Financial Planning Basics

Securing your financial future is a serious matter. Having a vision and a plan for your financial future brings the order and discipline you need, and ultimately the control and peace of mind you desire, in your financial life. Financial planning can help you define, pursue, and achieve your financial goals.

Here are some basics of financial planning:

What is financial planning?

Financial planning is a process that involves identifying your financial goals, and using sophisticated saving, investment, and tax strategies to achieve them. Some of your financial goals may include:

  • Ensuring a financially secure retirement
  • Building and preserving wealth
  • Funding your child’s college education
  • Paying off debts
  • Reducing the financial risks associated with devastating events
  • Creating income in retirement
  • Maximizing wealth transfer
  • Establishing charitable legacies

What is the financial planning process?

Financial planning is the following six-step continuous process designed to help you define, pursue, and achieve your financial goals:

  1. Define and agree with your financial objectives and goals
  2. Gather your financial and personal information
  3. Analyze your financial and personal information
  4. Develop and present a financial plan
  5. Implement the financial plan
  6. Review and update the financial plan

What is a financial plan?

After thoroughly understanding your financial goals and analyzing your current financial and personal information, your financial advisor prepares for you a financial plan – a document outlining your current financial position and the steps you need to take in order  to achieve your financial goals within your timeframe. Once your financial plan is implemented, your financial advisor periodically reviews it with you and updates it when needed, to ensure that your financial plan remains on the track to achieving your financial goals in a timely manner.

What are the benefits of financial planning?

There are many benefits to actively planning for your financial future. Going through the financial planning process –

  • Helps you crystallize and prioritize your financial goals.
  • Gives you a clear sense of where you currently are and the steps you need to take to get to where you want to be in the future.
  • Brings order, focus, and discipline to your financial life.
  • Improves your financial habits and behaviors.
  • Gives you the tools to monitor and measure your progress towards your financial goals.
  • Gives you control and peace of mind regarding your financial future.
  • Increases the likelihood of achieving your financial goals.

No matter what your financial goals, planning to achieve them is the first step of your journey. Planning for a desired financial life is a smart and responsible thing to do for yourself and for your loved ones. Before you start your search for a financial advisor, please read the article 5 Things to Consider While Selecting a Financial Advisor to find the right financial advisor for your needs.

5 Benefits of Financial Planning

Financial planning is a systematic approach towards pursuing your financial goals. It involves making the right financial decisions today for better financial results in the future. Financial planning adds clarity and inspires discipline to your financial life, which gives you a sense of control, assurance, and peace of mind regarding your financial future.

Following are the top five benefits of financial planning:

  1. Clarity: The financial planning process involves quantifying and prioritizing your financial goals, consolidating and organizing all your current finances, and assessing and analyzing your financial situation, to identify the gaps between your current financial position and your future financial goals, and how best to bridge these gaps. The clarity you gain during the financial planning process helps you see the big picture of your financial life and understand how your individual financial decisions impact your overall financial success.
  2. Discipline: Financial planning simplifies your financial life, which in turn inspires the financial discipline and commitment you need in order to pursue your financial goals. Knowing precisely where you stand at any given time in comparison to where you want to be in the future, and the steps you need to take to get there, helps you stay focused and committed in your journey towards your financial goals.
  3. Efficiency: Financial planning is about planning ahead for the financial future you desire. Knowing now where you want to be in the future allows you the time you need, to design and put in place a solid game plan that can help you arrive at your destination in the most efficient manner possible. For example, knowing what age you want to retire at and how much money you will need to have saved by then, helps you identify and employ sound savings, investment, and tax strategies along the way, that are most efficient and advantageous for your situation in achieving your retirement goal.
  4. Control: A financial plan provides the guidance you need to make sound financial decisions. It allows you to be in charge of your financial life, take deliberate actions in pursuing your financial goals, and proactively address potential risks that may jeopardize the financial future you desire; all that you need to feel confident in your financial journey and in control of your financial destination. 
  5. Peace of Mind: Financial planning provides a sense of assurance towards achieving your financial goals. It provides you the guidance you need to manage your financial life and the tools you need to measure your progress towards your financial goals. Always knowing you are on track to achieving your financial goal helps you to have peace of mind regarding your financial security in the future. 

