A common misconception is that financial planning for individuals is not necessary. However, the recent Covid-19 pandemic proved otherwise.
Financial planning for individuals is as important as it is for a small business or large enterprise.
Rather than merely setting goals, it takes a more detailed approach to build a personal financial plan, as the term planning suggests.
To begin with, one must know the objective and importance of financial planning and its components to lay down a concrete financial plan.
In this guide for financial planning for individuals, we will cover these crucial elements.
“Life is a rollercoaster ride, and you’d have to face tough challenges that can wreck you and your finances. This is why you must have a comprehensive financial plan to tackle such challenges.”
Importance of Financial Planning
Financial planning is not only for individuals who have crossed their 30s or are earning a significant income.
In fact, financial planning can help low-income individuals and households be in control of their finances, manage their financial issues or debts, and gain peace of mind.
Depending on their income, lifestyle, responsibilities, liabilities, and spending habits, people may spend or save much of what they earn.
Although you use most of your money on the present expenses, you might have a plan or dream for the distant future at the back of your mind.
There can be many things you need to do or wish to do in the future of varying priority.
Think of these plans as a financial goal. However, achieving a goal in a life where there are thousands of variables involved requires careful planning.
These variables also include emergencies and unexpected expenses that you must prepare for.
In simple words, life is a rollercoaster ride, and you’d have to face tough challenges along the way that can wreck you and your finances. This is why you must have a comprehensive financial plan to tackle these challenges.
How to Start Financial Planning for Individuals
Starting with financial planning needs a stepwise approach and the basic knowledge of the components of a financial plan.
However, a guide like ours can help you get started with financial planning for individuals regardless of whether you know its basics or not.
The guide will list down all the components of a sound financial plan. An annual financial planning checklist comes in handy when drafting a financial plan.
Components of a Good Financial Plan
A sound financial plan must have mandatory elements to make it effective and useful. Take a look at these components of a good financial plan.
1. Objective or Financial Goals
Before you begin with financial planning for individuals, you need to know what you wish to accomplish. Therefore, it is essential to list your goals and highlight their financial aspect – such as the money you’d need to save.
For example, these goals can be:
- Short-term goals that are a few years due, such as buying a new car
- Medium-term goals that you plan to achieve in five to ten years, such as buying a house, saving for a wedding, or starting a business
- Long-term goals that you wish to achieve in twenty years or more, such as a retirement plan or paying for your kid’s college.
2. Net worth Statement
Financial planning for individuals needs a bottom line of your worth to start with. Therefore, list down all the valuable properties, assets, debts, and liabilities you have.
Technically speaking, you can divide this list into two categories – assets and liabilities. Assets mean everything that can bring you cash or monetary value. Liabilities are everything you will need to pay money for, such as debts, credit card payments, etc.
Now, remember the assets will have a positive value while considering the liabilities have a negative value for convention.
Your net value will be the difference of assets and liabilities. If your liabilities outweigh the assets, your net worth will come in negative figures.
However, don’t be discouraged if that’s the case, as a sound financial plan will help you overcome the debts and liabilities and save money as time passes.
3. Retirement Plan
Financial planning for individuals constitutes planning for retirement, which begins with thinking about how much you’d be spending in your retirement years.
Experts suggest that your expenses in the retirement period should be assumed to be 80 percent of your current expenses, that is when you have paid off all your debts and are rid of all the mortgages.
It is true that you will dedicate a portion of your current expenses to insurance (we will discuss that in the next section).
However, Medicare doesn’t cover all the expenses, and such expenses can add up in the long term or at old age. Therefore, it is important to consider everything you’d need to spend for in your old age when you go through retirement planning.
4. Insurance Coverage
Insurance coverage is important for a failproof financial plan that can tackle unexpected large expenses. It is a kind of protection shield that is quite effective when used strategically. Without good research, you risk giving money away on less effective insurance packages.
The essential kinds of insurance constitute health insurance, disability insurance, life insurance, and auto and house insurance.
Therefore, counsel with a vendor for top insurance plans for individuals that are affordable and find out how much they would cost in total.
5. Debt Management Plan
You might have paid for your college tuition with a student loan that is still running or probably took a loan for a car.
An individual can have various kinds of debts, and not all these debts are bad debts. For example, a mortgage helps boost your credit score and is useful for securing good credit deals.
However, high-interest debts such as an overdue credit card bill degrades your credit score and pulls you down.
Therefore, you should make it a priority to repay the high-interest debts in the short term – think of them as short-term goals.
A good understanding of the interest rates or a financial advisor can help you sort your debts on the basis of priority.
6. Emergency Funds
Emergency funds are a backup resourced for unexpected events, yet not so unexpected as they happen to you or a family member sometimes, such as losing your job, medical emergencies, etc. Therefore, allocate a good amount to your emergency funds and start saving urgently.
A tip to calculate your emergency funds is to sum your living expenses for six months.
Your savings or emergency fund should be highly liquidable, i.e., it can be cashed out readily, such as in a savings account.
7. Cash Flow Planning
Cash flow planning or budget is the detailed layout of your expenses and income and can help you determine where your money is coming from and going.
Therefore, with a budget, you can easily tweak your expenses and cut down on some to increase your savings.
To calculate the budget, you must list all your incomes and expenses and then manage them accordingly.
Moreover, when listing down your expenses, you can separate them into high-priority and low-priority categories to make the process simpler.
8. Estate Plan
You should have a will that outlines how your assets will be passed on and what happens to your property.
Moreover, whenever you wish to change the nominees or beneficiaries, you should update the same in bank accounts, insurance policies, etc.
If you own a small business or real estate with considerable financial value, seek a financial advisor and attorney to draft a will.
You must outline the attorneys and financial advisors who can make financial decisions on your behalf when things go wrong and you become incapacitated.
Is it Expensive to Have a Financial Planner?
The above guide shall equip you with the knowledge you need to begin financial planning for individuals. However, hiring a financial planner makes more sense, especially for high-earning individuals.
Financial planners are the professionals for this task and can help you develop a failproof individual financial plan.
An important question that might arise here is whether having a financial planner is expensive.
Thanks to plenty of accounting firms now offering financial planning for individuals and increasing competition in the market, hiring a financial planner isn’t so expensive anymore.
However, it does take a bit of effort and research to find the right financial planner.
Take a Free Trial of Our Financial Planning Services
To make the search easier for you, we offer a free trial for financial planning for individuals and businesses. You can sign up for the free trial and experience our services at no cost.
Once you feel like our services are what you need, you can choose from various plans and customize them per your requirements.