Trying to become financially stable without a plan is a challenging thing to do. Planning ahead gives you a clear picture of your money situation and your goals.
If you think you’re doing just fine without a plan, experts like Dave Ramsey suggest you might be in financial denial.
Financial planning is more than important—it’s essential. These 11 reasons should convince you that you need this key activity in your life!
1. You Know Your Income Better
You probably know about how much your paycheck will be, but do you know where all your money is going?
When was the last time you analyzed your check stub? What’s your gross pay, and where is the money in between that and your net going?
If you don’t know the answers to these questions, you’re not alone. Most people have no idea how much they actually “make.” They only pay attention to what they bring home.
You should be monitoring how much you’re paying into taxes, Social Security, health insurance, and retirement. If you don’t have a paycheck because you’re self-employed, you still need to plan for each of these.
A financial plan lets you see where all of your pay is going and take control of it.
2. You Watch Your Spending
When you have the “money comes in; money goes out” mentality, you are more likely to spend frivolously. With a budget and analysis of your spending habits, you can see where changes need to be made.
Maybe your daily coffee habit isn’t as innocent as it seems when you add it up. Or your “dining out” meals are costing you more than your mortgage.
By watching your spending, you know where your money is going and can allocate it better.
3. Debt is Paid Faster
Are you making the minimum monthly payments on all your debt? Most people do, but this payment plan means each bill will take longer to pay off, costing you thousands of dollars in interest on average.
When you have a plan to pay off your debt, and you start actively paying more than the minimum, it disappears quicker. You’re saving money on interest and getting financially secure at the same time.
4. You’re Prepared for Emergencies
Would you be able to handle your expenses if you or your spouse were laid off today? How long would your savings last?
Financial planning covers the importance of a healthy savings account. Many experts suggest having at least three months’ worth of expenses saved up before you can consider yourself “safe” from most emergencies.
5. You Keep Your Standard of Living in Retirement
Having a plan for retirement should start early. The sooner you begin to save for your future, the more you’ll have when it’s time to retire.
If you want to keep your quality of life the way it currently is or make it even better, you need to have a path to get there.
Financial planners can help you consider your options to create a strong portfolio. They’ll help you understand what your investment choices are and to consider things like tax inflation and long-term care.
6. You Learn the Foundation of Finances
Financial knowledge is often learned from the generations before us. By stepping in to learn how economics works, you can break unhealthy cycles in your family tree.
It’s one thing to have someone step in and tell you how to “fix” your budget. When you learn the consequences of your decisions, both good and bad, you can make better choices.
Role modeling these good financial steps through habits also impacts those who look up to you.
7. You Build Your Assets
Of course, most people want to have assets, not liabilities. But some assets are also a liability, and knowing more about how things are valued helps you decide what to set as your goals.
For instance, a house can be an asset, but if you have a mortgage on it without equity, it’s also a liability. As you learn to plan your finances, you can avoid adding liabilities to your net worth.
8. You Have a Step-by-Step Action Plan
There’s a saying that goes, “A goal without a plan is just a dream.” What is your goal for your future finances? You need a plan to get there.
Financial planning takes a look at your short- and long-term goals. With those in mind, you create action steps to get to the next milestone.
You don’t have to know how you’re going to get to the final step yet. You just have to plan for the next one in front of you.
9. You’re Providing Security for Your Family
The unstable living that comes with not having a financial plan can be harmful to your family. How will they handle their expenses if something happens to you?
To ensure they’re protected, you need to have the essentials like insurance coverage, savings, and retirement and college funds in place as soon as possible.
They also don’t need to be saddled with your debt. Getting debt-free or having coverage in place to cancel out your debt in the event of an accident or death is part of financial planning.
10. You Watch Your Investments
Having a diverse portfolio of investments is an incredible step in your finances. It’s one of the most important parts of financial stability.
What are you doing with your investments, though? Are you paying someone else to handle them with the hope that they know what they’re doing?
Hiring a financial planner to handle your portfolio is perfectly normal. But don’t stay “hands-off.” Learn what they’re doing with your money and stay on top of your own investments.
11. You Learn Who to Listen To
Everyone wants to offer you advice when it comes to money, even if they have financial problems of their own.
As you get deeper into the world of economics and planning, you learn where to go for advice and who to stay away from. You may also become one of the “experts” your friends and family turn to in the future!
The shortest distance to any point is a straight line. Consider financial planning to be the “line” that gets you to your financial goals the fastest!