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  • Financial Planning: Article

    By Denise Schoenherr, Full-Time Faculty 
    Published December 2013

     

    A financial plan is a comprehensive approach to managing your financial life. It is used to aid you in preparing for your short-term and long-term goals. A financial plan includes income, expenses, investments, and debt. It is a road map that shows where you are now and how you plan to get to where you want to be in the future financially. Keep in mind that a financial plan is not written in stone. As you go through life, circumstances, income, and expenses change and when they do, you should review and edit your financial plan.

    Planning for your financial security is important at any age. It is never too early or late to start saving for your retirement, your children’s college education, or that vacation home you have always wanted to own.

    The Personal Financial Planning Process

    Personal financial planning is the process of developing and implementing an approach to meet goals, prepare for any financial emergency which may arise, and build a more secure financial future. Money can be a key stressor in personal and family relationships. People who develop financial plans often have less stress because they do not spend time worrying about their financial situation. They know where they stand and the actions they are taking.

    Many people think that a financial plan is only for those who have wealth. This is not true; everyone needs to plot the best strategies for their future. Financial planning is not a one-time event but a continuous process. Your plan needs to be re-examined periodically as changes take place in your life. Life events such as marriage, divorce, the birth of a child, college education, and retirement can affect the flow of money coming in and your expenses.

    The Life Cycle of Financial Planning and the Role It plays  

    Life events can affect your finances and how money is spent and saved. If you are single, your expenses are probably less than a person who has two children. Adjusting your financial plan is necessary each time there is a change in your personal status. Deciding to attend college, getting married, having children, becoming ill, losing your job, getting promoted, or retiring all affect your circumstances. Each can affect your income and, of course, your expenses.

    Each time you experience a new life event, you should review your financial plan to determine if previous financial choices still pertain to your life situation and current values or if there are changes that must be made. Events can and will change your standard of living, which is the lifestyle to which you are accustomed. Standard of living includes the necessities, comforts, and luxuries enjoyed or desired by an individual or family.

    The economy plays an important role in your finances. Inflation is a state of the economy in which the general price level is increasing. Higher inflation means that the dollar buys less and does not stretch as far as it did previously. If you are spending more for your daily needs, this results in less money to save. When prices go up your purchasing power is reduced. To measure the rate of inflation, the consumer price index (CPI) is used. The CPI is based on the cost of a fixed basket of consumer goods and services and is published monthly. This is also referred to as the cost-of-living index. A depression occurs when the levels of employment and production are low. When people are not working it means they are also not purchasing goods. This can result in low or no production of the goods you may need.

    The cost of living in the area in which you live will also influence your financial wealth. If daily expenditures for convenience items, gasoline, food, and maintenance goods and services are high in your community, extra money for savings will be less available because you will need it just to pay for the necessities of everyday life.

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