What are the financial planning principles for wealth?
What are the key components of financial planning and management?
Do you find yourself worrying about your financial future? Financial security is fragile and unstable especially during a global pandemic, but you can rein in your finances through financial planning principles.
Financial planning is an assessment of your current and future financial state. You can use financial planning to anticipate future financial incomes or losses.
We’ll discuss the six key components of financial planning and the six steps of financial planning so that you can be equipped to handle all your financial endeavors.
This is how to plan, prepare and protect your prosperity and wealth, especially in uncertain times.
The 6 Components of Financial Planning
What are the steps of financial planning? There are six key components of financial planning. Let’s look at each one in detail with advice for how to apply these to your daily life.
#1. Creating a Budget
A budget is a prediction of income and expenses for a specific time period. Budgeting is a key component of financial planning because it helps you determine how much money you will save and how much you will spend month to month.
You can budget for a lot of different things. For example, when it comes to your car, you can budget how much you will spend on gas and car payments each month. Gas prices can fluctuate and, depending on your average miles driven per year, your car insurance premium might change as well, so it’s good to have a budget for how much to spend.
Not having a budget can hurt you in the long run. You will be more likely to engage in impulsive spending, and you might not have enough money to pay your bills as a result. If you need help creating a budget, ask someone you trust to help you. You can always go to a financial advisor and seek their guidance as well.
Get your free budget spreadsheet here.
#2. Providing Funding for Larger Purchases
Larger purchases include buying a house or a car. Having money for these larger purchases is a key component of financial planning because it’s important to have a plan for saving and knowing when the right time is to purchase. You don’t want to end up making a large purchase and then regretting it later. Financial planning is essential for this.
Other significant purchases could be major life expenses like college and possible medical bills. It’s always good to be prepared and plan accordingly for expenses like this.
Emergency funds and savings accounts are essential for dealing with major life expenses, especially unexpected medical bills. These will prevent you from accruing unnecessary and rather expensive debts.
Having better spending habits is always beneficial for you and your wallet, which includes knowing when to save your money. Remember, you only need about two weeks to form a new habit. Let’s add smart spending and saving to your list of new habits to adopt this year.
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#3. Risk Management
Risk management is all about predicting future financial risks and thinking through ways to avoid those risks. This is a key component of financial planning because financial risks are inevitable.
An example of risk management would be having a business and wanting to purchase some software to help you manage your processes better. You’re doing your due diligence by buying this software to reduce risk in the future.
Another example of risk management would be purchasing insurance for your business like workers’ compensation. Even though it’s required in most states, it’s still good business sense. If an employee gets hurt on the job, workers’ compensation keeps you from being completely liable for their injuries.
Risk management lessens the blow when things go wrong financially. Make sure you are prepared as much as possible.
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Investing is putting money away on a particular plan or account and hoping for a return on your money. It can be something small like a savings account, or it can be bigger as the stock market.
This is another critical element of financial planning because it aligns with what financial planning is all about: predicting future incomes or losses.
Investing can be a gamble sometimes. Financial planning is so important when dealing with investments. Strategizing how you want to invest, how much, and when to invest is so critical.
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#5. Retirement and Transferring Wealth
Most people want to retire at some point. This component of financial planning is one of the more important ones because it requires that you think critically and analytically about how you want to spend your retirement and how you want to transfer the wealth you’ve accumulated to your family eventually.
Transferring wealth to your heirs can be done through gifting, loans, direct payments, and trusts. You don’t necessarily need to be on your deathbed to transfer wealth, either. With trusts, you can transfer wealth to your beneficiaries when you deem it necessary and appropriate.
#6. Record Keeping
The final key component of financial planning that we’ll look at is record keeping. This is similar to having a budget, but in this case, you are keeping track of past income and expenses.
Record keeping is important for financial planning because looking at previous records can help you predict your current and future income and expenses.
A beneficial way to keep track of records is to file away important documents like paystubs. Keep a filing cabinet or a filing case for when you need to put away your papers.
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What are the 6 Steps of Financial Planning?
