What is financial planning, and why is it important?

There's often a lot of confusion around what financial planning is and what it involves. Many seem to think that financial planning is creating a budget, but there's much more to it than that.

Financial planning is a term that’s thrown around a lot in the financial services industry. Nowadays, basically every financial advisor’s website mentions that they offer “comprehensive financial planning” for their clients.
But what exactly does that mean, and why is financial planning important?

What is financial planning?

Financial planning is the process of reviewing your entire financial situation to help you achieve your financial goals. This involves reviewing anything and everything to do with your finances – including banking, income, expenses, net worth, savings, debt, investments, insurance, taxes, and more.

There are many different techniques and strategies when it comes to financial planning, but generally, the first step is to gather all your financial information to get an overall picture of where you currently stand. This will give you a good understanding of your progress thus far.

The next step is to establish clear and defined goals for yourself. It’s important to clarify these goals as much as possible with specific dollar amounts and timelines to determine how much you’ll need to save each month to reach them. This step also involves planning for any potential risks or gaps, such as a lack of emergency savings or insurance coverage.

Once goals are established, the next step is to develop and implement a plan to reach those goals. This step involves making the changes necessary to achieve your goals and protect yourself from potential risks to your plan.

Lastly, and most importantly, you’ll have to continue monitoring your plan and progress to ensure you stay on track. Life is constantly changing, so you’ll need to continue making adjustments along the way.

This is an oversimplification of the process, but you get the idea.

Why is financial planning important?

Most people are pretty lost when it comes to their finances. They often have no idea where their money goes and whether they’re on track to reach their goals. So many factors come into play when it comes to your finances, which makes it much more complicated than it sounds.

The goal of financial planning is to enable you to know where you currently are financially, where you want to go, and what you need to do to get there. It’s a comprehensive process that can help prevent unexpected events from allowing you to reach your goals.

There are many other benefits to financial planning as well. The step of gathering all your financial information will help you get organized with your finances and have a better understanding of your accounts. It’s important to have a clear understanding of your entire financial picture to help recognize potential gaps and areas you can improve on.

Establishing clear and defined goals is very important as well. According to BusinessWire, 83% of people with a written financial plan feel better about their finances after just one year. Clearly and concisely defining your goals makes it much easier to know whether you’re on track to reach them, or what changes you need to make if you do happen to fall off track.

The next step is to develop and implement your plan. This involves determining what changes you need to make and moving forward with those changes. This step is often the most difficult for people as it can become overwhelming deciding what action is best for you and your situation. This is the part of the process where a lot of people will seek help from a financial planner to help them reach their goals. Though seeking help is optional, it can significantly improve your chances of reaching your goals by providing accountability and a clearer picture of exactly what you need to do.

After that, you’ll need to continue to review your progress and make adjustments as needed. Life is very unpredictable, which emphasizes the importance of ongoing monitoring and planning. A helpful way to do this is to set recurring reminders to review your plan, your spending, and your progress toward your goals.

No matter how great a financial plan may be, it’s worthless if you don’t follow it. Figure out what works best for you, and make sure to have a plan that’s attainable and realistic. Going through this process will put you in a much better spot financially than most people. Make sure to acknowledge your progress and celebrate the small wins along the way!