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What is Financial Planning and Why is it Important?

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Many people mistakenly think that financial planning is only for the very wealthy. They imagine that it applies to people with so much money they just don’t know what to do with it all. But nothing could be farther from the truth. Financial planning is beneficial at all income levels. Sound financial planning is a process. It is developing and following a realistic plan that matches your income to your goals and helps you to achieve your goals through fiscal discipline and conscious decision making. Every stage of life presents its unique financial hurdles. A good financial plan will help you prepare for those hurdles and navigate your way to your financial and life goals.

The Goal of Financial Planning

Life is full of expenses, both expected and unexpected. In addition, many major life goals carry a price tag. Whether you want to buy a house, save for college, prepare for marriage, ensure a comfortable retirement, or make a plan to transfer your wealth to your heirs, financial planning should be a part of your goals. A comprehensive financial plan will account for your income and your cash flow and help guide you toward your financial goals. It is often amazing how much you can do with your money when you have laid out the proper path.

According to a 2012 survey, less than a third of household financial decision-makers had a comprehensive financial plan. That means that the vast majority of Americans have no idea how to get from where they are now to their financial goals and dreams. While there may be some tools to create your own plan, the best thing you can do for your finances is to hire a qualified financial planner. A financial planner has the skills, expertise, and resources to help you put your money to work to do the things you want to do. Often they will have access to a wide variety of financial products that will help you manage your money.

Protecting Against Inflation

One of the main concerns that most people have not planned for is inflation. Long-term savings goals are essential. However, $100 saved today will not be $100 10, 20, or 30 years from now. While the amount of money stays the same, its buying power decreases. This is why simply squirreling away your money is a bank savings account is not the most effective method of saving for long-term goals. Instead, a financial planning professional can help identify the best place to put your money, based on your appetite (or tolerance) for risk and your long-term goals.

Planning for Retirement

Planning for retirement is one of the most common financial goals. A vast majority of Americans have an inadequate retirement savings plan or none at all! This can be a big mistake. Although the age of retirement is steadily increasing, there comes a time for most people when they can no longer work the way they did at the height of their earning years. Sometimes this is due to layoffs and the difficulty of finding a new job at an advanced age. Other times it is the result of aging and a lowered ability to perform the tasks associated with working.

Of course, many people would prefer to retire on their own terms, before age or layoffs force them out. To retire comfortably, financial planning specialists suggest that you will need to replace 70% to 80% of your pre-retirement income. That retirement income can come from a combination of Social Security, savings, a 401k, and any other retirement income you may have established in your working years. Together, though, they should be at least 70% to 80% of what you make before retirement. 

Planning for retirement can seem daunting, as the total amount you need to save is significant. However, financial planning exists to help you conquer these sorts of challenging financial goals.

Facing a Financial Crisis

Nobody plans to have a financial crisis. But that doesn’t mean you can’t prepare for a financial crisis. A financial crisis is any life event that has a significant impact on your finances. It could be either a major expense of a sudden loss of revenue. The most common types of financial crisis are medical expenses due to serious illness and loss of income due to a layoff.

One of the leading causes of bankruptcy in America is medical expenses. If you or a loved one become seriously ill, the financial impact can be overwhelming. This is one of those expenses that you really can’t skimp on. If a loved one is ill, there isn’t a lot of room for being frugal. Appropriate planning can soften the blow of medical expenses. By preparing a realistic emergency fund, you can absorb some of the costs of a medical crisis and avoid the most extreme financial consequences.

Another financial reality that few people want to think about is the chance of getting laid off. Even seemingly secure jobs can evaporate if a company is acquired, makes some bad financial decisions, or undergoes some other major shift. Changes in the economy that have nothing to do with you or your employer can have dire effects. So it makes sense to plan for a temporary loss of income. The general rule of thumb is to keep six months of income in emergency savings. Of course, no one is average, so developing a sound financial plan with a financial planning professional is important. Being prepared for a financial crisis can make the difference between a harsh blow and total financial ruin.

Transfer of Wealth

Don’t be fooled by the term “transfer of wealth”. It doesn’t necessarily mean that you are passing on some huge store of wealth. Instead, wealth is a term that refers to your full portfolio of assets, including savings, investments, your home, and your property. If you plan on passing on what you have to your children or other heirs, bringing in a financial planner is very important. If you have no plan, your estate (everything you own) will go through probate. Probate is a legal process involving a probate court that will oversee the distribution of the deceased’s estate. This is a lengthy process, taking six to nine months on average. It can also be costly, involving court fees and lawyer’s fees.

The most common way to avoid probate is with a living trust. This is something that your professional financial planner can help you to set up. By putting most of your estate into a living trust, you can avoid the probate process and speed up the transfer of your wealth while preventing many costs. This is just one option for setting up your estate so it can be transferred to your heirs. The main thing to know is that having no plan at all can be costly and disruptive and may result in much of your estate disappearing into fees and taxes. Financial planners can help smooth out the process, so it goes how you want it to.

Hiring a Financial Planner

If you are considering hiring a financial planner, it is important to make sure that you have a financial planner who puts your needs first. While most financial planners are honest and upstanding, there is always a temptation to do what is best for the financial planner first. So if you are ready to hire a financial planner, do your research. Check with friends or family for personal references. Do your research, including with the Better Business Bureau. There are also certifying agencies, such as the Certified Financial Planners, that accredit some professionals. Of course, one of the best ways to find great professionals in any field is through TrustDALE. TrustDALE puts every business through a rigorous 7-part investigative review process. Dale trusts The Lloyd Group. They have been in business since 1995 and have a proven track record.

Dale trusts The Lloyd Group and so can you!