Personal financial planning can be an intimidating topic. Everybody wants to be in a good financial position, but not everyone knows how to get there — and as such, many people put it off. But given the many benefits of effective and efficient personal financial planning, it’s important to take action sooner rather than later. After all, personal financial planning is about much more than just higher numbers in your accounts — it’s about improving your quality of life and achieving peace of mind.
Below, we’ll go over the specific ways that personal financial planning can benefit you, as well as what an effective personal financial plan involves.
Defining Effective Financial Planning
Before we dive into the heart of this piece, let’s first talk about what effective financial planning means. When people think about how to achieve financial wellbeing, many of them think about saving and investing. And while those are two important components, they’re still just part of the picture.
Effective financial planning is about creating a holistic plan that addresses every aspect of your finances and putting your money to use in the smartest way possible.
Benefits of Effective and Efficient Personal Financial Planning
So why is financial planning so important, exactly? We’ve rounded up a few of the key benefits of personal financial planning below:
1.Reduced Stress & Anxiety
An uncertain financial future can lead to a lot of stress and anxiety. In fact, 90% of Americans say that they experience financial stress.1 And stress doesn’t just affect your mental health. It can also take its toll on your physical health, leading to problems like difficulty sleeping, headaches, and muscle tension.
One thing that’s been shown to help alleviate financial stress: working with a financial advisor to help you come up with a sound financial plan. A 2022 study found that 83% of people who have worked with a finance professional feel less stressed thanks to their help.2
We saw this firsthand with a client who was feeling overwhelmed by increased family expenses on travel and grandchildren’s tuition. By working with them to update their financial plan to account for these changes, we could see the relief wash over their faces as they realized they could still achieve their goals without drastically cutting back.
Whether it’s navigating rising expenses, adjusting to life changes, or simply gaining confidence in your financial future, a sound financial plan and the partnership of a trusted advisor can be invaluable tools for reducing stress and achieving peace of mind.
The impact of a well-structured financial plan on reducing stress is undeniable. This was vividly evident in a recent client case.
2.Financial Security
When people are earning and saving significant funds, creating a financial plan may not be high on their priority list. But creating a financial plan in the good times can help you through uncertain times in the future, such as the loss of a job, a bear market, high inflation, and more.
An advantage of effective personal financial planning is that it can help you achieve peace of mind to know that you and your family will be well taken care of even if something unexpected were to happen. Indeed, 65% of people with a defined financial plan feel financially stable, compared with just 40% of those without one.3
3.Reaching Financial Goals
One of the major reasons to make a financial plan is to achieve your goals, whether those involve paying off your student debt, buying a home, or saving for retirement. A financial plan improves your likelihood of reaching those goals, whatever they are. For example, those with a defined financial plan are more likely to save at least 10% of their income for retirement than those without one.4
4.Improved Decision-Making
Without a formal financial plan, people often make off-the-cuff financial decisions based on instinct or hearsay. Other times, they don’t make decisions at all, and just let their earnings sit in a savings account. An effective and efficient financial plan, however, relies on proven research and data, resulting in more-informed decisions and ultimately, better outcomes.
One common stumbling block to well-rounded financial decisions? Holding onto company stock for too long. Many individuals who receive shares in their employer’s stock as part of their compensation get attached and hesitate to sell. As a result, a large portion of their net worth rests on the performance of a single asset. This can leave them vulnerable to significant losses if the company’s stock takes a downturn.
We recently saw this play out with a client who felt apprehensive about selling any of their company stock. By developing a customized plan with them, we were able to establish a strategy for gradual divestment over time, allowing them to diversify their wealth and reduce their exposure to company-specific risk and better set themselves up for a successful plan.
This case highlights the power of having a plan in place, even for seemingly straightforward decisions such as managing company stock within their portfolio. It promotes well-informed choices based on individual circ*mstances and long-term goals, ultimately leading to a more financially stable future.
5.Increased Confidence & Control
You can’t control everything when it comes to your financial future — a market downturn, for example, is something that’s out of your hands. But what you can control is how you manage your money, which — when done right — will allow you to weather any storm that might come your way.
As a result, you can feel more confident about your future. For example, 54% of those with a defined financial plan feel very confident about reaching their financial goals, compared with 18% of non-planners.4
Read More: 3 Benefits of Having a Financial Advisor
Components of an Effective Financial Plan
Now that we’ve addressed the question “Why is financial planning important,” it’s time to get into what the steps in effective financial planning are. While no two financial plans will look exactly alike, they should all include:
Setting Financial Goals
A good financial plan is based on your specific goals and how to achieve them. To come up with goals, think about the kind of life you want to lead in both the short and long term, then map that vision to concrete milestones.
