What Is Personal Financial Planning and Why Is It Important?

When it comes to finances, it is best to be prepared. Money matters are complicated to manage. It is important to balance your short-term wants, long-term goals and simultaneously handle any future exigencies that are out of your control. Whether it is about your daily budget, paying car bills, buying a home, or creating a retirement corpus, each aspect requires intricate personal financial planning. Therefore, it is crucial to figure out an effective medium to pay your bills while also planning for the future.

Despite understanding the importance of financial planning, most people do not undertake worthwhile steps to streamline their financial matters. According to a recent survey, three in four Americans (approximately 77%) are apprehensive about their financial condition. Their financial worries include saving for a child’s education, paying car and home loans, creating a retirement nest egg, and more. Most of these Americans are worried about their future. 68% of those surveyed are worried about not saving enough for retirement, 56% are anxious about keeping up with the cost of living, and 45% are facing difficulty in managing their debt levels. The impact of poor personal financial planning is not limited to the monetary aspects. The survey points that the monetary stress in Americans has further expanded into other aspects of their lives. 43% of respondents feel fatigued, 42% find it difficult to concentrate at work, and over 41% have trouble sleeping. About 25% of respondents also feel monetary stress impacts their relationships.

Therefore, effective money management is important for your short-term and long-term aspirations, as well as for a balanced personal life. Moreover, with the ongoing financial stress induced by the COVID-19 pandemic, creating a personal financial plan has become more important. At the core, personal financial planning covers your money, savings, and investments. A sound personal financial plan takes care of budgeting, savings, banking, insurance, debts, investments, retirement planning, taxes, and estate plans. The ultimate objective behind creating a personal financial plan is to meet your monetary goals, such as having sufficient funds to fulfill your short-term needs or achieve long-term goals (such as retirement planning, sponsoring children's education, and more. Typically, a financial plan involves a comprehensive analysis of your present finances, life goals, and any steps you aim to take to achieve those targets. You can consult with a professional financial advisor who can create a customized financial plan for you based on your risk tolerance, financial goals, current financial situation and future short-term and long-term financial goals.

Here is what you need to know about personal financial planning and the importance of financial planning for an individual:

What is financial planning?

Personal financial planning encompasses a disciplined approach through which you effectively manage your finances and maximize your existing monetary resources to achieve financial goals and objectives. It enables you to plan and manage activities, such as income generation, budgeting, spending, saving, investing, and protection (life insurance, health insurance, and estate planning. Personal financial planning is vital because it assures optimum asset utilization, equipping you to meet your life goals. Personal financial planning is not only for the affluent. Everyone who earns money needs a roadmap for a financial future. You can create a financial plan yourself or consider taking help from a professional financial advisor to ensure your roadmap is foolproof.

What is the importance of financial planning?

Planning is an integral part of human life, evidenced especially after the COVID-19 pandemic. In the prevailing social and economic circumstances, the importance of financial planning for an individual is indisputable.

Here are some of the key advantages of personal financial planning:

  • Enhance your savings:
  • A sound personal financial plan helps you boost your savings. Even though you can increase your savings without having a financial plan, this strategy might not be the most effective for you. With a financial plan, you can comprehensively understand your income, expenses, and future goals and accordingly create a budget to maximize your savings while living a financially comfortable life in the present. The objective is to create a zero-based budget, track down your expenses, and lower your spending consciously to increase your savings in the long run.

  • Improve your standard of living:
  • Most people assume that a financial plan involves living life frugally. However, a financial plan is the opposite. When you create a financial plan, you identify areas that report excess spending and redirect the funds towards savings or investments. A good financial plan does not require you to compromise on your standard of living. Instead, it aims to improve your expense strategy and increase your income through additional sources. Personal financial planning enables you to achieve your goals while living relatively comfortably.

  • Be prepared for financial emergencies:
  • Emergencies cannot be anticipated. The only way to be prepared for unexpected events is to create an emergency corpus that can come to your aid during such critical events. For instance, COVID-19 led to unexpected losses in the stock market, loss of income, unemployment, etc. While you could not evade the circumstances, you could effectively handle the crisis with a comprehensive financial plan in place. Your financial plan involves creating an emergency corpus, including six months of living expenses, which will sustain your expenditures during financially weak situations or emergencies requiring immediate monetary aid. This means during an emergency, you do not have to worry about arranging funds. You are well-equipped to handle any financial emergency.

