Financial planning is the process of creating a comprehensive plan for the future. This plan identifies your goals, identifies your current financial resources, and helps you to save for the future. Financial planning also helps you monitor spending, establish budgets, and increase cash flow. Using a financial plan can save you from being burdened with debt or unable to make necessary payments.
Financial planning has evolved over the years. It has become more predictive and data-driven, and it is no longer a yearly exercise. It now incorporates data science and best practices. It is now predictive and involves examining why things happen and what is likely to happen. While financial planning can help you set financial goals, it cannot give you a guaranteed outcome.
Before creating a financial plan, it is important to compile all relevant financial documents. This includes income sources, loan balances, and investments. The more information you have, the easier it will be to create a detailed plan. In addition, this method can help you save for the future and help you prepare for tough times.
Developing a budget is an essential first step. The NerdWallet website suggests using the 50/30/20 budget principle, which means allocating 50 percent of your take-home pay toward needs and 30% to wants. The remaining 20 percent is earmarked for saving and debt repayment. Medium and long-term plans will focus on reducing debt and planning for retirement. Financial planners will also ask if you have a 401(k) plan.