When you plan, you identify financial goals and develop strategies to meet them.
When you do financial planning, you're looking toward the future, specifically at building the kind of security you'd like to have and being able to afford the lifestyle you want. But to plan successfully, you also have to evaluate the present, including the financial choices you're making now. Otherwise it's too easy to find yourself making random decisions that won't move you toward your goals effectively, or that may even interfere with achieving them.
A financial plan is a game plan that evaluates your current assets and debts, identifies the things you want (or need) to provide for, and lays out a strategy to pay for them. Developing the plan is one thing. Sticking to it is another.
It's never too soon, or too late, to begin financial planning. Financial planning is important, whether you've just started working or are thinking seriously about retirement. And it should be a continuing process, so that you can evaluate your progress, revise your goals, and update your strategies on a regular schedule.
Without planning, you run certain financial risks. You may not have enough in reserve to meet expenses you're expecting, like the down payment on a home or the price of a college education. You may have to revise your retirement plans. Or you might leave your family without enough to live comfortably if something happens to you.
DEFINING YOUR GOALS Planning is important because it helps you identify a range of goals that you're working to achieve:
Short-term goals You can invest for things you hope to have in a couple of years, like a new car or a new home.
Mid-term goals There may be expenses that will occur several years ahead, like tuition payments or a vacation home.
Long-term goals You probably have hopes for a comfortable retirement, the opportunity to go places and do things you've always wanted, or a chance to provide security for your heirs.
In financial planning terms, creating a strategy means defining the steps you'll take to accumulate the money you need to pay for the things you want.
To begin, you need a clear sense of what your goals are, what they will cost, and how much progress you've already made toward achieving them. For example, you will have to evaluate the performance of the assets you already have. And you probably will have to find ways to increase the amount you're investing and select how you will invest it.
Many people take advantage of professional advice in drawing up a financial plan and putting it into action. You can work with a particular person from the beginning, consult a number of different experts, or choose someone to execute the decisions you make on your own. The biggest danger isn't making a mistake by choosing the wrong approach. It's in doing nothing about investing.
A major advantage of working regularly with an adviser is the added incentive it can provide to get started and stay focused.