’s always a good idea to review your financial plan every so often, especially if you’ve had a major change in your financial circumstances or lifestyle.

If the idea of managing a financial plan seems a bit overwhelming, don’t stress. The Mint app allows you to keep track of everything from your purchases and investments, to a personalized budget and savings goals. Get started with the free app to help you stay on track with your financial plan and set yourself up for a stable future.