A common error that people make is to mistake financial planning with budgeting. While it is very important to have control of your finances, budgeting is only one building block in the financial planning process.
Budgeting is setting your income and expenditure in any given year. It is very important to set a budget each year and organise your finances. I wrote about how to do this previously. If your bank account is all over the place and overdrawn on a regular basis, you will find it difficult to plan for the future. By writing out your annual budget, you can begin to plan with a bit of certainty.
Financial planning is much bigger than setting a budget. The process starts with getting you to think about what is important to you in life. What is it that you want to achieve*?
Financial planning is not all unicorns and rainbows, setting goals of travelling around the world and spending six months of the year hiking the Himalayas. There are lots of practical and important financial obligations that are important to you that have to be planned for:
Once you have the basics in place, you are able to work on the life changing experiences. You can make decisions about your money that will make a difference to your life…going on those holidays that you thought you couldn’t afford, moving to your dream home, changing career to do what you are really passionate about.
The financial planning process helps you make those financial decisions with certainty. If you spend money now, what effect will it have on your future. Will you run out of money in 15 – 20 years time? How much more money do I need to earn each year to reach my goals? How much money do I need to save? Is it better to save money or pay down my mortgage?
And most important, it will tell you if you have too much money. Are you working too hard when you can be doing things that you really love doing? Can you help out your kids financially without putting your own lifestyle at risk?
What is the most important goal that you want to achieve and when do you want to achieve it by? Drop me an email at email@example.com and let me know.
*Spoiler alert – it’s financial independence