A financial plan is a plan that aims to collect all the important aspects of your financial life in a cohesive and intentional way. Generally, it includes details about your goals, cash flow, debts, savings, investments and insurance. It can be an informal or formal document that lets you see where you stand and gives you a roadmap of how to get you to where you want to be.
Today, close to nine in 10 American households engage in some form of financial planning. Whether it’s following a basic budget or setting up a retirement account, you may already be taking some steps toward planning your finances right now — without even realizing it!
A financial plan can have a big impact on overall financial success. Not only can it help you make the most of your money, but it can also be a gateway toward financial security.
Research shows, for instance, that planners feel more confident in meeting and reaching financial goals. In fact, the more households plan financially, the better prepared they are to deal with financial emergencies, save, manage debt and invest, according to a benchmark report by the Consumer Federation of America and the Certified Financial Planner Board of Standards.
What’s more, developing a plan that works for you doesn’t have to be daunting or complex. Here are some great reasons to start planning your finances.
Simply said, having a financial plan can make your money work harder for you. That’s important, because feeling more in control of your finances – vs. feeling like your finances control you – leads to less stress and better money decisions, research shows. Planning can help you accomplish four important things:
Maybe you’d like to get rid of credit card debt and boost the balance of a rainy day fund. Perhaps you want to save for a new smartphone or start saving for your son’s future college education. All of us have financial goals — probably a lot of them. A financial plan reduces the uncertainty of how to go about achieving them by providing clarity into your priorities, one by one.
By providing a framework to build on, a financial plan is like a roadmap that keeps you on course and also lets you take advantage of tools and strategies to get where you want to be. When you know the reasons behind your plan, financial decisions actually become easier because you’ll always direct specific actions toward the outcomes you set.
Just like a child’s toys can get misplaced if they’re not put back in their place, a disorganized financial life can make it easy to lose track of where your money’s going.
People with a written financial plan achieve healthier money habits when it comes to saving and investing in their future, such as ensuring a well-stocked emergency fund and maintaining on-time payments and zero balances on credit card accounts. This peace of mind leads to 65% of planners feeling financially stable vs. 40% of non-planners.
It’s no secret that financial stress is common; in fact, one study found 77% of us experience it. The problem is, as the study also discovered, under the effects of stress, everyone tends to be worse at saving and budgeting, feel less in control and are more impulsive in spending their paycheck.
The good news? Evidence shows that just thinking about long-term financial goals for even a few seconds can reverse those effects of financial stress, causing people to become better at saving and budgeting and more confident about being able to deal with their finances.
As you can see, there’s a positive relationship between financial planning and financial preparedness. People with a financial plan have more confidence in their money habits when it comes to saving and investing in their future. And that sets them up well to reach the goals they set.