For short-term goals, you might want to ask yourself questions like:
- How much do I have in my savings?
- How much of my paycheck do I want to put toward my 401(k)?
- Are there any vacations I plan on taking in the near future?
- What debts do I need to pay off, and how feasible is my current payment plan?
- Do I want to buy any big-ticket items in the near future (e.g. car, major household appliances, high-end electronics)?
For longer-term goals, consider questions like:
- Do I want to purchase a home? If so, when?
- When do I want to retire?
- Would my family and children be taken care of if something happened to me?
- How much will I need to save for my children’s college tuition and fees?
Goals provide you with direction, purpose, and motivation in your life.
When articulating your goals, it helps to be specific. For example, it’s easier to plan for a goal such as “I want to buy a three-bedroom house with a backyard in Walnut Creek within five years” than “I want to own a home.” You may even want to write your goals down — research has shown that people who write down their goals are 42% more likely to achieve them.5
Budgeting & Tracking Expenses
After identifying your financial goals, you should be able to calculate how much money you need to put away each month in order to reach them. And to ensure that you hit those targets, you’ll want to create — and stick to — a sustainable budget.
To start, look at your monthly expenses over the past year or two and break them down into categories such as living expenses, discretionary expenses, and savings. You should be able to find this information on your credit card statements, but you can also hire a bookkeeper or use an app such as Goodbudget or PocketGuard.
Then, determine if that spending is in line with your saving and investing goals. If not, you’ll need to see where you can cut back.
Read More:
Building an Emergency Fund
When forecasting your financial future, always expect the unexpected. No one wants to think about unfortunate events such as accidents, illnesses, or the loss of a job, but it’s important to be prepared for them.
How to establish an emergency fund? To help you visualize the process and key milestones, let’s take a look at this handy infographic:
One crucial question when building an emergency fund is ‘how much is enough?’ Experts recommend saving up at least three to six months’ worth of expenses in a savings account to draw on in case of a sudden incident. Hopefully, you won’t need to use it — but if you do, you’ll be glad it’s there.
Managing Debt
Having debt isn’t always a bad thing. Taking out a student loan to finance medical school, for example, can increase your earning potential, while a mortgage can help you build home equity. That said, it’s important to pay them off — but you should do it the right way.
Certain types of debt, such as credit cards, carry high interest rates and are considered “less productive” because they accrue more debt over time. Paying these off sooner can be beneficial. There are also various strategies available to help you manage your debt effectively. Most financial professionals recommend paying off debts with the highest interest rates first, but some find that the “snowball” method — in which the smallest debts are paid off first — is more motivating.
Other debt strategies include:
- Refinancing
- Consolidating debt
- Increasing your monthly payments
The best method for you will depend on your individual circ*mstances, so make sure to check with a CERTIFIED FINANCIAL PLANNER™ professional if you’re unsure which one is right for you.
Investing for the Future
For many high-net-worth individuals, most of their wealth is composed of investments, making investing a key part of any personal financial plan. But coming up with an investment strategy is complicated, and individuals typically don’t have the time nor the specialized knowledge to do so on their own.
Morningstar’s annual “Mind the Gap” study reports, for example, that the average investor repeatedly underperforms the market. The 2023 report found that the average investor misses one-fifth of their investments’ average net returns.6 One of the biggest reasons for this is that individual investors tend to make investments based on what they hear is doing well — but by that point, it’s often too late to capitalize on the initial momentum.
The best investment strategies are evidence-based, diversified, and focused on proven historical returns. If you don’t have the time, energy, or specialized knowledge to come up with one on your own, it’s best to seek help from someone who does.
Read More: Our Investment Approach
Protecting Yourself With Insurance
People don’t always think of insurance as a wealth-building strategy, but it’s an essential part of any effective financial plan. Ensuring that you have the right insurance policies in place can protect you and your family in the event of accidents, illnesses, and other risks. This might include:
- Health insurance
- Home insurance
- Life insurance
- Disability insurance
- Liability insurance
- Car insurance
While you will have to allocate part of your budget toward premiums, these policies can prevent you from racking up bills that could set you back financially in a major way during emergencies.
Simplify Your Financial Planning With Team Hewins
As you can see, there are many benefits of personal financial planning — but creating one can be complex. Effective financial plans are about much more than just saving and investing. They touch many different aspects of your life. And if the idea of creating your own financial plan is daunting, that’s understandable. But you don’t have to go it alone.
At Team Hewins, our team leverages a proprietary Smart Life Planning Process to help you develop a comprehensive and effective financial plan based on your unique needs and circ*mstances. We take the legwork and guesswork out of financial planning so you can achieve peace of mind. Reach out today to schedule your free consultation.
