What Is Personal Financial Planning And What Are Its Key Components?
"It's not hard to make decisions when you know what your values are." - Roy Disney
What Is Personal Financial Planning?
>>This is part of The Ultimate Financial Planning Guide.
A personal financial plan is a detailed overview of your current money situation, short-term and long-term financial goals, and the steps you will take to achieve them.
Most importantly, a solid financial plan is highly individualized to reflect your personal and family situation. It encompasses things like your earning potential, investment plans, risk tolerance, tax plans, and more.
But more about the key components of a financial plan momentarily.
You might be reading this and find it very overwhelming to even think or read about creating a financial plan, let alone doing it. But please don’t hit the snooze button on your finances.
No one expects you to prepare a plan in one day - creating a financial plan is a process. I won’t lie and tell you that it’s easy to build a financial plan and stay on track. If it was, everyone would consider themselves financially secure (on the contrary, according to a recent study by Fidelity, 60% of Americans are concerned about their finances).
What I can tell you is that your future self will be very thankful if you take the time and effort to do it.
As promised, let's now get into the key components of a financial plan.
The Key Components Of A Financial Plan
I'm sure you figured it out already, but a good financial plan entails a whole lot much more than budgeting and tracking your investments. It takes into account all of the major areas of your financial life. Each component plays an individual role and collectively, they should give you a clear understanding not only of your current financial standing but also your projected finances.
These components might be categorized differently from person to person, but I like to bucket them into these 6 pillars of a financial plan. Some of these might sound familiar.
The 6 Pillars of a Financial Plan
- Income & Expenses
- Savings & Investments
- Assets & Liabilities
- Retirement Planning
- Tax Planning
- Risk Management
|Income & Expenses||
|Savings & Investments||
|Assets & Liabilities||
But first...Before we go any further in discussing financial plans, we will need to take a few steps back and get in tune with some very essential elements of building a personalized financial plan that works for you. One which you will be driven and motivated to pursue.
I am talking about your core values and financial goals.
No idea what I'm talking about? Perhaps you've some idea? Either way, you are in the right place to learn more.
Let's journey on to chapter 2 where we will discuss what personal core values are and why it is important to align your personal core values to your short and long-term financial goals and financial plans.
Ready? Well, let's do it then!
Chapter 1: What is a Financial Plan & What are its Components?
Chapter 2: What Are Your Core Values?
Chapter 3: How to Set SMART Financial Goals
Chapter 4: 7 Financial Goals to Help you Reach Financial Freedom Faster
Chapter 5: 10 Steps to Create a Solid Financial Plan