Components make up the larger whole while steps are sequences that help you achieve something. Below, we will look at each step in detail.
#1. Figure out Your Current Financial Situation
Knowing where you stand with your current financial situation is the first step in this process. Take inventory of your finances and make sure you know how much you have. This is why keeping a record and a budget would help you.
Using an Excel spreadsheet is very helpful when it comes to figuring out your current financial situation. They can calculate your finances quickly and efficiently.
With anything in life, you have to start with your current state and situation before looking ahead to where you want to go.
#2. Create Financial Goals
The next step is creating financial goals. You can even make S.M.A.R.T. goals, which are goals that are specific, measurable, attainable, relevant, and time-based. With these kinds of goals, you can have a clear financial plan for your money and where you want to see it grow.
An example of this would be saving $500 every two weeks to reach a financial goal of $5,000 by a certain date. Be as specific as you can with your S.M.A.R.T. goals. The more detailed, the better.
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#3. Consider Alternative Options
Alternative options can be to continue on the financial path, expand on the course, or change plans. You can also create a new approach. You may not need alternatives, but it’s good to look them over and consider which course of action works best for you.
Looking at every angle and option possible is always the wisest thing to do. If you find it difficult to see beyond your plans, seek advice from close friends and family with sound financial knowledge. Getting another perspective can help you to ascertain what other paths you can take with your finances.
#4. Assess Those Alternatives
Sometimes, plans have to be amended and changed for you to be able to reach your goals. Always check to see if the financial plan you’re using is working for you and your S.M.A.R.T. goals. Evaluate your values and ambitions. Make sure your financial strategy aligns with those.
You must make sure your values and beliefs align with your financial goals because you will be more likely to accomplish them. Your views are your why and your intention. Trying to achieve your dreams will be pointless and fruitless if you don’t match your why.
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#5. Execute Your Financial Action Plan
Action plans are simply courses of action that you execute. Once you’ve decided which alternative option to go with, it’s time to implement your action plan. Work toward your S.M.A.R.T. goals and persevere through them.
There are many ways to go about achieving your S.M.A.R.T. goals. One way that has been found to be helpful is having an accountability partner to keep you on track.
You can also aim to try and reach your S.M.A.R.T. goal before the intended deadline. The earlier you can achieve your goal, the better off you will be financially.
#6. Revise Your Financial Plan as Needed
Revising your financial plan should be on an as-needed basis. You can even consult with someone you trust and determine which route to go for your financial plan. Financial advisors are perfect for planning out your finances as well.
Life situations happen, and things like your values and goals may change. Evaluate your goals and values every few years or so to make sure you are on the right track for what you want out of life.
Use these six steps to help you figure out your next course of action when it comes to your finances. Try your best to do them in order and don’t stress about trying to be perfect with these steps.
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How to Apply Financial Planning Principles to Your Life
Financial planning is a lifelong process and journey. You don’t become an expert at something overnight. The same goes for financial planning and learning about the principles of finance.
The principles of financial planning are essential to your success. Whether you use them for personal or business reasons is totally up to you.
Applying the above principles and steps to your life can seem overwhelming. Reference what we’ve discussed here to help you figure out how to use them practically. You are well equipped with the proper tools to help you financially plan for your future.
Get Your Simple Budget Spreadsheet
Ready to start planning your finances? Great, step one is creating your budget. With the Simple Budget Spreadsheet, you’ll be able to track your expenses and savings It’s easy to use and compatible with Google Docs and Microsoft Excel.
Pick two or three steps and principles you can apply to your life today. Start small and watch your finances grow. Share what you’ve learned here with others.
Good luck with all your financial planning goals.What are the key components of financial planning? Click here for sound financial planning principles for prosperity and wealth you need to know. #BuildWealth #Wealth #PersonalFinance #FinancialLiteracy
Which financial planning principles do you follow?
More About Guest Contributor
Peyton Leonard writes and researches for the car insurance comparison site, MyCarInsurance123.com. Peyton is adamant about financial planning and helping people achieve financial security by goal setting and evaluating their core values.
Last Updated on January 8, 2022