We all must have vaguely heard about financial planning, although most of us may not understand it in detail. Financial planning is a definitive process to meet one’s financial goals to create wealth and future financial security. It acts as a guide to navigate you through life, and have good control over your income, investments, expenditure, and enjoyment. Let us discuss the key components of financial planning in depth –
- Understanding cash flow
This is the first key component of financial planning. You must understand your cash flow, i.e. know how much you earn, how much money you can save and invest, and comprehend the relationship between your debts and assets. It will be difficult to reach your financial goals if you are living beyond your means, so you need to take that into consideration.
- Goal setting
After understanding your cash flow, you need to identify and set definite financial goals. Goal setting is an important aspect of financial planning; if you don’t know where to go, it is difficult to reach there. So setting specific goals is half the battle won. You need to learn what to do with your finances and pave your own way for future financial security.
This is a major tenet of financial planning, as it is not enough to just earn money and save it to ‘just get by’. You need to invest money to make it grow. Creating wealth and future financial security is what will make the money last and help you and your family thrive instead of just survive. Since the importance of investing cannot be undermined, you need to carefully evaluate your investment options. Pick the right avenue from the various types of investment after studying them well and figure out where to invest money for maximising returns.
- Managing risk
Another key component of financial planning is mitigating risk. You need to be aware of the worst-case possibility that if you get physically disabled or otherwise medically unable to manage your work, or pass away early in life, then you need to take care of your family. If you have a spouse or kids, then it becomes all the more important to understand these risks and plan accordingly to prevent financial disaster and create security instead.
- Education planning
Surely you want your children to have the best education that money can get. For this, you need to start planning very early on. You need to analyse the options available and take into consideration factors such as student loans, educational tax credits, and a whole lot of other financial burdens that come as a part and parcel of higher education.
- Tax planning
You need to have basic tax knowledge if you want to plan your finances well. If you are inclined towards a certain financial strategy for your personal financial planning, then you need to be aware of the tax consequence of that particular strategy. And if you are deciding which strategy to choose, then you must study the tax consequences of those multiple strategies and decide accordingly.
- Retirement planning
This is a very important aspect of financial planning because after all you are planning ahead to secure your future. You need to make sure your finances last you throughout your retirement years and in a pragmatic way take into consideration other factors such security for your medical bills, any other age-related issues you might face, and travel funds to enjoy your retirement as well.
These are the 7 key components of financial planning that will aid you to build your financial strategy and achieve your goals. Think over these and all the best for your future success. Happy investing!