Before learning the process of financial planning, let’s get a brief understanding of what actually is personal finance planning.
So, Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. It can be defined as the process of managing your money to achieve personal economic satisfaction.
Now, We can start learning the financial planning process in just 6 steps.
Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION.
- Evaluate income, savings, living expenses, and debts.
- Prepare a list of current asset and debt balances and amounts spent for various items.
- Match financial goals to current income and potential earning power.
Step 2: DEVELOP FINANCIAL GOALS.
- Identify feelings about money and the reasons for those feelings.
- Determine the source of your feelings about money (facts or influence of others).
- Determine the basis of your financial priorities (social pressures, household needs, or desires).
- Decide on specific financial goals to pursue for your situation.
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION.
• Common courses of action include:
• Continue the same course of action.
• Expand the current situation.
• Change the current situation.
• Take a new course of action.
• Creativity in decision making is vital for effective choices.
• Electing to “do nothing” can be a dangerous alternative
Step 4: EVALUATE YOUR ALTERNATIVES.
• CONSEQUENCES OF CHOICES.
• Opportunity cost: What you give up by making a choice.
• The cost, or trade-off of a decision, cannot always be measured in terms of money/currency.
• May refer to the value of money or time that you give up.
• Decision-making will be an ongoing part of one’s life.
• Consider the lost opportunities that will result from each decision.
• Uncertainty is a part of every decision.
• Consider inflation risk, interest rate risk, income risk, personal risk, and liquidity risk.
• FINANCIAL PLANNING INFORMATION SOURCES.
• To minimize risk, gather relevant information from print media sources, financial institutions, and financial specialists.
Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN
• Develop an action plan that identifies ways to achieve financial goals.
• Possible action plans can be increasing savings, reducing spending, increasing income by working extra hours, or making provisions for taxes.
• To implement action plans you may need assistance from others.
Step 6: REVIEW AND REVISE YOUR PLAN.
• Financial planning decisions need to be assessed regularly.
• A complete review should be done at least once a year.
• More frequent reviews may be required for changing personal, social, and economic factors.
• Regular reviews of decision-making process can help in making priority adjustments to achieve financial goals.
So, now you have the guide to start your financial planning.
Don’t wait, start as soon as you can so that your money can grow by itself and you don’t have to work for it.