OVERVIEW OF FINANCIAL PLANNING; BENEFITS, COMPONENTS, AND THE PROCESSES.

Money may not make you happy but it can answer a lot of questions you may be asking and prevent a lot of misery. _ Benjamin Nathan Otchere, FPWM

Financial planning is a comprehensive process that involves evaluating an individual's or an organization's current financial position or situation, identifying financial goals, and developing a strategy or a plan to achieve those goals. It encompasses various aspects of personal or corporate finance including budgeting & saving, investing, managing debt, and planning for retirement, tax planning, and estate planning. In the context of individual finances, the financial situation can be identified by examining your assets and liabilities through your financial statement. Also, a budget can help you identify your spending pattern, an added diagnosis to the financial statement examination. In this edition of financial planning insights, I will be sharing why you need to plan your finances, 7 key components of financial planning, and the systematic efforts involved in financial planning:

Why you need to plan your finances?

1. Peace of Mind: Everyone desires to have peace when it comes to finances. Always seeking financial help from cronies and family is always uncomfortable. When you intentionally plan your finances it gives you peace of mind. You get the serenity and sanity to enjoy life. Also, in planning financially, you reduce financial stress by having a structured approach to managing finances and ensuring preparedness for various life stages and events.?

2. Financial Direction and Clarity: One of the things that comes to mind when you plan your finances is direction and clarity. When you set up your financial plans and put them in motion, you provide a clear roadmap for achieving financial goals and making informed and better financial decisions.?

3. Financial Independence & Security: Who doesn't like independence or freedom? Everyone does, right? It doesn't matter in which area of life you are seeking freedom. A financial plan gives you the financial independence to live an honorable life full of choices. For security, financial plans, help in building a solid financial foundation, preparing for emergencies, and protecting against risks.

4. Financial control and Efficiency: Financial planning gives you absolute control over your finances. Everyone doesn't want money to control them but we want to control money. Your financial plan will enable you to be disciplined in spending and saving, leading to more efficient use of resources and better control over your financial future.

You need a budget; A proven system for breaking the paycheck-to-paycheck cycle, getting out of debt, and living the life you want. _Jesse Mecham's You need a Budget book

Key Components of Financial Planning

1. Budgeting and Cash Flow Management: Budgeting is one of the financial planning tools that helps you manage your limited resources. It involves tracking income and expenses to ensure effective management of cash inflow and outflow and to identify areas where spending can be reduced. An individual, a corporation, or a sovereign nation that can budget consistently and monitor can make wealth through their limited resources.?

2. Saving and Investing: Savings and investment is the act of setting aside money for future needs and investing it in various financial instruments (stocks, bonds, mutual funds, etc.) to grow wealth over time. Here, you put your money to work harder for you, enjoying the potential of a compounding effect.?

3. Debt Management: Another tool to help you attain financial freedom in financial planning is debt management. A debt management plan will help you analyze current debts and create a strategy to reduce or eliminate them efficiently. It also involves strategies for managing various kinds of loans, credit cards, and other liabilities.

4. Retirement Planning: Retirement planning is the act of strategizing to fund your future today so that you can live financially independently, like today while at retirement, i.e., the event (Otchere, 2023, p. 52). Determining how much money is needed for retirement and developing a comprehensive and easy-to-follow investment plan to reach those goals, often involving retirement accounts like the three-tier pension scheme, 401(k) plans, IRAs, etc is very imperative for every career person or business owner.?

5. Tax Planning: Tax planning is strategically planning financial decisions to minimize tax liability through various legal means such as deductions, credits, tax waivers, and income timing.

6. Insurance and Risk Management: Insurance is a financial arrangement where an individual or corporation pays a premium to an insurance company in exchange for protection against potential risks or financial loss (Otchere, 2023, p. 64). Insurance in its entirety is about exchanging and managing risks. We can also say it is a way of assessing risks and ensuring adequate insurance coverage (health, life, disability, property, etc.) to protect against financial losses.

7. Estate Planning: Estate planning is the process of preparing for the transfer of assets after death, including wills, trusts, and other estate planning tools, to ensure that assets are distributed according to wishes and with minimal tax impact or wealth loss.?

The abundance of natural resources is not equal to economic bliss, nor is the abundance of wages or salary equal to financial independence. _Benjamin Nathan Otchere, FPWM

Steps in the Financial Planning Process.

To be successful in your finances, you need a financial plan. How do you get a financial plan as listed above earlier? I have made a simple, step-by-step, proven method to help everyone and this is similar to the 7-step process that is recognized internationally.

1. Gathering Financial Data: The first step is to collect all relevant financial information, including income, expenses, assets, liabilities, insurance policies, and tax documents. This information can be obtained using the personal financial position and the budget statement.?

2. Diagnosing & Analyzing Financial Status: The second step is to evaluate your current financial health and situation by analyzing the collected financial data in step one to understand your net worth, spending pattern or cash flow, and financial habits.

3. Establishing Financial Goals: In this third step, you must identify short-term, medium-term, and long-term financial goals. This will be realized through the analysis of your financial data. Financial goals established could range from buying a house, funding education, planning for retirement, etc

4. Developing a Financial Plan: In the fourth stage, one has to create a detailed plan that outlines strategies to achieve the identified goals. This includes specific actions, timelines, monthly contributions, assumed average interest rates and financial products or services to be used.

5. Implementing the Financial Plan: At this last but one stage, execution is critical. This is the most crucial stage of the whole financial planning process. Here, you must be committed to execution. Executing the financial strategies laid out in the plan. This could involve opening investment accounts, purchasing insurance, setting up automatic deductions, restructuring debt, etc

6. Periodic Monitoring and Review: Here is the last stage. This stage is also very important. This is where you check whether you are on track or not. Whether you have made progress or are retrogressing. Periodically or regularly reviewing and updating the financial plan to ensure it remains aligned with changing goals, life circumstances, and economic conditions is prudent in this last stage. Adjustments are made as needed to stay on track.

In a nutshell, financial planning is a dynamic and continuous process that involves evaluating an individual's or organization's financial status, identifying financial goals, and creating strategies to achieve those goals. It requires regular assessment and adjustments to ensure sustained progress toward financial stability and success. This can involve budgeting, investment management, risk management, tax planning, retirement planning, and more.

References;

a. Otchere, B. N., FPWM (2023, October 1). Basics of Retirement Planning [PowerPoints].

b. Otchere, B. N., FPWM (2023, October 1). Basics of Insurance and Risk Management [PowerPoints].

Author: Benjamin Nathan Otchere, FPWM | Certified Financial Planner | [email protected]