When we talk about financial planning, we usually think in terms of the future. After all, that's what "planning" is all about. But in order to make the best decisions for our financial futures, we also have to address issues related to our past financial histories and our present financial situations. Without this foundation, we simple don't have a clear enough understanding of our finances to be able to move forward with a serious financial plan for the future. As a result, good financial planning should happen in three phases with the future planning actually being the last step of the process.
Here are the three phases of good financial planning and what you need to do in each of them to have financial stability in your future:
Phase One of Financial Planning: The Past
Most of us aren't starting out with a clean financial slate as we start planning for our futures. In fact, it is often because of financial problems in our pasts that we get motivated enough to start planning in the future. We want to avoid having the kind of money problems that we've already experienced. In order to be able to make those solid plans for the future, it is imperative that we address the problems of the past.
These are the areas of the financial past that must be addressed before moving on to the planning stages:
- Debt. This is the biggest area of concern when dealing with the past. To be able to move forward with a positive financial plan for the future, it is absolutely necessary to eliminate the debt that we have included in the past. The first step is to understand the seriousness off that debt. This requires getting a credit report and going through it as well as organizing our debt information so that it is all clear.
• Spending habits. It is also important to assess the spending habits that got you into debt in the first place. If you don't fully understand the problems that caused the debt to accumulate in the first place, it's highly likely that you will repeat these same mistakes. This can greatly undermine any financial planning that you do. Take the time to sit down and figure out where you spent the money, what the flaws were in your spending and how you will do better in the future.
Phase Two of Financial Planning: The Present
In order to be able to move forward with planning for the future, we have to assess several aspects of our present lives. That's because the money that we have now, as well as the spending that we are currently committed to, greatly affects how much we are able to save for the financial future. Creating a plan for reducing current spending and paying off debt as quickly as possible can assist greatly with making and executing financial plans.
These are the areas of the financial present that must be addressed before moving on to the final planning stage:
- Know what your financial situation is. It's surprising how many people don't actually know the specific details of their income and spending. Sit down and make a spreadsheet that shows what your income is and what your expenses are. Include all monthly expenses as well as a basic guesstimate as to what your daily expenses add up to over the course of a month. This will give you a good idea of where you're spending your money.
- Start cutting back on spending. Planning for the financial future is going to mean making some changes to your present spending to free up some money for the future. Use your spreadsheet to assess where you can start saving some money. Consider whether you need additional income and how you might obtain it.
- Settle your debts. The debt that you calculated in the first part of your financial planning needs to be paid off. This means creating a realistic plan for payments. It could also mean moving debts around - taking out a home equity loan to cover all credit cards and reduce your monthly payments is one example of how this can be done.
• Make a commitment. The most important thing that you can do in the present is to commit to getting serious about financial planning. Sit down and write out your goals for the financial future and include an affirmation that you are going to meet these goals. This may sound a little bit hokey to some but can greatly assist you in the long run with remain committed to your financial future.
Phase Three of Financial Planning: The Future
This is part of financial planning that most people are thinking about when they sit down to start their savings for the future. With the other two phases complete, this phase becomes much simpler to execute and much more realistic to do well. There are many different aspects to what you might plan for your future, some of which you'll want to consider now and others which you'll come back to at a later date.
These are the areas of the financial future that you may consider planning for and how to get started with them:
- Retirement. The biggest reason that people want to plan for the future is that they want to make sure that they are financially stable when they retire. This is particularly true for up-and-coming generations that have reason to believe that there will not be social security to assist them down the line. Here are some steps that you can take to begin planning for retirement:
o Understand your 401K. Work through the details to make sure that you understand how it is supposed to work for you.
o Start a savings account now. Begin setting aside a percentage of your income in savings that you won't touch until retirement.
o Pay off your home. Your home is a valuable asset that can be a source of income for you during retirement. Pay it off now so it's a help instead of a burden in the years to come.
o Brainstorm ideas for making money after you retire. Retirement doesn't mean that you can't earn an income. Consider if there are part-time jobs or work at home projects that you might be able to work on for a few years after retirement.
o Envision your financial future. Sit down and make a list of the things that you want after you retire. This will help you set some savings goals and keep you focused on your plans.
- College tuition. Retirement isn't the only reason that people want to start planning for future finances. Often, parents want to make sure that they have enough money set aside to pay for their children's college education. Here are some steps that can be taken to do that:
o Create a savings account for your child. Work out budget for adding to this account regularly.
o Understand the 529 plan. See if this government-sponsored tuition savings plan makes sense for your family.
o Beg. Well, don't beg but start telling grandparents and other relatives that they can help out at holidays and throughout the years by gifting your kids with tuition money that goes into a special account.
- Emergencies, travel and medical expenses. Most people also want to save money for these types of unexpected costs that come up over the years. There are two important things to do in this area:
o Save money. There should be a separate savings account for this type of expenditure so that you don't have to pull money from the retirement account or the college tuition account.
o Get insurance. Most expenses are significantly reduced when you work paying for insurance into a monthly budget instead of trying to deal with these types of expenses on your own.
• Investment. In addition to figuring out how to save for the future, many people want to know how to start investing in businesses and stocks that will make them money down the line. The best thing that you can do is to speak with a financial planner who will assist you in understanding the ins and outs of investment and how it will work for you.
There are many different things that you can start doing today to begin saving money for the future. There are also things that you can do to plan for generating income even as you get older. However, these future plans won't work out well unless you have a solid foundation for understanding your financial past and present.
Ross Harrison from Tokyo, Japan on December 28, 2010:
Good Stuff, thanks for posting.
Haydee Anderson from Hermosa Beach on February 09, 2009:
good points you have here. thanks
Elisabeth Sowerbutts from New Zealand on January 26, 2008:
Curious about this comment
"Get insurance. Most expenses are significantly reduced when you work paying for insurance into a monthly budget instead of trying to deal with these types of expenses on your own."
That's certainly not the case in Australia/NZ - I tend to self-insure a lot. I only got insurance on my personal effects about 8 years ago. I insure houses and used to insure m income when I was a high income earner. I have never had comprehensive health care insurance - the cost of going to the doctors is maybe US$50 / visit which is a lot cheaper than the equivalent insurance - unless you are going every week! I have recently decided to self-insure for major health stuff too - the government pays for accidents but for other items as long as you have access to about $20k (line of credit for most people with a home) then its often cheaper to pay if you have to
Hector Herrera from Dominican Republic on January 26, 2008:
This is excellent guide for financial recovery.It show us the way to diagnose our failiures from a historical point of vies in order to learn from our mistakes and avoid them in the future. I gives us a way plan based on this diagnostic.
I enjoyed it and learn a lot.
Prince Maak from Just Above the EARTH and below the SKY on January 26, 2008: