Why You Should Have a Financial Plan!

by Krantcents · 15 comments

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All businesses need a financial plan and you should too! A financial plan is a decision-making process and tool that enable management to assess results and set targets for growth. A financial plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives and the time frames involved. It is the combination of strategy and objectives! Are you planning ten (10) or twenty (20) years in the future? 

Just having a budget is not enough! A budget is an annual or yearly task; you need to tie it to your long range (2-5 years) goals. For example, you want to save enough money for retirement, buy a house and take care of your children’s education. There are just three (3) major financial goals that you cannot achieve in one (1) year. You cannot establish a savings budget based on this year’s earnings to reach a target that is ten (10) to twenty (20) years or more in the future. You need a long-range strategy and goals, which you can review annually.

Where do you start?

  • Goals – You start with your goals! You should have short (1 year or less) and long (1-5 years) range goals. You can develop much longer-range goals, but break them down to five-year increments. If you just graduated from college, you may have five (5) and ten (10) year goals. Personally, I used ten-year increments and attached it my age. For example, I used thirty (30), forty (40), fifty (50) years old, etc. I took those goals and set objectives, milestones and short-term goals.
  • Outcome – I start with the outcome! If I want or need four million dollars for retirement, I would find out how much I need to contribute now to achieve that outcome in forty (40) years. Is it a SMART goal? Is it specific, measurable, attainable, realistic and timely? Can I live reasonably on what is left from my paycheck and still work on my other goals? If I can answer yes to these questions, I start my contribution. This is just a simplistic approach to financial planning.
  • Objectives, Milestones, or Steps – Developing the objectives, milestones and steps to reach these goals is the most important part of this process. Part of your planning process, you may develop more goals such as getting additional training, education or experience to help you reach your goals. It may add cost or expenses, but it will be an investment in the future. When establishing multiple goals, you may have to set priorities too. It should be part of a long-range plan, which should include your strategy to achieve them.
  • Monitor Progress – Monitoring your progress monthly, quarterly and annually is very important! It is the best way to check your progress and adjust for changes or overcoming obstacles. Remember you are monitoring your progress against goals, objectives, milestones you established based on your short and long-range goals. You may want to modify your goals because you surpassed them or realize that you need to make changes.
  • Budgets, Financial and Strategic Plans – Budgets, financial plans and strategic plans need flexibility! Frequent checks, monitoring and review helps to achieve better control and visibility of your goals. There is my approach to financial planning! It helps me achieve my goals because I am watching for problems early and make changes to get back on track. I achieved financial independence using these planning skills and you can too!

Final thoughts

Many financial experts stress budgeting to control your expenses and I cannot disagree with it. Budgets should be the result of a clear financial plans you developed for your long-range goals. In addition, you need to monitor your progress and make the appropriate changes to reach your objectives, milestones or goals. A budget is a great tool, but you can miss the big picture by just concentrating on controlling your expenses every year. Do you have a financial plan?

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Marie @ The Money Template May 28, 2014 at 5:14 pm

Having a financial plan is very important, especially when you have a business. If you have a good strategic plan, then everything will fall into the right place.

Krantcents May 28, 2014 at 6:11 pm

I obviously agree, but I am also recommending it for individuals too. It is the combination of financial and strategic planning.

debs (@debtdebs.com) May 28, 2014 at 7:24 pm

We never did 5 year plans before. We were just focused on day-to-day living and trying to get the kids raised. It was a mistake. Now we have one, and I imagine we will continue to for a long time. :-)

Krantcents May 28, 2014 at 8:42 pm

Good for you! It seems obvious for certain things like retirement, kids education or career, but it is so much more.

dojo May 29, 2014 at 4:50 am

We’ve done the budgeting stuff for a while and also keeping track of our expenses, but without a good plan, we weren’t able to make too much progress. Sure, we’re not spending like crazy, but there needs to be even more focus and some better planning.

Krantcents May 29, 2014 at 6:54 am

Planning makes you think about what you want to accomplish in 5 or 10 years. You also think about the resources you need to accomplish it.

Josh Rodriguez May 29, 2014 at 7:53 am

Hey…it’s been a while. I see you’re still publishing awesome content! I recently started a business and we’re just getting into dealing with the headache of not having a financial plan. Going to send a link off to my business partners to check this post out! Thanks!

Krantcents May 29, 2014 at 8:17 am

The planning process is important for businesses and individuals! A budget covers just a year and I am sure you have (financial & other) goals that go longer than a year. I utilized a financial (long range) plan when I worked on financial independence. Good luck in your business. If you do the planning upfront, it is easier to achieve your goals.

Tie the Money Knot May 29, 2014 at 8:05 pm

Having a financial plan can be very helpful in getting oneself to achieve goals and maximize abilities. Businesses have plans, at least more sophisticated ones do. Big companies, obviously. While many don’t want to view it this way, it can be really helpful to think of individual/personal finance as a business (income minus expenses = profit).

Krantcents May 29, 2014 at 8:28 pm

Some may call it discretionary income! Income in excess of necessary expenses. Necessary expenses would include saving/investing, taxes etc. Similar to “net profit.”

Prime Values June 4, 2014 at 1:50 am

Nowadays with economies balancing at the edges of cliffs, one needs insurance and potential for growth as well. So, personal investing skills are vital.
It still takes years to practice and develop good personal finance skills.

Krantcents June 4, 2014 at 7:04 am

More than personal finance skills you need a long range goal and plan to achieve it.

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