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What is Personal Financial Planning?

We might hear the term a lot, but what does it actually mean? Put simply, personal financial planning is a strategy by which you can achieve your financial goals. These financial goals can be short or long term, but are specific to you. It is a strategy that includes your saving, investing, retirement planning and so much more.

Building off of a previous article, today we’ll look at what personal financial planning is at its root. In doing so, we’ll explore the key components of personal financial planning. Hopefully, after reading this article, you’ll have a solid base to build from as you take control of your finances. With that, let’s get started.


Key components of personal financial planning.

Key Components Of Personal Financial Planning

Budgeting

As mentioned in my previous article, budgeting should always be the first step you take in creating a financial plan. The process of making a budget requires understanding of your earning and spending habits. Knowing what you make and invest, as well as your expenses and taxes, are parts of this process. Tracking these things, either by hand, or in an app, will be the foundation of your budget. According to a recent Debt.com article, the majority of Americans keep a budget. In addition, the vast majority feel that keeping a budget has helped them get out of debt.

Understanding Your Income

Your income is more than just the wages that you earn from your job(s). In addition to your wages, it also includes things like a pension, dividends, and bonuses. Understanding your different streams of income requires you to pay closer attention to your work benefits, and your investments. If you have any, your short term capital gains are also qualified as a source of income. However, they are not taxed as normal income, which is something to keep in mind.

Personal Financial Planning: Understanding Your Expenses 

Looking at your expenses also is a more complicated process than you may expect. Your expenses aren’t just what you spend towards your rent/mortgage, food and clothing. They also include things like your insurance, entertainment expenses, subscriptions and credit cards. As we covered in my previous article, the interest on credit cards can also be a sizable expense. In addition, your employment status impacts what type of taxes you pay. Are you an employee, or an independent contractor? Do you have work expenses? If so, does your employer compensate you for them, or do you pay the expense yourself?

Understanding Yourself 

Any part of personal financial planning is knowing what you are planning for. Knowing your timelines, risks, values, goals and expectations are critical aspects of the process. Knowing simple, but specific, aspects of yourself will help you build a personal financial plan. Are you planning on retiring soon? Do you plan on having children? Is saving for college something you want to do? All of these questions are good examples of questions to ask yourself. Knowing what your specific goals also becomes easier after you have built a budget.

Keep it Updated

Where you are in life, and what you want out of it, changes with time. Don’t be afraid to change and reevaluate your goals and existing plans as your life changes. For example, if you were originally making a financial plan as a single individual, but are now married. Or if you had been planning to retire at 65, but now want to join the FIRE movement. Whatever those life or personal changes are, make sure that your habits reflect them. Your goals, habits, and expectations are not set in stone, so don’t feel bad about adjusting them.

Retirement Planning

While most of us want to retire, getting there requires some planning. Does your employer offer a 401k or 403b plan as part of your benefits? Both are types of retirement accounts offered by employers, but with differences in what those savings can be used for. If your employer offers one, or both, consider maxing out your contributions. In addition, see if you are offered a traditional or Roth 401k. The type of 401k will impact your maximum contributions and whether contributions are pre or after tax. If your employer offers a match to your contribution, that only expedites the rate at which your savings will accumulate. Investing in an employer offered retirement account, and maxing out your contributions are a great way to set yourself up for a successful retirement plan.

In addition, you have options even if your employer does not offer retirement accounts. You have the opportunity to personally invest in either a traditional or Roth IRA. These plans have similar differences as their 401k counterparts. So be sure to check and see which is right for you.

Tax Planning 

As alluded to earlier, part of personal financial planning is also planning for your tax burdens. This aspect of your financial planning involves finding how to minimize your tax burdens and liabilities, in addition to maximizing your deductions. In order to properly asses your current tax status, consider speaking to a tax professional.

Important Part of Financial Planning: Estate Planning 

While perhaps not a glamorous part of personal financial planning, estate planning is also important. Planning for your family’s future if/when you die ahead of time can save quite a bit of trouble. And it can save heartbreak for your loved ones. Steps include laying out beneficiaries, ensuring asset ownership is up to date, coordinating trusts, and naming a power of attorney. However, these are not all of the steps you may have to take. For this reason, it is prudent to consider starting early so you can better understand your situation and needs.

Miscellaneous

There are other aspects of your personal financial planning journey that you may be interested in. These include things like education or philanthropic planning. If you intend to save or invest for your child’s education, there are options available to you. The Coverdell and 529 College Savings plan are the two main ways to save for a child’s education. Similar to the differences in retirement accounts, there are nuanced differences to each. So, be sure you are investing in the proper plan for you. And research both more fully. Philanthropic planning pertains to your charitable contributions, and the tax benefits that proper planning may provide.

Final Thoughts On Personal Financial Planning

When looking at personal financial planning, the different components may seem daunting. However, with proper time and effort, and maybe even help from licensed professionals, it can be done. What is important is to not let the process overwhelm you. It’s also important not to let the steps dissuade you from continuing. For this reason, it’s also important to take care of yourself on your personal financial planning journey. Taking vacations, doing things you enjoy, or involving those you trust can all make the experience more enjoyable. The less it feels like another job, the more you’ll want to stick to it. At the end of the day, that’s what counts. A personal financial plan is only useful if you can, and want, to apply it to your life.

The post What is Personal Financial Planning? appeared first on Investment U.

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By: Gabriel Shabat
Title: What is Personal Financial Planning?
Sourced From: investmentu.com/personal-financial-planning/
Published Date: Fri, 11 Feb 2022 19:50:30 +0000

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