Components of a Financial Plan
February 12, 2025
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The financial goal of most people is to become wealthy. This is the reason why a lot of people are seen chasing their dreams of higher income. This is because, in their mind, a higher income correlates with being wealthy. A lot of the time, it negatively affects their health and happiness also. The normal assumption is that if a person has a higher income, then they will also have a higher net worth in the future. However, this is not the case.
The stories of many high-income earners going bankrupt later on in life are not uncommon. These stories can be found in the high earning professional class as well as amongst celebrities. The reality is that long term wealth has been associated with a long term tendency to consistently engage in financial planning. People who pay attention to their finances and take regular action on a month on month basis to end up being wealthier as compared to their peers.
In this article, we will have a closer look at the steps of financial planning.
There are certain predefined steps that need to be followed in order for effective financial planning. The steps have to be carried out in the sequence mentioned below:
The first goal of financial planning should be to make sure that all the needs are met. If excess money is leftover, it can be used to fulfill wants. The typical needs expressed by people are a house, a car, provision of education, and marriage for kids.
The ability to be financially independent during retirement is also one of the biggest life goals expressed by people. It is important that each goal has a specific time frame attached to it.
At this step, the investor has to find out how much money they have leftover for investment. It is also important to keep in mind that as the income will rise, so will the income taxes. This is the reason that tax planning often becomes a part of this step.
This step involves evaluating different debt, equity, and real estate options in order to finally select the investment vehicle. It is advisable to run projections at this stage and see how the desired net worth changes if the market performance changes. The transaction charges and the managing fees should also be taken into account at this point.
It is common practice for investors to set up an annual meeting with their investment advisors in order to review the performance of their portfolio. Based on the performance in the past periods as well as expected performance in the future, portfolio allocations may be changed.
The bottom line is that financial planning is a complex discipline that includes several other disciplines like retirement planning, tax planning, asset acquisitions, etc.
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