Securing your financial future is a serious matter. Using a systematic approach to pursue your financial goals increases the likelihood of achieving them in the most efficient manner possible. Financial planning can help you take a lot of the guesswork out of your financial life and avoid many unpleasant financial surprises in the future.

8 Common Misconceptions About Financial Planning

Most people understand the basics of financial planning and the benefits it offers. Yet, many of them also have some misconceptions about financial planning.  While there can be a variety of reasons why many people don’t plan for their financial future, part of it can be explained by some common misconceptions they may have about financial planning. 

Here are 8 most common misconceptions about financial planning.

  1. “Financial planning is only for the wealthy families” – Saying financial planning is only for wealthy families is like saying only wealthy families have financial needs, dreams, and aspirations. Financial planning is for anyone who wants to organize their finances, make sound financial decisions, and pursue money goals. Paying off debts, building wealth, having a secure retirement, and giving their child a debt-free college education, are some of the most common financial goals most people have, regardless of their level of income or net worth. No matter your financial status, financial planning can help you pursue your financial goals in the most systematic and efficient manner possible.
  2. “Financial planning benefits only the reckless spenders” – Financial planning is for anyone, reckless spender or not, looking for clarity, organization, and discipline in their financial life. Financial planning can help you simplify your financial life, quantify and prioritize your financial goals, and provide you the direction you need in pursuing your goals.
  3. “Financial planning is all about budgeting, cutting back and saving” – This may or may not be warranted depending on your current financial and personal situation, and the financial goals you are trying to accomplish. An effective financial plan goes beyond saving, to help you live the life you want, with the resources you already have. A right financial plan for your circumstances can balance what you need and want today, with the personal goals you have for the future.
  4. “Financial planning is all about selling me financial products” – Not all financial advisors earn commissions, referral fees, and other financial incentives on the products and solutions they recommend for your needs. Unlike commission-based financial advisors, fee-only financial advisors earn only an hourly fee or a flat fee for their expert financial advice, and nothing else. Ask your financial advisor about his fee-structure and all potential conflicts of interests.
  5. “Financial planning is same as retirement planning” – While retirement planning is one of the major financial goals for most people, it is usually not the only financial goal in their life. In addition to having a goal of ensuring a secure retirement, you may also have other financial goals such as building and preserving wealth, funding your child’s college education, paying off debts, reducing the financial risks associated with devastating events, maximizing wealth transfer, establishing charitable legacies, etc. A well thought out financial plan prioritizes your financial goals and may even make it possible to pursue many, or all of them, simultaneously.
  6. “Financial planning is just about investing” – Financial planning takes into account various parts of your financial life – taxes, insurance, retirement, budgeting, investing, estate planning, and life goals – and develops financial strategies that make those parts work together, in achieving your financial goals in the most efficient manner possible. While sound investing is an important part of financial planning, it does not constitute the entire financial planning in itself.
  7. “Financial planning is not for young people” – Establishing a plan early in life can help you build a solid financial foundation and learn good financial habits early on. The sooner you start making sound financial decisions, the better off you will be. The younger you are, the more the time you have for achieving your long-term financial goals. Also, the longer you wait to have a financial plan, the fewer the options you will have.
  8. “Financial planning is a one-and-done deal” – Financial planning is not a once in a lifetime event that you handle and cross off your to-do list. Financial planning is an ongoing process. Once your financial plan is in place, it should be periodically reviewed and updated to assure that you remain on target towards achieving your financial goals. As you experience changes in your life, your financial plan should also reflect those changes.

In summary, financial planning is for anyone who wants to pursue their financial goals in the most systematic and efficient manner possible, regardless of their age, financial status, income level, or life stage.

Common Excuses People Use to Avoid Financial Planning

While most of us have dreams and aspirations about the financial future we want for ourselves and for our family, only a few of us have a plan to achieve them. Financial planning is the most systematic and efficient way of pursuing our financial goals.