  • Combat inflation:
  • Inflation is a real phenomenon, one that can erode years of your hard-earned money. As per CPI (Consumer Price Index), the present rate of inflation in the U.S. is 6.2%, the highest in over three decades. It is anticipated to rise sharply in the approaching years. Sound personal financial planning helps you offset the impact of inflation in the long term by choosing investments that generate inflation-beating returns while aligning with your risk tolerance. For instance, if you are a high-risk investor, you can create a diversified portfolio comprising primarily stocks to generate high long-term returns. Stock investments can potentially offer higher returns that can help you accumulate significant wealth in the long run.

  • Achieve retirement financial security:
  • Retirement is the start of the golden period of your life. However, you can only live a financially secure retired life if you have a sufficient retirement nest egg to support your non-working lifestyle. According to a PwC report titled ‘Retirement in America’, one in four Americans has no retirement savings. The others who have saved for retirement are significantly short of the actual sum required to live a comfortable retired life. According to the report, people between the ages of 55 and 64 years, on average, have $120,000 as their retirement savings. According to this, the monthly retirement sum for a person is only $1,000, which is too little to support a comfortable retired life. Personal financial planning can help you create the required retirement lump sum. Your financial plan can involve effective savings and investments to accumulate the required retirement sum. Irrespective of how far your retirement is,financial planning is always helpful in building a safe financial net.

  • Reduce taxes:
  • Taxes consume a large portion of your income. Without a financial plan, you might be missing out on several tax-saving opportunities, which can considerably reduce your tax burden. Wise financial planning strategies, such as sponsoring the child's education, investing in tax-advantaged retirement accounts, giving charitable contributions, delaying withdrawals, etc., enable you to minimize your tax liability. Further, tax-loss harvesting strategies and capital gain offsetting mechanisms can also lower your tax duty.

  • Effective money management:
  • One of the most critical benefits of personal financial planning is that it creates financial discipline and helps you judiciously use your hard-earned money. For instance, you might be saving your money in cash or a bank account. However, deploying your funds in inflation-beating, tax-saving financial instruments like mutual funds, etc., is a much better use of your money. Further, avenues like real estate, alternate assets, etc., could also provide high returns. A financial plan helps you save your money in wiser financial instruments.

  • Attain peace of mind:
  • Holistic personal financial planning gives you a sense of security, allowing your mind much-needed peace. You are content knowing that you have sufficient funds to combat any exigency. Further, you have the right investments and tax strategy, you are moving toward your financial goals timely, and your retirement plans are in order. Financial planning helps you make smart decisions and create a security net that provides you with peace of mind.

How to create a personal financial plan?

Creating a personal financial plan is an exhaustive process. You have to consider monetary and non-monetary aspects to draft a foolproof financial plan. You can engage the services of a professional financial advisor to help you create an all-inclusive financial roadmap for your present and future financial security.

Here are some steps you can use to create a personal financial plan:

  1. Assess your current financial situation and goals:
  2. The first step in creating a financial plan is to analyze your present financial situation. Identify your income sources, list down your expenses, assess your savings balance, identify the gap in savings target, analyze your investment portfolio, check your taxes, evaluate your debt status, and more. This will give you an in-depth and realistic understanding of your monetary situation and equip you to make an informed financial plan that aligns with your life. Apart from analyzing your financial circumstances, assess your goals and values before creating a financial plan. Understand what you want to achieve in your life and list your different financial goals. Write all big and small financial goals and tie them with a timeline. However, ensure your goals are realistic and explicit. For instance, you want to purchase an SUV car worth $30,000 in the next two years, or you want to accumulate $ 1 million by 2035 (the year of your retirement). Your goals are the basis of your financial plan. They act as motivation and a guiding force for your strategies. Personal financial planning can help you better comprehend your financial objectives and deploy smart strategies to achieve them.

  3. Create a budget and redirect excess funds towards your goals:
  4. An infallible budget is the most critical step of a financial plan. Small cuts in your expenses can go a long way in helping you accomplish your goals. A sound financial budget can adequately cater to your present and future needs while ensuring you spend every dollar wisely. Personal financial planning involves assessing your current expenses, income, debt, priorities, short-term and long-term goals, etc., to create a budget aligned with your financial objectives like buying a home, accumulating a retirement corpus, etc. A financial plan functions as a guide, helping you trim unnecessary expenses and redirect excess funds towards your targets. The objective is to create a zero-based budget, where each dollar you spend has a definite purpose and is spent optimally. You can reduce your discretionary expenses like online subscriptions, dining out, etc. A financial plan enables you to identify areas where you are overspending and can reduce your expenditures for optimum money utilization.

  5. Set aside an emergency reserve:
  6. Creating an emergency reserve is a key step of personal financial planning. An emergency reserve is a lump sum set aside for any unexpected future contingency, such as loss of income, salary cut, health crisis, early retirement, etc. As per experts, your emergency corpus should hold at least six months of your current living expenses. However, this is only an indicative figure; the actual amount depends on your financial situation, life stage, risk tolerance, health status, etc. Keep your emergency reserve parked in a financial instrument that assures liquidity, capital safety, and decent growth on your funds. You can consult a professional financial advisor to understand how much to set aside as an emergency fund and which financial instrument to use for this purpose.

