A financial plan is like a blueprint. It is a description of what you want to achieve and the tools you need to achieve it. Financial planning is the process of asking questions to ensure that you manage your risk against unexpected events, save enough for retirement, avoid pitfalls in the investment process and think about what happens to your estate after you die.
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Helps With Risk Management
Solid financial planning begins with risk management. If you can't work, you can't pay the mortgage. If you die early, you can't provide for your family.
A financial plan analyzes the risk of these types of events and the impact they could have on you and your family. Then it offers solutions.
A financial planner will advise you to move from more aggressive investing to conservative holdings as you age to reduce your risk of losing more than you have time to replace by the time you retire.
Helps With Retirement Planning
Social Security is not likely to provide you enough to live on when you retire. A financial plan will calculate your expected income from all sources, such as Social Security and a company pension. It will then look at your current and projected expenses to see whether you will have enough money.
By developing a financial plan you will know how much you need to save in order to have the kind of retirement you want. Working with a professional advisor who uses financial planner software helps you more accurately project your needs decades into the future.
More and more younger people are looking at the Financial Independence, Retire Early plan. FIRE aims to help you cut your expenses, increase your savings and improve your investments so you can start enjoying post-retirement life before you are in your 60s or 70s. Using financial planning books and visiting chat rooms, websites and social media channels of like-minded people can help you with your plans.
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Helps Avoid Investment Pitfalls
Another purpose of financial planning is to develop a long-term focus and keep you there. Whether you choose your investments yourself or use a professional adviser, many people, from neighbors to advertisements to unsolicited sales people, will offer ideas and opinions suggesting that the grass is greener with their ideas or services. A financial plan gives you a context in which to evaluate new investments and avoids the pitfall of trying to chase the highest return.
Improves Estate Planning
Purchasing insurance to care for a disabled child or to look after a spouse not used to financial matters is not enough. Specific instructions need to be laid out as to how the money is to be used. Similarly, families can split over questions about who runs the family business or who gets the cottage. It is the job of financial planning, specifically estate planning, to help you address these questions while you live so that your post-death wishes are executed.
Jim Priebe has been writing and publishing since 1992, when he self-published the newsletter "Spiritually Speaking." His next assignment was with a small-town newspaper in which he authored the column "Environmentally Sound." Later he wrote Web content and maintained a blog for a community radio station. He holds a master's degree in economics from Queen's University and studied radio broadcasting at Humber College.