Despite knowing the benefits of financial planning and how financial planning may help you realize your financial goals, you may avoid pursuing financial planning thinking the following:

I can get along without planning for my financial future.”
Financial planning simplifies and organizes your financial life, which in turn inspires the financial discipline and commitment you need, to follow your financial goals. It is found that households with a financial plan are 70% more likely to make sound financial decisions and pursue their financial goals, than the ones without. Financial planning gives you the roadmap you need to follow in order to achieve your financial goals in the most efficient manner possible.

“I will get to it later.”
Financial planning helps you make sound financial decisions. The sooner you start making smart decisions about your money, the better off you will be. The sooner you start planning, the more the time you have for achieving your financial goals. Also, the longer you wait to have a financial plan, the fewer the options and paths you will likely have in order to get to your financial destination.

“It’s too much work for me.”
Your financial advisor should create your personalized financial plan with the least amount of work for you. You will need to provide the financial documents that your financial advisor needs in order to prepare your financial plan (W2s, tax returns, bank and credit card statements, assets and liabilities documents, insurance policies, Will, etc.). Once your financial plan is in motion, your financial advisor will monitor its progress and update it when necessary.

“It’s too expensive.”
The benefits of financial planning far outweigh its costs. The savings you may realize from the expert financial advice on your taxes, investment, insurance, estate, cash flow and retirement, are far greater than what you pay for such advice. In many cases, a financial plan costs less than the amount most people spend on their coffee every day. Some financial advisors may even waive their financial planning and tax preparation fees if your assets, that they manage, are above a certain amount.

“It’s not needed for my situation”
Financial planning is for anyone who wants to organize their finances, make smart financial decisions, and pursue money goals. After all, making smart financial decisions is for everyone, regardless of their age, life stage, or financial status. Whether you want to accumulate a set amount of money for future life events, maximize your money using smart financial strategies, or ensure peace of mind regarding your financial future, financial planning can help you achieve your goals.

Securing your financial future should be your immediate goal and an utmost priority. Do not let these, or any other excuses, stop you from pursuing the financial life you desire. The sooner you start working on your financial goals, the sooner you will start maximizing your money and progressing towards your goals.

5 Things to Consider While Selecting a Financial Advisor

The term “financial advisor” is a generic term that anyone can use to describe themselves regardless of their educational background, professional experience, and subject matter expertise. Moreover, not all financial advisors are required to be impartial and act in their clients’ best interests. This creates confusion for consumers who may be searching for a well-qualified and unbiased financial advisor.

To ensure your financial advisor is well qualified in personal finances and unbiased in his advice, consider the following five criteria: 

  1. Credentials: Having a renowned credential in financial planning, such as Certified Financial Planner (CFP) or Personal Financial Specialist (PFS), confirms that the advisor has acquired the education and experience in some or all major areas of personal finance, including taxes, investments, insurance, retirement, and estate planning. CFP and PFS credentials are awarded only to those individuals who have met the rigorous requirements of education and experience in planning for personal finances, as well as have passed the certification examinations and agreed to abide by the financial planning practice standards and continuing education requirements.
  2. Subject Matter Expertise: Most financial advisors are planning professionals, not necessarily subject matter experts, in personal finances. For example, a financial advisor is skilled in planning for your taxes; but unlike a Certified Public Account (CPA) or an IRS Enrolled Agent (EA), he is not a subject matter expert in taxes. Similarly, a financial advisor is skilled in planning for your investments; but unlike a Chartered Financial Analyst (CFA), he is not a subject matter expert in investments. Work with a financial advisor who is also a subject matter expert in those areas of personal finance that are important for achieving your financial goals.
  3. Client Specialization: Not all financial advisors serve all types of clients. Most financial advisors specialize in serving only certain types of clients with specific profiles. For example, a personal financial advisor may build his expertise and customize his services to serve only those individuals and families, who are in certain professions and life stage, with specific financial goals and net worth. You should ask whether the advisor is specialized in serving only certain types of clients with specific profiles in order to determine whether he is the right fit for your situation and financial goals.
  4. Fee structure: A financial advisor’s fee structure largely determines whose best interests he serves – his client’s or his own. A fee-only financial advisor charges only fees for his advice, whereas a fee-based financial advisor not only charges fees, but also earns commissions, referral fees, and other financial incentives on the products and solutions he recommends for you. Work with a financial advisor whose fee structure is conflict-free and aligned with your best interests.
  5. Availability: Your financial advisor should be regularly available, attentive, and accessible to you. Ask the advisor how many clients he currently serves and the maximum number of clients he is planning to serve regularly in the future. This clients-to-advisor ratio is one of the key factors in assessing your advisor’s availability to you in the future. Also, you should ask which planning activities are typically performed by the advisor and which ones are delegated to his junior staff members. Lastly, you should make sure that the advisor is accessible via phone and email during normal business hours.

