By The FoolProof Team
In basic terms, personal financial planning is deciding how to use your financial resources to reach specific goals. Common goals for students in high school, for example, include purchasing a car, computer or stereo system, saving for higher education, or preparing to get a job and place of their own and live independently after graduation.
Whatever your goals, good financial planning can help you evaluate all your resources (such as earnings from employment, savings/investments, and credit) and plan how to use them most effectively to reach your goals. Sound financial planning can greatly increase your dollar power.
What are some good reasons to start financial planning early?
Financial planning helps you make your money work for you in several ways:
- Get more bang for your buck. By setting goals and planning how to use your money you can make it work harder for you.
- Know where your money went. The flip side of planning how to put your money to work for you is that you will have better control and understanding of where you spent it.
- Be less likely to slip into debt. Planning what to save and spend and how to use credit to achieve your goals can help you avoid unwise use of credit or your hard-earned cash.
- Build more savings sooner. What would you like to save for? A vehicle, college tuition, a first home? Financial planning helps you set realistic savings goals and develop strategies for meeting them. Through the wonder of compound interest (even when interest rates are low), picking the right savings strategy and instruments can help you reach your goals more quickly. Your credit union offers a number of ways to save from money market accounts to certificates of deposit and IRAs; be sure to talk to them.
What are the basic steps in financial planning?
A good online resource, "Fundamentals of Financial Planning" from the Learning for Life website at Florida State University identifies six basic steps:
- Identifying realistic, specific and measurable goals and objectives for earning and using your money
- Gathering the information you need to plan
- Analyzing your present situation, earning prospects, goals and considering the alternatives for meeting them
- Developing strategies to achieve the goals
- Putting the strategies into action
- Reviewing and revising your strategies and overall plan on a regular basis.
Should a budget be part of financial planning?
Yes. A budget enables you to identify both your expected income and expenses. Your budget then sets out how you will spend and save that income—you make the choices. For example, if you budget 10% for savings and pay yourself first when you receive a paycheck, then your savings grow. If you know that your budget allows on a certain dollar amount for clothes or break snacks, you can keep track of your spending much more easily. A budget helps you live within your means and meet your financial goals.
Where can I learn more about financial planning?
There are many good resources online. In addition to the online course mentioned above, check out these for a start:
- 12 "Must-Know" Principles for Financial Literacy for Youth from Jump$tart Coalition.
- The Teen Consumer Scrapbook is written for teens by teens and has good info on financial planning and other consumer issues. It's a project of the Washington State Office of the Attorney General.
- TheMint.org has a variety of articles on earning, saving, spending, tracking your money, investing and owing. It also has calculators and interactive activities to help you plan and test your skills.