Financial planning means something different to everyone. For some, it's about getting by on their paycheck, for others it's about watching the stock market each day.
Unfortunately, very few of us feel prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day.
Because our lives and goals are so different, there is no turn-key solution for managing ones finances and meeting financial goals. We can, however, identify several steps successful people take in planning for and meeting their financial goals.
We call these steps "Life Cycle Planning" because each step can be tied to the attainment of certain life defining events that almost everyone goes through.
Development of Human Capital
Human Capital is a person's ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.
In our early years, usually between age 19 and 25, we set ourselves on a course that largely defines our Human Capital potential. Each of us makes an investment in Human Capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.
It should also be noted that although our greatest focus on Human Capital development is in our early years, this is an investment we should continue to make and assess throughout our working careers.
Management of Expenses, Budgeting
Once our "Human Capital" investment begins to pay dividends in the way of earnings, we must begin to develop and apply management skills to our newfound earnings.
Without managing our expenses, our wants and needs will invariably outpace our ability to earn. By implementing some form of budgeting we can begin to set our sights on saving and meeting our longer term financial objectives.
A beginning budget can be as simple as setting aside a predetermined percentage of our earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month.
As our budget begins to pay off in a healthy savings account, we begin to wonder how best to apply our limited savings to our unlimited needs and wants.
Without exception, the first financial need we should meet is to have an emergency fund. An emergency fund allows us to cover unexpected short term needs using cash instead of leveraging our future earnings through costly loans.
As a general rule of thumb, your emergency fund should be adequate to maintain your standard of living for six months.
Adequate Insurance Protection
A major disability, the loss of a family breadwinner, a fire in your home, a major medical problem for a family member... the most dramatic emergencies can seldom be planned for through personal saving.
Although such tragedies can create devastating individual financial hardship, the financial risk of such events can be shared by very large groups of families and individuals through insurance.
Life insurance, disability insurance, property and casualty insurance and major medical insurance all have a place in our Life Cycle planning.
Long-Term Funding Objectives
Once we have accumulated sufficient funds to cover our emergency needs and purchased protection against financial risks, we can begin saving for our long-term goals in earnest.