Once you have shortlisted a few competent and impartial financial advisors in your local area, consult the ones who offer a FREE initial consultation first. During the initial consultation, assess the advisor’s availability and any other professional attributes you are seeking in your financial advisor.

Having a well-qualified and unbiased financial advisor by your side is extremely important in your journey toward your financial goals. When searching for a financial advisor, consider the advisor’s professional credentials, client specialization, subject matter expertise, fee structure, and availability to select the right financial advisor for your needs.

Retirement Planning 101

Retirement planning is about planning to accumulate your retirement nest egg during your working life and distribute it wisely during your retirement years, so that it lasts your entire retirement. It is about thinking ahead and planning to realize the life you want to live in retirement. 

Here is a brief overview of the steps involved in retirement planning: 

Define your retirement goals:
Defining your retirement goals is about determining when you want to retire and what kind of lifestyle you want to have in retirement. You must consider your and your spouse’s health, life expectancy, social security and Medicare eligibility, hobbies and interests in retirement, etc., while defining your retirement goals. 

Determine your retirement income needs: 
Defining your retirement goals will help you determine the income you will need in retirement. You must consider inflation, taxes, healthcare costs, other incremental costs, etc., while estimating your income needs in retirement. While the exact amount of income you will need in retirement depends upon your specific retirement goals, for most people, it is between 70% and 90% of their inflation-adjusted living wage in the last year of their working life. 

Calculate your retirement nest egg needs: 
A part of your retirement income will come from reliable sources such as social security, company pension plan, fixed annuities, etc.; the assets that you saved for retirement will need to generate the remaining income. The amount of retirement assets you need to accumulate before retiring depends on the portion of your total retirement income that needs to be generated by it. Keep in mind your risk tolerance, life expectancy, the inheritance you want to leave behind for your loved-ones, charitable giving, etc., while calculating the nest egg you need for retirement. 

Accumulate your retirement assets: 
The difference between the amount of retirement assets you have now and the amount you need to save before retiring can be accumulated by saving and investing a set amount every month until retirement. This save-and-invest phase is known as accumulation phase. If the amount required to be saved and invested every month is unreasonable/impossible to be saved, your retirement goals will need to be adjusted accordingly (postpone retirement, cut back on your current and/or in retirement lifestyle, work part-time or consulting in retirement, adjust estate goals, etc.). Identifying and utilizing the most beneficial saving, investment, and tax strategies, is the key to successfully accumulating your retirement nest egg. Your financial advisor can help you identify and implement the financial strategies that are most advantageous for your situation. 

Manage retirement risks: 
Your retirement goals may be jeopardized due to various reasons including failure of retirement assumptions(life expectancy, market risk, inflation, taxes, etc.), unexpected life events(divorce, major health issues, death of a spouse, etc.), and unusual economic events(stock market crash, housing market slump, deflation, etc.). Identifying and managing the retirement risks that are probabilistic and controllable in nature, both during accumulation phase and distribution phase, is essential to realize your retirement goals. Your financial advisor can help you manage your retirement risks using the most effective risk management tools and techniques ideal for your situation. 

Monitor and update your retirement plan: 
Retirement planning is not a one-time event but rather an ongoing process. Your retirement plan should always reflect your most recent situation and up-to-date retirement assumptions at any given time. For example, if you get a big promotion or buy a rental property, this new development in life must be reflected in your retirement plan, and your financial strategies must be adjusted accordingly. Monitoring your retirement plan’s progress on a periodic basis and updating it with new realities as they emerge, as you go through your life, is essential to ensure you remain on track to achieve your retirement goals. 

