Financial planning is a term that can be applied to a variety of activities meant to help manage money. The goal of this planning is to prepare for future financial needs by looking at long term goals and realistic assumptions about future income and expenses. In broad terms, financial planning is the process of setting and achieving specific financial objectives with the aim of attaining specific financial goals. In laymen’s terms, financial planning is also known as budgeting, saving, investing or estate planning. In fact, financial planning is one of the most important aspects of personal finance management.
In general, a financial planning strategy is a detailed analysis of an individual’s present pay structure and future income and expense patterns with the goal of setting realistic financial goals with realistic assumptions about future consumption and ability to pay. The analysis would look into various sources of income like wages, salaries, alimony, interest income and other direct and indirect payments. Other factors such as taxes, social security and other benefits are also examined in order to set up a clear picture of how much money a person will be bringing in throughout his working life.
After setting up the necessary goals, the next step in the process of financial planning is to determine what investments should be made. Two main types of investments are savings and new investment. The first type is designed to produce income which will be used to meet the immediate and long term goals like buying a house or paying for kids’ college education. Investments in savings accounts are usually done to obtain interest income. In other cases, such as those for new homes, the focus of savings investments is to build equity.
Another type of investment is bond and mortgage programs. Bond programs are normally taken out in order to obtain more money to invest. Mortgage programs are typically done in order to purchase a property to provide stable financing for future goals such as home ownership. Savings accounts may also be established for the purpose of funding future expenses such as education, child care and other entertainment costs. The aim of saving programs and mortgage programs is to invest the saved funds in assets that will bring in more income in the future.
The process of financial planning is never complete if there is no way of putting the plans into action. People need to make budgeting and other decisions so that they can plan for different aspects of their lives such as their retirement and the purchase of a home. Having a financial plan will also help to determine which investments will bring in more profits and which ones will not. This also applies to unexpected expenses that can occur in one’s lifetime.
Regardless of the type of investments chosen to achieve future financial goals, one should never underestimate the importance of cash flow. Cash flow is basically the total of all the cash-in and cash-out transactions of a certain account. Good cash flow is needed to achieve the future financial goals that have been put into place through financial planning. The best way to achieve a high level of cash flow is to make use of investments that earn a higher interest rate.