What is Financial Planning And Why Is It Important?

money with calculator, pen and notebook for financial planning

Not all of us are earning like Bill Gates, Jeff Bezos, or Elon Musk. We do not have billions of dollars in our name. Does that mean we will not be financially secure as those millionaires, then? We can, and we should aspire to be one.

There are times when we find ourselves dwelling in unforeseen situations, like someone in the family getting sick, car problems, unexpected school fees and more. These events can deeply affect us financially, especially if we are not ready. Most of the time, it happens because of our own doing- impulsive buying, always eating out, and wanting to be always on the trend. Situations like these can put us into a serious financial dilemma.

The good thing is, it will not always stay like that. You can get yourself out of your financial problems and build a more financially secured future.

What is Financial Planning?

Financial planning allows you to maximize your resources through proper management of your finances to best achieve your financial goals and objectives.  In financial planning, you have a comprehensive grasp of your financial picture that includes how and where to save or invest your money. 

Difference between Budgeting and Financial Planning

You might get confused between financial planning and budgeting. As we have mentioned earlier, financial planning is a concept that allows you to have a broader look at your finances. This concept includes budgeting, retirement planning, saving, insurance, and getting out of debt. 

Budgeting is an effective and important financial strategy. It makes you look closer into your financial situation now and helps you track your spending, save, and reach your short-term financial goals. Financial planning, on the other hand, is more about your long-term goals. You can fully feel its benefit when you retire, or when something unexpected happens.

Common financial challenges

 At some point in our lives, most of us have to deal with financial difficulties. Some are lucky to have not experienced such issues at all. Others were able to get out of their financial dilemma, while some are still struggling in getting out of it.

Here are the most common financial problems most adults are facing these days.

Spending more than your Income

Many who are struggling with their finances have some things in common, one of them is spending more than they should. I was like that too, and I still struggle from time to time. You might think you are not a big spender because you are not into buying expensive things. But, every dollar you spend from eating out, takeaways, and those little things you buy online, add them up together and you will be surprised with the total.

Set up a monthly budget and cut out on those extras. It will take getting used to, but you will reap the benefit for the long term.

Never Ending Monthly Payments

Have you accounted for everything you are paying for monthly- from your digital subscriptions, music, high-end gym membership and so on? If not, it’s high time to pay attention to where your money is going every month. If it isn’t needed, then unsubscribe or end your membership there. Do not squander on unnecessary things if money is tight.

Credit card balance

Using a credit card in buying essentials is becoming a norm these days. It is convenient, and others think it is helpful, especially when you ran out of cash. However, you have to bear in mind that a credit card’s interest rate makes the price of the charged items a great deal more expensive.  It is not helping you nor making your life convenient, more likely, it pushes you to pay more than you should have.  

No Emergency Fund

During good days, some of us forget to spare even a small amount for emergency funds. So when life takes us by surprise- you or someone in the family getting sick, loss of income and so on, you will not know where to get cash.

Include an emergency fund in your monthly budget. A small amount of maybe $50 every month will come a long way.

Buying a New Car 

I like what Investopedia wrote on their blog, “the inability to pay cash for a new car can also mean an inability to afford the car.” And most consumers take car loans to get one. Cars are expensive, do not burn your money paying something that depreciates over time.

Buy a car that uses less gas and costs less to insure and maintain, but will still fit your needs.

Renting or Buying a house

Real estate properties increase their value over time. Thus, buying houses will even get more expensive as time goes by. According to the S&P CoreLogic Case-Shiller National Home Price Index, in March of this year, home prices in the US increases up to 13.2% from the prior year. 

 On the other hand, during the first half of 2021, the rent prices also soared up to 9.2%, making it even more difficult for consumers who are already on a tight budget. 

Deciding whether to buy or rent a house is a hard one to make. There are factors you need to consider especially your income. Will buying a house allows you to save money in the future or will it leave a significant long-term dent in your monthly budget?

Not Investing in Retirement

Invest in your retirement so you can live comfortably even after retiring. 

“If you’re able to put money into additional funds, consider opening an extra IRA to build that retirement fund and secure your future,” says Brad Scheidt, Executive Vice President for Oklahoma Central Credit Union. “Take advantage of these savings vehicles to lower your tax burden and earn interest for your golden years.” 

Student loans

Student loans are one of the reasons why young professionals these days are already having debt issues. Imagine you just graduated and started earning decently, but then a loan is already waiting for you to pay.

Pay your student loans as much as you can every month, or you will have to pay more interest if you keep on delaying it.  

Not bothering about financial planning 

There are probably two things why people don’t bother to financially plan their future; either they just don’t care yet, or they are just afraid to look at the numbers. It is quite scary seeing your liabilities outweighs your assets. However, that is the good thing in creating a financial plan. It gives you direction and a chance to think of solutions addressing your financial issues.

Your financial problem is not permanent. Whatever you are going through right now, you have a chance to turn it all around.  

Benefits of Financial Planning

Back when I was younger, I fail to see the importance of planning my finances. No savings, I barely could even control my spending. Then, one day I realized I have been working for years, but I still don’t have anything under my name. That made me re-evaluate my finances. I started planning. It isn’t easy, and it continues to be a struggle for me, but the benefits I gained and will be gaining in the future exceeds the struggle.

Emergency Fund

Nobody knows what will happen in the future. We all know that. When you think that everything is going smoothly as planned, unexpected situations arise, and most of the time, it requires money. Especially when it involves health. Even with insurance, dealing with health issues will hurt your pocket.

Thus, being financially prepared for such a situation would bring a big difference for you and your family. It will not make things easier, but it will make things less stressful.

You can retire comfortably

When we say financial planning helps us achieve our long-term goals, it’s because it does. It helps us prepare for our retirement so we can live comfortably after working hard most of our lives.

You can invest in your retirement homes, vehicles, buy other real estate properties that you can develop or just spend your money travelling around the world.

Can Control your spending habits

One of the things that you need to be conscious about is your spending habits. It is one of the reasons why people live from paycheck to paycheck. By creating a financial plan, you will know your cash flow, helping you evaluate how and where you are spending your money, and giving you options to save more.

Can be financially secured

No one wishes for something bad to happen in the future. But, in case you will lose your job, or someone gets sick, you won’t have a problem with where to get cash. You and your family will be financially secure without compromising your current state of living.