Retirement marks the end of accumulation phase and the beginning of distribution phase of retirement planning. The distribution phase is also known as retirement income planning phase as the primary focus in this phase is on income creation and cash flow strategies, with a goal to ensure that your retirement nest egg lasts your lifetime. Your financial advisor can help you identify and implement various investment, withdrawal, and risk management strategies, that can meet your need for income and cash flow throughout your retirement.

5 Reasons for Retirement Planning

Retirement is an inevitable life event that marks the end of your full-time employment and its resulting income. Whether you are in the early or middle stage of your career, nearing retirement, or already in retirement, achieving a financially secure retirement should always be one of your most important financial goals.

Here are five reasons why you should plan for your retirement:

  1. You are living longer: According to the CDC/NCHS statistics, the average life expectancy of Americans at birth has increased from 47 years in 1900 to 79 years in 2014. This trend is likely to continue, or even accelerate, given the continuous advancements in health science and technology. A man has a 50% chance of still being alive at the age of 81 (and a woman at the age of 85), a 25% chance of living to nearly 90, and a 10% chance of getting close to 100. While living longer means enjoying your life for a few more years, usually it also means a longer retirement. Living more years in retirement requires a bigger retirement nest egg and longer income planning for living expenses, healthcare costs, and other necessities in retirement. A sound retirement plan can help you accumulate and distribute your retirement nest egg so that it will last your lifetime.
  2. Government benefits are not enough: According to the Social Security Administration, the average Social Security benefit for retired workers in 2016 was $16,049 for the year, just about a third of the annual retirement income a typical retiree needs. In addition, according to the U.S. Centers for Medicare & Medicaid Services, Medicare does not cover all medical treatments and health-related costs in retirement, leaving retirees to pay, on an average, 20% to 30% of their medical expenses out of their pockets. To make matters worse, there is a possibility that Social Security benefits and Medicare coverage may shrink even further in the future. In short, you cannot rely solely on government welfare to take care of your financial needs in retirement. You need to accumulate retirement assets that are sufficient to produce 60% to 90% of your total income needs throughout your retirement.
  3. Social dynamics are changing: What are social norms today may not be the same when you retire. Gone are the days when children were entrusted with taking care of their ageing parents. You should no longer want to be financially dependent on your children; regardless of whether they feel you are a welcomed responsibility, or a burden they simply cannot afford. Planning to save a sufficient nest egg to take care of your financial needs in retirement is a responsible thing to do, not just for you and your spouse, but also for your children and other family members.
  4. Cost of living is rising: Inflation erodes the value of money over time. To maintain your current lifestyle, you will need more money in the future than what you need at present. While you are working your salary may keep pace with the inflation, but in retirement, that may not be the case. Retired people feel the effects of inflation more than others, since they are on a tighter budget and have more fixed expenses. Retirement planning considers the true value of your savings in future terms, both during accumulation phase and distribution phase of your retirement, to ensure your retirement nest egg lasts your lifetime.
  5. Your retirement nest egg is not automatically guaranteed to last your lifetime: Retirement planning involves two phases: accumulation phase and distribution phase. The distribution phase is also known as retirement income planning phase. Even if you are well on your way to accumulating your needed retirement nest egg, or have already accumulated it, you still need to plan to ensure that your retirement nest egg generates the income and cash flow you need throughout your retirement. Retirement income planning considers withdrawal, cash flow, investment, and various other financial strategies to do just that. Retirement income planning must begin at least 10 years before the retirement.

Each day that you are working is a day closer to your retirement, no matter how far away it may seem now. The sooner you start planning for your retirement, the better chance you have of achieving your retirement goals.

