The Importance and Definition of Financial Planning

Financial Planning

 Plancorp Team By: Plancorp Team


Did you know that most Americans don't have a solid financial plan or enough emergency savings in place? In fact, only 30% of households in the U.S. have financial plans. This staggering figure underscores just how essential financial planning is—even for those who feel they have their finances under control.

In this article, we'll walk you through the basics of financial planning and why it's important. Then, we'll talk about the benefits of having a solid long-term financial plan while reviewing practical tips you can implement. 

What Is Financial Planning?

In essence, financial planning is developing a framework by which you can holistically look ahead to make strategic financial decisions, aligning your monetary decisions with your life goals. More than investing or saving, a solid financial plan outlines your actionable steps so you can achieve your financial goals much faster while using your risk profile and current net worth as a guide. Through financial planning, you can implement a more streamlined approach to increasing your income and investments. 

Why Is Financial Planning Important?

Financial planning is crucial if you want to achieve financial freedom, whichever stage of your financial journey you may be on. It provides direction, which allows you not just to accumulate wealth but also to use it purposefully to improve your life and reach the pinnacle of success. Your current financial situation will dramatically improve while you gain a more solid understanding of your investment options. As a result, once you reach a level of complexity, having a plan makes it easier for a professional to assess your status and point you in the right direction. A financial plan is a roadmap that can help you implement strategic financial decisions, not only for your short-term financial goals but also for your long-term ones. 

Financial Planning Benefits

Financial planning offers a number of benefits. Those with solid financial plans are often well-prepared for unforeseeable events in life at every stage of their financial journey. A financial plan can give you a clearer understanding of your current financial status as well as help you plot your financial life. For an astute investor, it allows you to have better gains while moderating risks. 

Moreover, a well-tailored financial plan also ensures that wealth surpasses your personal needs and wants and provides security to future generations. You’ll also gain peace of mind and have a better chance of being able to care for your loved ones. Here are some of the benefits of financial planning:

A Comprehensive Financial Overview

Financial planning offers you an all-inclusive perspective of your assets and liabilities, as well as your cash flow. You may have diverse assets, like real estate, mutual funds, equities, bonds, or businesses, but your plan will consolidate these varying elements to offer an accurate picture of how much money you make, your net value, and your cash flow. Your financial plan is not a single piece of paper with a checklist on it. It's a collection of your assets, goals, and plans that helps you make strategic financial decisions and feel confident that you're on the right track. It also tells you how much of your income you will need to set aside for your emergency fund, tax payments, monthly expenditures, and savings and investments. 

Maximizing Returns

As an investor, having a financial plan means you can maximize your returns without going beyond your risk tolerance. By regularly monitoring your financial plan, developed in conjunction with a professional like Plancorp, it's easier to incorporate evidence-based investing principles. Additionally, you can implement an approach that strives for consistency above short-term payoffs, which often go along with higher-risk investments.

Efficient Tax Strategy

A smart financial plan takes taxes into consideration so you can invest wisely. If you have taxable as well as tax-free accounts, these will allow you to strategize your asset allocation while minimizing your tax liabilities. You can open tax-deferred income-producing accounts like a Roth Individual Retirement Account (IRA) or opt for mutual funds with lower tax rates and other tax-efficient investments, such as municipal bonds. 

Generational Wealth Transfer

If you want to ensure that future generations of your family are provided for, then financial planning is crucial. You can take advantage of wills, trusts, and life insurance policies that can help you transfer your wealth in the most tax-efficient ways expeditiously without the risk of probate. These are also types of investments that need to be a part of your financial planning process. For example, a living trust helps you avoid losing money from probate expenses while also giving your family more privacy compared to a will. 

Financial Planning Tips: What Practical Strategies Can You Implement?

If you want to start strategically creating your financial plan, here are some tips that you should bear in mind:

Start Early

Time is one of your strongest tools. By starting early, you’re harnessing compound interest's ability to grow wealth. Compare these two scenarios: if you started investing $200 monthly from age 25, and then decide to retire when you reach 65, you could have a retirement fund of $520,000 (with the assumption of a 7% rate of return). But, if you had waited until you reached 40 before you started saving, you could only have around $160,000 worth of retirement funds. So, by starting early, you're taking advantage of one of the best investment tools out there—compounding interest.

Diversify Your Portfolio

Diversification means you’re investing in a variety of assets, strategizing among equities, bonds, mutual funds, estate planning, retirement planning, etc. This helps diminish the risk. The goal of diversification is to maximize returns by investing in assets that respond differently under identical situations. 

Additionally, there is a special callout for those who receive compensation in the form of equity from their job. While this is a fantastic way to benefit from the growth and success of your company, without proper financial planning, it becomes an easy way to end up with overly concentrated investments. For more, visit our full guide on making the most of equity compensation.

Review Your Financial Plan Regularly

Life's circumstances can change frequently, so your personal finances shouldn't be set in stone. You may have to adapt considerably so these changes won't negatively impact your financial goals. 

Let’s say that your family recently experienced a medical emergency; you may need to adjust plans for your savings or be more cautious with your investments. 

Additionally, working with a trusted wealth manager can make a huge difference when you need someone who can review your plan regularly. Don't be afraid to ask your financial advisor questions — the success of your financial planning could depend on it. 

The Value of Personal Financial Advisors in Tailoring Comprehensive Financial Plans

Creating an extensive financial plan by yourself may appear simple, but the more detailed facets can easily become overwhelming. Collaborating with a financial advisor can provide you with personalized advice specifically designed for your financial circumstances, but you also need to know how to interview a financial advisor. Wealth managers possess expertise in navigating intricate financial landscapes with the aim of creating not only strong but also relevant financial plans. 

With our elite team of financial planners, we go beyond providing standardized advice; it is more about crafting strategic plans integrated with your personal finance and financial goals. Contact us and talk to a financial advisor. We can help you create a tailored financial plan based on your needs.


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Plancorp started with a unique philosophy: Always put your clients’ interests ahead of your own, and you’ll build a successful business. That was in 1983, but the sentiment still drives every decision we make. After 40 years of helping individuals, families and business owners plan for financial independence, our commitment to serving as financial life advocates is stronger than ever. More »