Financial life planning has been a game-changer since its introduction. Unlike traditional finance planning which creates a one-size-fits-all solution to financial needs, financial life planning provides financial solutions that consider individual financial values and goals. It not only answers the how but also considers the why behind your finances.
This means that Financial life planning makes sure it includes the reason (why) you’re planning your finances to deliver an outcome that’ll help you get the most out of your finances. It also envisages the different life stages with their accompanying challenges and draws a flexible and suitable financial plan to address them. Simply put, financial life plan puts the ‘life’ in financial planning.
Financial life planning goes through what is known as the financial life planning cycle. The financial life planning cycle typifies the various life stages in financial planning, right from when you get your first job to when you retire. A typical financial life planning cycle goes through the following steps:
For most people, this is their first foray into the world of finance. Getting employed means you start earning some income which you can use to either pay off your student loan or start building wealth.
The second stage of the financial life plan cycle is when you start to build a career, get married, start a family, and settle down. At this stage, your financial responsibilities increase and you need to make plans that’ll help you adjust to this change.
These are the years before retirement. At this stage in financial planning, you make sure you put your house in order before you go on retirement. By now, you should have saved enough money in your 401(K) or have a passive income-generating model that gives you enough money monthly. The idea is to prevent you from working odd jobs during your retirement years just so that you can make ends meet.
Financial life planning doesn’t stop at retirement, it continues even after you’ve stopped active work. At this stage, you’ve just gone on retirement and won’t be depending on your salary. Your income streams therefore dwindle and you need to adjust your financial goals to suit your current situation. Financial life plan will help you assess your current financial situation and draw the most effective strategy to help you adjust to your early retirement years.
At this stage, you are well into retirement and may even become dependent on people for home care and mobility. If you don’t have a financial life planning in place to help you pay the bills of people who’ll take care of you, then life will be miserable. Aside from that, you need to make sound financial choices that’ll not leave your finances in the red. If you have a sound financial life plan in place, then there’ll be no cause for alarm.
Financial life planning isn’t rocket science. It is very easy to create. All it requires is an honest assessment of your current financial situation and future financial goals, and you are good to go. There are several steps in creating a comprehensive financial life plan including financial planning questions that’ll help you get the most out of your finances.
The first step is to set reasonable and achievable financial goals. Avoid the temptation of setting lofty goals that’ll put unnecessary pressure on you and your finances. Let your goals be SMART. Use a financial planner to set, track and manage your financial goals. Reasonable and achievable financial goals serve as a blueprint to guide your financial decisions going forward. They should inspire you and spur you on when the going gets tough. To set financial goals, assess your current financial situation and see how you can tweak it to achieve your desired goals. The financial life planning questions to ask yourself are:
To maximize your current financial situation to achieve your desired financial goals, create a budget. Creating a budget will help you discover areas where you expend too much money. These areas can be either cut-off or trimmed down to help in actualizing your financial goals. To create a budget, make a list of all your sources of income and how much you make from each income stream in a month. Then create a list of expenses you make every month. This should help you identify some expenses that need trimming or cut-off. Note that a budget is the bedrock of planning. You can use a free budget planner to help you draw the most accurate and comprehensive budget that’ll aid your financial life plan.
Once you’ve trimmed down your expenses, you’ll have extra money which you can use to set up an emergency fund. Emergencies are unpredictable and come when you least expect them. That’s why it is prudent to have some funds on standby whenever emergencies rear their ugly heads. Most experts recommend that you save at least 3 months worth of expenses for a rainy day. Life is uncertain, therefore, include emergency funds in your financial life planning. The financial planning questions to ask are:
The answer to these would determine the amount you need to set aside for emergencies.
Setting up an emergency fund is great, signing on to an insurance scheme is laudable, but the best is to have both options. Buying an insurance scheme protects you and your family against life’s harshest circumstances. Even if you’re unable to set up an emergency fund, the automatic deductions of your insurance plan are a safety net. So sign up for an insurance scheme to help you sail through difficult times.
Financial life planning ensures that you have some money to fall on when disaster strikes. You can subscribe to a life insurance scheme to ensure that in the event of your passing, your dependents (wife, children, parents, etc.) don’t struggle to make ends meet. Other insurance plans can pay your medical bills when you’re admitted to the hospital and some can even be used to pay off mortgages. The most important thing is that you have a safety plan, which is either an insurance package or emergency fund, or both, to cushion you during tough times.
Now that your emergency fund is set up, the next step is to draw a plan on how to pay off your debts. Debts are obstacles to achieving financial goals. They can drain you financially, psychologically, and emotionally and rob you of happiness. That’s why in a plannings, you need to come up with ways to manage your debts. If you are in huge debt, then settle it as quickly as you can.
Make sure you pay more than the minimum balance and find other streams of income to help you pay it off. If your debts are not huge, you can settle them through installments without heaping unnecessary pressure on yourself and your finances. To settle debts quicker, you can create other streams of income. Also, desist from using your credit card. Adopt the “if you can’t afford it twice, don’t buy it” principle. Finally, only buy items you’ll need and cut down on your wants. Financial life planning can only help you reach your goals if you settle your debts.
The most logical step, after you’ve settled your debts, is to invest. Earning dividends on your money is a sure way of combating inflation and having enough money when you retire. Though your 401(k) retirement plan is great, make sure you build investment plans that will grow your wealth and generate passive income for you.
Financial life planning requires that you include both your early and late retirement years when you’re planning for your retirement. This is because both are two different stages of life with their unique financial challenges. Most experts advise that, when investing, opt for investment vehicles that offer protection for your initial capital and steady growth. This is to ensure that your investment is untouched regardless of the economic turbulence.
Financial life plan is a comprehensive plan that considers all the stages of your life and incorporates them into designing a suitable financial plan for you. It helps you to set realistic financial goals and achieve them. However, you need to review them occasionally as your financial needs and goals may change as you grow. You can alter the plan to suit your current financial situation. Yes, it is that flexible. Financial life planning can ultimately help you become financially free and enjoy your life. For more information on how to become financially free check out our GuardianWealth financial literacy program today.