8 Reasons Why People Don’t Plan for Retirement

For most people, the amount of income they need in the first year of their retirement is between 70% and 90% of their living wage in the last year of their working life. Furthermore, most retirees need 60% to 90% of their total retirement income to be generated by the nest egg they have saved for retirement. While most people understand the need for a retirement nest egg, many people don’t plan for their retirement for the following reasons:

  1. They lack the basic understanding of retirement planning – Here are two articles that will help you gain the basic knowledge about retirement planning: the article Retirement Planning 101 will help you understand the what and how of retirement planning, and the article 5 Reasons for Retirement Planning will explain some of the reasons why you should plan for your retirement.
  2. They don’t know where to begin – It all begins by calling a financial advisor. Your financial advisor will help you crystallize your retirement goals, and prepare your personalized retirement plan with a roadmap showing how best to achieve your retirement goals.
  3. They believe it’s too early – Money needs time to grow. The sooner you start saving for retirement, the lesser the amount you will need to save every month, and the more the time your money will have to grow. In short, the sooner you start, the better the chances you will achieve your retirement goals.
  4. They believe it’s too late – It’s better late than never when it comes to retirement planning. Just because you are of a certain age, or have a specific financial profile, doesn’t necessarily mean it’s too late for you to start planning for your retirement. Work with a financial advisor to learn about various options and alternatives feasible for your situation.
  5. They put it off – The longer you wait to start planning for your retirement, the more the amount you will need to save every month, and the lesser the time your money will have to grow. In short, the later you start, the fewer the options and financial strategies that may be available for pursuing your retirement goals.
  6. They think they are too busy to plan – Where there is a will, there is a way. Planning for a financially secure retirement is just as, or even more, important than any other personal or professional matters, that you may be busy with. Your financial advisor should create your personalized retirement plan with the least amount of work for you.
  7. They believe they don’t make enough money to save for retirement –You would be surprised to know how big of an impact small adjustments in your financial habits and priorities can make on your overall financial success. Depending on your age, risk tolerance, and other circumstances, you may be able to meet your retirement goals by saving only 1% to 2% of your income every year.
  8. They believe contributing to 401(K) and IRA alone constitutes retirement planning – Retirement planning is not just about accumulating a retirement nest egg in the most efficient manner possible, but also about how best to expend it during your retirement years so that it lasts your lifetime. Remember, 401(K) and IRA are just two of the many available retirement saving vehicles that may be suitable for your situation. There are many other savings, investment, tax and other financial strategies, which may need to be employed to successfully achieve your retirement goals.

Retirement is not a matter of if, but a matter of when. Planning for this inevitable life event is not only a smart financial move, but also a responsible thing to do. No matter your reasons, planning for a financially secure retirement is too important to ignore or even delay.

7 Traits of Successful Retirees

Retiring successfully means being able to accumulate the retirement nest egg needed for a financially-secured retirement. While planning is the key to retiring successfully, not everyone who plans for retirement is automatically guaranteed to achieve their retirement goals. People who retire successfully display some, or all of the following seven traits:

  1. They have a clear vision for their retirement – Having a clear vision for retirement means precisely knowing your retirement goals – what age you want to retire at, the kind of lifestyle you want to enjoy after you retire, and the amount of income you will need to generate in retirement to support your lifestyle. Successful retirees work with a financial advisor to crystallize their retirement goals and develop a plan to achieve them.
  2. They use experts – Creating and implementing a well-thought-out retirement plan requires expertise in various areas of personal finance including taxes, investment, insurance, estate, and debt. Successful retirees recognize how utilizing such expertise can help them maximize their money and improve the likelihood of their financial success. Hence, they work with a financial advisor who can assemble and employ the needed financial expertise in creating a comprehensive retirement plan, and implementing it using cohesive financial strategies.
  3. They don’t procrastinate – You are never too young or too old to start planning for your retirement. However, the sooner you start, the easier it is to achieve your retirement goals. Successful retirees rise above the reasons why people don’t plan for retirement and start planning as early as possible.
  4. They live by a budget – A home budget can help you track your expenses and see where your money goes every week, month, or year. A budget can help you avoid any impulsive and unplanned spending that might jeopardize your financial future. Successful retirees carefully plan and prioritize their expenses, and live within their means. They understand how their individual spending decisions can affect their overall financial success.
  5. They pay themselves first – Paying yourself first means setting aside from your income the amount you need to save for your financial goals, before paying for any other expenses. Successful retirees automate their savings; meaning they have the amount that they need to save every month for retirement automatically deposited from their paycheck into a workplace retirement account, or from their bank account into an IRA, before they have a chance to spend it. They understand that preparing for the future is just as important as living in the present.
  6. They stick to the plan – Achieving retirement goals requires a steadfast adherence to the plan. No matter what the circumstances, successful retirees remain committed to their plan and dedicated towards achieving their retirement goals. They always follow the plan recommendations timely and precisely, even if doing so becomes difficult at times. They periodically review their plan and update it when necessary, to ensure it always reflects their most current situation and plan assumptions.
  7. They retire for a reason – Retirement can be devastating if not financially secure, and boring if not busy with the things you love to do. Successful retirees retire not because they have reached the proverbial retirement age, but because they have accumulated the sufficient nest egg they needed for retirement, and they have plans for more fun and fulfilling activities rather than working. They understand why financial independence is important, and how it can turn their retirement years into truly golden ones.

