Most people want to handle their finances so that they get full satisfaction
from each available dollar. Typical financial goals include such things
as a new car, a larger home, advanced career training, extended travel,
and self-sufficiency during working and retirement years.
To achieve these and other goals, people need to identify and set priorities.
Financial and personal satisfaction are the result of an organized process
that is commonly referred to as personal money management or personal financial
planning.
Personal financial planning is the process of managing your money
to achieve personal economic satisfaction. This planning process allows
you to control your financial situation. Every person, family, or household
has a unique financial position, and any financial activity therefore must
also be carefully planned to meet specific needs and goals.
A comprehensive financial plan can enhance the quality of your life and
increase your satisfaction by reducing uncertainty about your future needs
and resources. The specific advantages of personal financial planning include
Increased effectiveness in obtaining, using, and protecting your financial
resources throughout your lifetime.
Increased control of your financial affairs by avoiding excessive debt,
bankruptcy, and dependence on others for economic security.
Improved personal relationships resulting from well-planned and effectively
communicated financial decisions.
A sense of freedom from financial worries obtained
by looking to the future, anticipating expenses, and achieving your personal
economic goals.
We all make hundreds of decisions each day. Most of these decisions are
quite simple and have few consequences. Some are complex and have long-term
effects on our personal and financial situations. The
financial planning process is a logical, six-step procedure:
(1) determining your current financial situation
(2) developing financial goals
(3) identifying alternative courses of action
(4) evaluating alternatives
(5) creating and implementing a financial action plan, and
Step 1: Determine Your Current Financial Situation
In this first step of the financial planning process, you will determine
your current financial situation with regard to income, savings, living
expenses, and debts. Preparing a list of current asset and debt balances
and amounts spent for various items gives you a foundation for financial
planning activities.
Step 2: Develop Financial Goals
You should periodically analyze your financial values and goals. This
involves identifying how you feel about money and why you feel that way.
The purpose of this analysis is to differentiate your needs from your
wants.
Specific financial goals are vital to financial planning. Others can
suggest financial goals for you; however, you must decide which goals
to pursue. Your financial goals can range from spending all of your current
income to developing an extensive savings and investment program for your
future financial security.
Step 3: Identify Alternative Courses of Action
Developing alternatives is crucial for making good decisions. Although
many factors will influence the available alternatives, possible courses
of action usually fall into these categories:
Continue the same course of action.
Expand the current situation.
Change the current situation.
Take a new course of action.
Not all of these categories will apply to every decision situation;
however, they do represent possible courses of action.
Creativity in decision making is vital to effective choices. Considering
all of the possible alternatives will help you make more effective and
satisfying decisions.
Step 4: Evaluate Alternatives
You need to evaluate possible courses of action, taking into consideration
your life situation, personal values, and current economic conditions.
Consequences of Choices. Every decision closes off alternatives.
For example, a decision to invest in stock may mean you cannot take a
vacation. A decision to go to school full time may mean you cannot work
full time. Opportunity cost is what you give up by making a choice.
This cost, commonly referred to as the trade-off of
a decision, cannot always be measured in dollars.
Decision making will be an ongoing part of your personal and financial
situation. Thus, you will need to consider the lost opportunities that
will result from your decisions.
Evaluating Risk
Uncertainty is a part of every decision. Selecting a college major and
choosing a career field involve risk. What if you don’t like working in
this field or cannot obtain employment in it?
Other decisions involve a very low degree of risk, such as putting money
in a savings account or purchasing items that cost only a few dollars.
Your chances of losing something of great value are low in these situations.
In many financial decisions, identifying and evaluating
risk is difficult. The best way to consider risk is to gather information
based on your experience and the experiences of others and to use financial
planning information sources.
Relevant information is required at each stage of
the decision-making process. Changing personal, social, and economic conditions
will require that you continually supplement and update your knowledge.
Step 5: Create and Implement a Financial Action Plan
In this step of the financial planning process, you develop an action
plan. This requires choosing ways to achieve your goals. As you achieve
your immediate or short-term goals, the goals next in priority will
come into focus.
To implement your financial action plan, you may need assistance
from others. For example, you may use the services of an insurance
agent to purchase property insurance or the services of an investment
broker to purchase stocks, bonds, or mutual funds.
Step 6: Reevaluate and Revise Your Plan
Financial planning is a dynamic process that does not end when you
take a particular action. You need to regularly assess your financial
decisions. Changing personal, social, and economic factors may require
more frequent assessments.
When life events affect your financial needs, this financial planning
process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help
you make priority adjustments that will bring your financial goals and
activities in line with your current life situation.
