Financial Planning Guide: Learn The Basics To Get Started

Financial planning is any type of strategizing around the monetary aspects of your financial life. These areas range from the basics — such as budgeting, saving and paying off debt — to more complex areas, such as investing for retirement and estate planning. In short, if it involves your personal finances, then there’s a way to plan for it and optimize the outcome.

Here’s what financial planning is all about and what you need to know to get started.

Financial planning: What it is and why it’s important to have a plan

A financial plan can help you direct how you organize your finances, from the small, short-term questions to the big, long-term issues. Your financial plan can be as big and complex as you want it to be, or as simple and straightforward as you like — so long as it helps you get to where you’re going.

A financial plan can help you get your financial life in order in areas such as:

• Budgets – How much can you spend this week or month and still stay on track?
• Debt reduction – How much do you need to pay down and how can you do it?
• Retirement – How much do you need to save from each paycheck to retire comfortably?
• Investments – How can you save and invest to grow your wealth?
• Taxes – How can you minimize your tax bill and ensure the money is there when you need it?
• Insurance – How can you get the right coverage at the right time?
• Estate planning – How will you distribute your assets to your loved ones?

These are some of the largest issues when it comes to financial planning. And the plan can be as “big picture” or “little picture” as you want to make it. But here’s the point: Your financial plan needs to provide a path for you to meet your financial goals, including helping to motivate you.

Types of financial planning

Financial planning can be broken down into categories depending on the activity.

• Budgeting: Budgeting revolves around the daily choices that impact your finances. A budgeting plan can help you understand where your money is going and how you can adjust to meet your goals. Good budgeting is the “blocking and tackling” of good financial habits, and you can really only build wealth when your spending remains below your income.
• Debt reduction: If you’ve piled on too much debt, a financial plan can help you devise a way to get out from under debt. That may involve living below your means or refinancing your debt. Whichever way you go, this kind of plan helps you get out of the habits that led to debt.
• Retirement planning: This kind of financial plan can help you create the roadmap to a comfortable retirement, showing how much you need to invest each month and year to achieve your goals. It can also help you pick the right investments to meet your goals and help you adjust those investments over time.
• Wealth management: A wealth management plan can help you build wealth and grow the wealth that you already have. Your plan may cover tax-advantaged ways to build wealth, how to minimize taxes and the best options to grow your net assets. This kind of plan may involve investment management, tax planning and estate planning.
• Tax planning: Taxes can be daunting even when they’re relatively easy, and good tax planning helps minimize your tax liability to ensure you have money when you need it to pay the bills. Good tax planning can create ways to minimize the long-term impact of taxes on your finances, too.
• Insurance planning: Insurance planning can help you get the right insurance for the right stage of life, allowing you to maximize its benefits while minimizing its costs. A good plan can help protect you, at least financially, from some of the twists of fate and help you stay on your feet.
• Estate planning: Estate planning is the process of optimizing your estate when you pass, ensuring that you’re minimizing taxes and that your loved ones receive what you intended. Good estate planning helps minimize costs and speeds your estate through the legal system and reduces family strife.

How to make a financial plan: A step-by-step guide

Some elements of a financial plan may be relatively easy to create and implement, but others may require the expertise of a savvy planner who understands the best way forward.

For example, you may be able to get your family’s budget in order, but when it comes to taxes or estate planning, it can help to call in an experienced advisor to be sure you have all the important aspects covered.

1. Set your objectives

Your financial plan begins with you, namely, your goals and objectives. That means you need to carefully consider what your goals are.

• Do you want to own your own home? And how big?
• Do you need to pay for your children’s education?
• How much money do you want to retire with?

Your objectives can be any number of things, but the first step is figuring out what they are, and that requires some time spent carefully considering what you want.

2. Create the plan

Once you’ve figured out what you really want, you can start planning how to get there. You’ll want to consider how to create a plan that gets you to the place you want to be. For example:

• If you’re looking to build wealth, then you’ll probably want to think about how to invest, but that begins with saving money and living below your means (and maybe paying down debt).
• If you’re working on a budget, you’ll need to carefully consider your income and where you spend your money, so that you can begin working toward your goals.
• If you’re looking to become a millionaire, then investing is a great path to get there. But if you don’t know how to invest or what to invest in, it may make sense to call in an expert financial planner. The planner can help you make smart decisions and avoid wrong turns.

Depending on your financial objectives, you may need to call in an expert at many different stages of your life or as your objectives change. For example, young couples may not worry much about estate planning, but may need to carefully consider insurance and taxes. So you can call in an expert when it’s time to set up the next stage and make smart decisions.

3. Implement the plan

Once you have your financial plan in place, it’s time to implement it.

In some cases, implementing it may involve buying insurance or creating an investment plan. Such steps may be relatively straightforward and easy to implement. For example, creating an estate plan can be something that’s done once, though it’s useful to review periodically.

In other cases, implementing the plan may require work on a weekly or even daily basis, such as keeping up with debt payments or investing part of every paycheck to build wealth.

If you’ve determined that the plan will get you to your goal, you need to keep moving ahead. You’ll need to keep motivating yourself to stick to the plan — something that a great financial advisor can do.

4. Adjust the plan, as needed

It can make sense to review your plan as your circumstances and goals change. If you’ve paid down your debt, for instance, you can move on to a new stage in your plan, building wealth perhaps. Or if you’ve moved from building wealth to maintaining it, then you can develop a budget that ensures that you don’t spend down your principal while still generating income.

As you go through life, your objectives will change. So it’s vital that your financial plan shifts to help you meet your goals.

How to get help with your financial plan

The type of financial planning available varies greatly, depending on exactly what you need.

Some advisors specialize in retirement issues, particularly around retirement accounts and the best time for you to claim Social Security. These advisors may also be able to help you with estate planning and similar issues.

So, it’s important to shop around to find advisors who have specialized knowledge in areas that align with your needs. Not all advisors are the same or have the same expertise — and that’s why it’s also critical that you establish your goals and objectives, because they will shape your search.

How much financial planning costs

Regardless of which kind of advisor you work with, it’s vital that you understand how an advisor is paid. Advisors with a fiduciary duty, such as certified financial planners (CFPs), are tasked with working in your best interest, making decisions that benefit you first.

Advisors who are paid by a big financial institution may be free, but they’re typically just salespeople in disguise. They may help you buy the company’s products and services regardless of whether they best meet your needs. And that could end up costing you a lot of money.

Other advisors may charge an hourly fee ($150-$300) or a per-project fee. But others may charge several thousand dollars to develop a financial plan, depending on exactly what you need.

It’s important to review your plan when your goals change, and that may mean revising the plan with your planner’s help. But it can be money well spent if it helps you make smarter decisions.

Why financial planning is so important

Financial planning can help you optimize your finances, helping you make the most of what you have. It can also help you make smart trade-offs between your short- and long-term financial choices, helping you understand where it’s smart to spend your money and where to save.

With smart planning, you can ensure that your own family’s “balance sheet” is ready for almost anything, whether that’s retirement, paying for college or buying that special thing you’ve always wanted. Planning can help you get there and minimize the trade-offs along the way, making it easier to get what you want today without sacrificing too much tomorrow.