It is never too late for anyone to adopt these seven traits, regardless of their stage in life or financial situation. Doing so could make a world of difference to their quality of life during their golden years.

Why Budget?

Your budget is a blueprint of how you are going to spend and save your income over the next 12 to 24 months. Your budget not only helps you maximize and prioritize your current finances and gain clarity and control over them, but also serves as a foundational building block for your short-term and longterm financial goals.

A well thought out budget can help you in the following ways:

  • Reveal waste – Creating a budget requires projecting your future expenses based on the analysis of your past spending patterns. During the analysis, you may find that some of the discretionary expenditures were wasteful or unnecessary in nature. These may include late fees, penalties, interests, recurring automatic charges for useless memberships and services, excessive dine-outs, and unusually high spending on clothes, accessories and other personal items. Budgeting can help you minimize, or in some cases, even eliminate such wasteful expenses.
  • Set priorities – Your budget is your spending plan. Forecasting your spending requires you to identify your financial priorities, and allocate your finite income amongst various spending and saving categories accordingly. For example, budgeting makes you choose between whether to spend on a cup of coffee every day, or buy a life insurance policy; dine out every weekend, or pay down your credit card debt; and go vacationing overseas every year, or save for retirement. Budgeting can help you spend your money on the things that are important to you, now, and in the future.
  • Control spending – Following a budget requires you to limit your expenses as per the plan, and avoid any unplanned expenses. Your budget tracks your expenses against the plan, and alerts you when you overspend on a budgeted item or spend any amount at all on a non-budgeted item, so that you can take corrective actions. For example, if you budgeted $2,000 for your family vacation, your budget will hold you to that commitment, and require you to either limit your spending on your family vacation to $2,000 or cut some other discretionary spending to make up for the overspending, if any.
  • Reduce stress – Budgeting helps you plan and prepare for most of your expenses over the next one to two years. When annual expenses are budgeted each month, sufficient funds will exist to pay the bill when it becomes due. This saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan on how to spend them. Budgeting gives you a clear picture of your overall finances and a control over how your money is spent, which in turn, gives you the peace of mind you need regarding your financial future.
  • Improve relationships – Money can cause a lot of stress in a relationship. Creating a budget in tandem with your spouse will avoid conflicts, and resolve personal differences on how your money is spent. There will be no more back and forth after-the-fact about why one of you “wasted” money on something, and no sticker shock when you get the credit card bill. Budgeting promotes teamwork for common financial goals, and prevents conflict on how the money is used.
  • Reach financial goals – No matter your financial goals – paying down debts, building wealth, saving for your kids’ college and your retirement, buying a vacation home, or anything else – budgeting is often the first step in your journey towards achieving them. Following a budget helps you prioritize and control your spending, and save for your financial goals. It provides you the discipline, focus, and commitment you need to achieve your financial destiny.

Budgeting is the most basic and the most effective tool for managing your money. Creating and following a budget involves self-discipline and sacrifice, but it will help you develop wise spending habits to better manage your finances, now and into the future.