Financial planning is a broad, generic term that can mean different things to different people. Too often, it is associated with financial products like mutual funds or life insurance. For others, it’s simply about getting ahead financially.
If you Google “financial planning,” you will find a lot of attempts at explaining what financial planning is. Despite the fact that there is no shortage of information about what financial planning is or should be, it is still confusing to many people. Even I have had struggles with explaining what financial planning means.
Financial planning is a road map
The word ‘planning’ means looking into the future to make the future as predictable as possible. That’s all plans are . . . a road map or game plan or framework for the future. Add the word ‘financial’ and a financial plan is simply a look into your financial future to ensure that you are implementing the right financial strategies to get ahead financially.
A road is a strong metaphor for a plan. Most roads have a starting point (where you are today) and a destination (where that road will take you). Often roads have intersections where you can get off the road you are on and get onto a different road. A road sets a direction, which is likely to change from time to time. All of these thoughts are also relevant to financial planning.
As you can see in the diagram, financial planning is a journey. It’s not just a destination but also a series of destinations through a journey . . . a financial journey. Along the way, there are a number of different issues or what I call priorities to take into consideration.
The 12 areas of financial planning
- Financial Organization – How organized are you? Are you dealing with the basics of money management like using the net worth statement, cashflow statements, budgeting and paper management.
- Debt management – Are you in control of your debt? Do you know how to reduce, manage and pay down your debts like mortgage, credit cards, lines of credit, etc?
- Managing your spending – Do you live within your means? Are you and over spender? Do you need to learn about budgeting and expense tracking? Are you in control over your spending?
- Saving money – Do you save money regularly? Do you know how much should you save? Do you know if you are using the right accounts like RRSPs or TFSAs? When do you have enough?
- Career and Work – Are you happy with your work? Are you making enough income? Do you have a plan on how can you improve your work and income?
- Risk management – Are you protected from financial disaster? Do you have enough life insurance? Do you have disability coverage? Do you have an emergency fund? Are you prepared for a rainy day?
- Investing – Do you know what you are invested it? Do you participate in the management of your portfolio? How is your portfolio doing? Have you reviewed your portfolio lately?
- Tax Planning – How much tax are you paying? How much do you keep after tax? Do you do tax planning? Are you taking advantage of tax savings strategies?
- Retirement planning – Do you have a retirement plan? Do you know when you want to retire? Can you retire? Do you know how much money you will need or have at retirement?
- Estate planning – Have you thought about an estate plan? Do you have a will, an enduring power of attorney and a personal directives? Have you thought about what will happen if you die or get disabled?
- Saving for children’s education – If you have children, have you thought about who is going to pay for their education? Are you utilizing RESPs? Have you looked at other ways to save?
- Working with advisors – Do you need help from a professional? Do you work with a financial advisor? How do you find a good advisor? How do you work with them? How do you pay them?
What are your priorities?
At different stages of life, you will have different financial priorities. The things that matter most when you are in your 20’s may not be the same as what matters most when you are 55 or 85.
Financial planning is really about assessing your priorities at different stages of your life and setting some goals and direction based on those priorities. Financial planning is about assessing where you are and where you want to be and then setting some priorities and goals along the way as you journey on the road to financial freedom (whatever that means to you)! If you want help assessing where you are today and setting some goals to start the journey, you can download this assessment I use with people.
Good planning also requires good tools (check out my follow up to this article on financial planning tools)
What do you think financial planning means? Do you have any insights to add?