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What is financial planning?

Financial planning might sound like something only the rich need and can afford. Maybe you’re picturing stocks, bonds, and second homes – but all of us need some sort of financial planning.

Financial planning is a process, not a product. It’s the long-term method of wisely managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life. In order to be able to create a sound financial plan, goals must first be established. A follow-up meeting is then scheduled, during which data is gathered to analyze and evaluate your financial status. Once the financial plan is complete, your plan can be developed and implemented. Monitoring the plan on an ongoing basis (every 3-5 years) is essential in order to make necessary adjustments to reach your goals.

In these next paragraphs, I’m going to detail for you the steps needed in financial planning:

Identify goals: Think broadly about life goals and what you need financially to achieve them. If you’re thinking about buying a house, a second home, have kids, or are thinking of having kids, you want to be thinking of a financial plan. You also want to be thinking about when you would like to retire or the income you are going to need when you retire.

Collect financial data: What’s your net worth — that is, the value of your cash, investments and other assets versus your debts? How much cash is coming in and going out? The money you spent last year, where did it go? What did you spend on groceries, what did you spend eating out, or going on vacations? All these things get tied into the financial plan.

Put it all together: Contrast your goals with the data about your income, expenses and net worth. Don’t be disheartened — remember, you’re mapping how to get from where you are now to where you want to be.

Develop immediate, medium-term and long-term plans: Building and following a budget is a common immediate step. Reducing credit card or another high-interest debt is a typical medium-term plan that can unlock long-term savings growth. Life stages will dictate some things: If you’re nearing retirement, you want to think about when you want to retire, and how to make the money last. If you’re a millennial, you need to start doing something now about retirement savings if you haven’t started.

Put your plan into effect: Set realistic goals and check in on them each month. The goals should support one another. For example, a goal to reduce high-interest credit card debt by $250 a month helps a medium-term goal of improving your credit, which will help longer-term goals like buying a home or investing more for retirement.

To start a financial plan, or to make sure you’re on track today, click here for your FREE Retirement Report from Rukosky & Associates!

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