What Is the Importance of Financial Planning?

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Financial Planning is a process of setting realistic goals and then achieving them through investment planning, insurance planning and tax planning. To many people the workings of insurance, investments and taxes are complex and mysterious. Financial planning is meant to unlock these mysteries and help you choose appropriately from the multitude of options.

Goal Setting

Developing realistic goals is a cornerstone of financial planning. Goals setting comes first because it guides what you do and keeps you on track for years to come. Financial planning helps you set realistic goals -- ones that you can achieve -- and it also highlights goals you may not have thought of. Typical goals include retirement planning and saving for a child's education.

Investment Planning

Investment planning and retirement planning go hand in hand. When you retire you will need a large pool of capital from which to draw. The way most people build this capital is through investing during their working years. Retirement planning will make an estimate of your retirement income and tell you how much you need to save to achieve that income. It will also set objectives about how much your investments need to earn.

Insurance Planning

Associating insurance planning with financial planning is often an idea that takes getting used to. After all, insurance is an expense and costs money. The logic of insurance planning is that your greatest asset is your ability to earn money, especially in your early working years. If you die young, your family will have one less bread winner and, without adequate insurance, may face financial hardship. Even without the catastrophe of a premature death, many people face disabilities that can last for up to two years. The financial hardship this causes can wreak havoc. Financial planning will help you understand these risks and their financial implications, so you can make an informed decision about whether or not to insure against them.

Tax planning

Financial planners will often know of more than one way to achieve the goals you have set. When this happens they will make use of their tax knowledge to guide you in choosing the route that is the most tax efficient. Tax planning is not about finding loopholes or pushing tax interpretations to the limit. It is about making use of accepted practices and drawing on the expertise of the planner (and perhaps accountant) to legitimately make use of deductions you are entitled to but perhaps not aware of.

Estate Planning

Estate planning ensures that your wishes are carried out after you die. A good estate plan can avoid family conflict among adults or ensure that young children are cared for properly. For example, even if you purchase enough life insurance for your minor children, you cannot be assured the money will be best used for their care without proper directions you specify in your will. As another example, if you have one cottage and three children you might avoid a divisive family squabble by going through an estate planning process to determine what happens to your cottage after you die.

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