  7. Pay off your debts:
  8. Financial security is possible when debt-free. Debts are complicated and stressful – mentally and monetarily. Hence, paying off your pending loans is an important aspect to consider in your personal financial planning. A well-drafted financial plan helps you constructively manage your liabilities and become debt-free. Your financial plan can be instrumental in assessing your liabilities and using optimum debt management strategies like paying off high-interest debt through a low-interest loan, bridging your earning gap to eliminate the need for debt, and more.

  9. Manage your investments and related assets:
  10. Your financial efforts can go in vain if you do not invest your savings wisely. Hence, a sound investment portfolio is essential for your future growth and retirement years. An investment portfolio aligned with your monetary goals and risk appetite can help maximize your profits and enable wealth accumulation in the future. Your financial plan can involve finding the right investment options per your life stage, monetary condition, and risk tolerance. For instance, if you are 10-15 years away from retirement, your risk tolerance could be high. In this case, you can consider investing heavily in stocks and balancing your portfolio with some debt-related securities, alternative assets, etc. Alternatively, if you are closer to your retirement, it may help to create a conservative portfolio chiefly comprising debt-related, fixed income securities balances with some stock investments. The objective is to create a portfolio that aligns with your risk appetite. Your financial plan also involves monitoring and managing your portfolio and timely rebalancing your portfolio to enhance returns. A well-diversified portfolio in sync with your risk tolerance can help you effectively sail through testing market times like the one induced due to COVID-19.

  11. Create a retirement corpus:
  12. Retirement planning is an integral part of all financial plans. Right strategies in the present can help you financially secure your non-working years. Your financial plan can help you carefully assess different retirement savings vehicles {like an IRA (Individual Retirement Account), a 401(k), a Roth IRA, etc.} in terms of features, advantages, drawbacks, withdrawal limits, penalties, etc. You can focus on creating a retirement goal and define strategies to help you attain the target. Ideally, map your risk acceptance with your life stage and accordingly rebalance your portfolio. You have to be careful about the contribution limits, withdrawal rules, RMDs (Required Minimum Distributions), and more. If need be, you can ask a professional financial advisor to help you use different retirement accounts to lessen your tax liability, maximize savings, get penalty-free drawings, and ensure your retirement reserves last a lifetime. A smart financial plan also encompasses Social Security benefits, its withdrawal strategies, delaying strategies to maximize Social Security checks, and more. Your financial plan should ideally assist you in securing your health, lifelong care, government-sponsored health programs like Medicaid, etc.

  13. Deploy tax-saving strategies:
  14. Taxes are painful but a reality. Each year, you pay a large sum of your earnings as taxes, which reduces your savings. However, through financial planning you can minimize your tax burden. With effective tax strategies, you can lower taxes on your income. Proficient financial tricks like using tax-advantaged retirement accounts, capital gain offsetting strategies, charitable donations, lifetime gifts, trusts, and tax-loss harvesting tactics, etc., can aid in averting your tax burden. If you have received an inheritance or estate gift, financial plans can support you in reducing its tax implications. A dependable tax plan is the strongest pillar of a financially-sheltered future.

  15. Think of your estate:
  16. Estate planning is not only applicable to the rich. Instead, anyone who owns assets needs to include a holistic estate arrangement in their comprehensive financial plan. Fine estate planning can assure long-term financial security and fulfillment of legacy wishes. But estate planning is a daunting task because of the numerous regulations, tax laws, documentation, beneficiary rules, etc. Therefore, you could consult a financial advisor to get guidance in executing critical estate planning tasks, including taking stock of your assets, drafting a will, reducing estate taxes, reviewing beneficiary designations, streamlining foreign investments, and so on. Your financial plan can help you effectively use your estate assets and pass them on to your beneficiaries as desired, without incurring hefty taxes or penalties.

To summarize

Overall, the importance of financial planning for an individual is indisputable. It is best to begin personal financial planning as early in life as possible to benefit from better investments, longer time horizons, higher risk appetite, maximize returns through compounding, lower taxes, better savings and wealth accumulation, etc. You can also consider engaging with a professional financial advisor who can evaluate your financial requirements exhaustively to create a financial plan aligned with your needs and goals.

To get in touch with a fiduciary advisor who may help you create a suitable financial personal plan to attain your short-term and long-term financial goals, use the free advisor match service. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your needs and goals.

For additional questions on the most suitable financial strategies for your unique financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.

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