Financial Planning is a process that helps build a road map that defines the direction in which you want your life to proceed into the future. If you think of your future as a story that is yet to be told, financial planning is then the process by which you will tell that story. A financial plan will help you navigate through the life stages such as employment, marriage, home ownership, parenting, eldercare, divorce, retirement and ultimately death—and all the stops in between. A Financial Plan is a course of activities or specific actions that can help achieve and implement your dreams, goals and aspirations.
Major Areas of Financial Planning
- Retirement Planning- Will you be financially secure during your retirement? You can increase the chances that the answer will be yes by careful retirement planning. Setting up a retirement planning strategy should be a top priority. More than ever, it’s up to you to achieve your wealth goals. Work with a qualified financial planner about the best way to build your nest egg and to learn which investment options make the most sense for you.
- Estate Planning- Why do I need an Estate Plan? Estate planning is the process of accumulating and disposing of an estate to maximize the goals of the estate owner. The various goals of estate planning include making sure the greatest amount of the estate passes to the estate owner’s intended beneficiaries, often including paying the least amount of taxes and avoiding or minimizing probate court involvement.
- Risk Management- What things should I insure? How’s your health? Could you afford to lose it? If you become sick or disabled, temporarily or permanently, would you be able to support yourself? For most people, the answer is “no,” yet a large number of people — even some with quality health insurance — are not insured for disability.
How about your life? If you were to die suddenly, what kind of financial hardship would result? Would there be dependents left without basic support? Would your burial costs impose undue hardship on others? Morbid as they are, these questions are at the root of life insurance decisions. If there are people who can’t afford to lose you, you should buy life insurance.
Sometimes, you buy insurance to protect lending institutions. If you have a home mortgage or a vehicle loan, you have little choice. The lending institution will force you to get insurance and will dictate the coverage levels. In this case, it’s not your financial hardship that lenders are nervous about; it’s their own.
In the same way, private mortgage insurance (PMI) protects the lender, not you, should you default and stick them with a house worth less than the balance of your debt.
What if you own a car, home, or other personal possessions outright? Start by thinking about which of these are the most valuable. If these valuables were damaged or lost by accident or theft, would this lead to severe financial hardship? If so, you should purchase enough insurance to replace them. Most homeowner’s policies cover the loss of personal possessions. Auto comprehensive and collision insurance covers the loss of your transportation.
The most complicated topic among these is liability insurance. You buy this to protect yourself from others. If your negligence or error should lead to damage of their property or, worse, their health, you should be prepared to cover these costs in case you are sued. Such liability coverage usually comes with your car and home or renter’s insurance. So-called “umbrella policies” are also available for more general liability. Coverage limits, in these cases, are usually based on your net worth.