Fundamentals of Financial Planning
Many people go through life without taking the time to plan out their finances and typically end up scraping by financially. By setting aside some time for financial planning, you may be able to reap the rewards and enjoy a higher standard of living in the future and right now.
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Protect From Unexpected Expenses
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One of the important areas of financial planning involves protecting yourself against unexpected expenses. One way to protect yourself is to create an emergency fund, which is an amount of money that you set aside for emergency expenses only. This way, instead of dipping into other savings or borrowing money when emergencies come up, you simply tap the emergency fund. Buying the appropriate types of insurance is also important when protecting yourself financially. Homeowners insurance, auto, health, disability and life insurance all help protect your financial position.
Goal Setting
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Another important aspect of financial planning is setting goals. Before you can set goals, you have to evaluate your financial situation and find out where you are. Look at the amount of savings you have, what assets you have and what liabilities you owe. Once you know where you are, set some goals that you want to work towards. For example, set a goal for your net worth in five years and in 10 years. Other goals could include owning a specific house or building up your retirement savings.
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Retirement Savings
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Retirement savings is another important part of financial planning. Many people wait until it is too late to start saving for their retirement. With the power of compound interest, you can accumulate a relatively large nest egg for your retirement years. Choosing the right vehicle for your retirement savings is important. For example, you could set up an individual retirement arrangement or participate in an employer-sponsored plan such as a 401k. These options make it possible for you to save money on taxes when planning for your retirement.
Estate Planning
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Estate planning is another critical component of financial planning. This could include creating a will or a trust so that your assets go to the proper beneficiaries when you pass away. But if you do not take the necessary steps in the estate planning, your assets will be split up by the probate court instead. When this happens, your possessions may not be divided in the way that you would have chosen. Estate planning can be completed on your own or with the assistance of an estate planning attorney.
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