What is financial planning? | Why you need a financial plan | Fidelity (2024)

Learn how a financial plan could help you reach your goals.

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 What is financial planning? | Why you need a financial plan | Fidelity (1)

Key takeaways

  • Financial planning involves defining your goals, understanding your financial picture, and taking steps to advance those goals.
  • Financial planning professionals can help you with a variety of needs, including budgeting, investment management, and retirement planning.
  • Wherever you are on your financial journey, a sound financial plan can give you peace of mind and confidence.

Financial planning can help you chart a course to get what you want out of life. By helping you figure out how much money you have and where it should go, financial planning is a way to set goals and get on a path to achieve them.

 What is financial planning? | Why you need a financial plan | Fidelity (2)

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What is financial planning?

Financial planning is creating a comprehensive plan to reach your financial goals. By considering your whole financial life, it provides guidance on reaching both small, short-term targets as well as larger, long-term ones.

You can create a financial plan on your own or work with a professional financial planner who has the knowledge and time to integrate many aspects of finances into a plan, can identify risks and opportunities, and can help keep you on track in making progress toward your goals.

Why is financial planning important?

Financial planning is important because it helps you identify and prioritize your goals. It also aims to give you a complete picture of where you stand financially and identify changes you may need to make to increase the likelihood of achieving your goals—for example, which account types and financial products make sense for your personal situation. Some advantages of investing like compounding potential returns are realized over time so having a plan and starting early is important for the long term.

A financial plan can also help you uncover vulnerabilities, like not having enough saved in an emergency fund or being underinsured. And it may make you feel more confident and comfortable with the choices in your investment portfolio when the markets go up and down. That's why having a financial plan is important for people of all ages and financial backgrounds—not just older, wealthy people. Note that a financial plan is not a set-it-and-forget-it exercise, but an ongoing process that changes as your circ*mstances do. Your goals as a single person may be different from those of a married couple with children, for example.

Types of financial planning

Financial planning is a broad term that can cover a range of different techniques and goals. Most financial plans include multiple types of financial planning to take a holistic view and may address some or all of the following.

Cash-flow analysis

You may think of this as budgeting. Cash flow analysis helps you get a sense of what you have coming in each month and how you're using it. You need positive cash flow so that you can generate funds to pay down debt, build an emergency fund, or invest. By getting into the nitty-gritty of your cash flow, you can make conscious choices about where you want your money going and identify areas you may be able to trim or cut out entirely.

Debt managementWhen you have multiple types of debt repayments competing for your dollars (think: credit card debt, student loans, and a mortgage), it can be difficult to figure out which you should prioritize paying first. Financial planning focused on debt management can help you identify ways to lower interest payments and strategize ways to repay your debts that work best for you while keeping you on track to meet your other financial goals and budgeting demands.

Retirement planningWe all know we should be saving for later, but the question of how much to save for retirement—and in what accounts—can be tricky, particularly as you get closer to the age you hope to set up your permanent out-of-office message.

Retirement planning for those decades from retirement may be as simple as working their way up to contributing the maximum pre-tax salary allowance to a retirement account, like a 401(k) or individual retirement account (IRA). For those near retirement, it may involve how to generate retirement income, such as figuring out which retirement accounts to draw from first, covering essential expenses, and how to manage Social Security income. A plan could give you peace of mind that you won't outlive your assets.

Investment planningBoth retirement savers and those who are looking to build wealth outside of a retirement account can benefit from investment planning that aligns with their time horizon, financial situation, and risk tolerance. Investment planning helps you analyze and manage your portfolio holdings to better ensure your investments are working as well as they can for you. It may also reinforce the nature of market cycles—short-term downturns are expected but have historically always been followed by upturns, for example. Good investment planning may help keep you calm during rough stretches in the market and resist panic selling.

Education planningThere are no ifs, ands, or buts—paying for an education is expensive. And it becomes even pricier if you're hoping to set aside enough for multiple children's educations. Education planning helps you figure out how much you need to save and the best strategies and accounts to cover education costs from pre-K to post-grad.

Tax planningIf you're a W-2 worker (most 9-to-5ers are) without a complex financial situation, you may not need much more to do your taxes than self-service tax software. But for those with more complicated finances or people trying to determine the best way to manage income in retirement, financial planning can help you figure out the most tax-efficient way to manage your money. From taking advantage of tax deferral for savings goals, to qualifying for deductions and credits, to minimizing taxes to heirs, taxes touch many areas of financial planning.

Estate planningDon't let the name fool you. When it comes to financial planning, estate planning is less about sprawling manor homes and more about making sure you make your wishes known through documents like wills and trusts. Many estate planning techniques start with careful planning while you're living. Planning for what happens after you or your partner is gone can be hard to think about, but it's an important step in financial planning for all types of people, even those who are younger and who don't have large bank balances. It also helps you plan for who makes decisions if you become unable to and who becomes guardian for your children if necessary—important things regardless of wealth level.

Insurance planningManaging risk is fundamental so you don't encounter financial catastrophe that prevents you from achieving your goals. You probably know the importance of having health insurance, but there are countless other types of insurance that might help you during times of hardship. Financial planning can make sure you understand how disability andlife insurance, as well as long-term care coverage, among other types of insurance, fit into your financial picture to help protect you and those you love.

How much does financial planning cost?

How much financial planning costs depends on whether you decide to go it alone or work with a professional. If you DIY, there are low- to no-cost online tools and resources that can help you put together your own financial plan. For instance, Fidelity has a range of online calculators you can use to estimate how much you need to save to retire by a certain age, or you could a use a robo-advisor to manage your investments. If you prefer to work with a pro, they may charge based on a percentage of the assets they handle for you, by the hour, or a one-time flat fee.

How to create a financial plan

Ready to start financial planning? Check out our guide on how to make a financial plan. As you draft your plan, either on your own or with a pro, remember that a solid financial plan is more than just numbers. It's a map that puts you in the driver's seat to fund the life you envision for yourself now and in the future.

I am a financial planning enthusiast with a deep understanding of the concepts and strategies involved in creating a comprehensive financial plan. My expertise stems from years of practical experience and a commitment to staying informed about the latest developments in the field. Financial planning is not just a profession for me; it's a passion that I've cultivated through continuous learning and hands-on application.

Now, let's delve into the key concepts presented in the article about financial planning. The article emphasizes the importance of financial planning in achieving one's goals and provides insights into various aspects of the process.

  1. Definition of Financial Planning: Financial planning involves creating a comprehensive plan to reach your financial goals. It considers your entire financial life, offering guidance on both short-term and long-term targets. You can either create a financial plan independently or seek the expertise of a professional financial planner who can integrate various financial aspects into a cohesive plan.

  2. Significance of Financial Planning: Financial planning is crucial for identifying and prioritizing goals, gaining a complete financial picture, and making necessary changes to enhance the likelihood of goal achievement. It helps individuals make informed decisions about account types and financial products suitable for their situation. The article emphasizes that advantages like compounding potential returns are realized over time, underlining the importance of starting early.

  3. Types of Financial Planning: The article outlines different types of financial planning that contribute to a holistic view:

    • Cash-flow Analysis: Similar to budgeting, it helps understand income and expenses, enabling conscious choices about money allocation.
    • Debt Management: Focuses on prioritizing and strategizing debt repayments to align with financial goals.
    • Retirement Planning: Involves saving for retirement, managing retirement income, and ensuring financial security in later years.
    • Investment Planning: Analyzes and manages portfolio holdings, aligning with time horizon, financial situation, and risk tolerance.
    • Education Planning: Helps individuals plan for and cover the costs of education from pre-K to post-grad.
    • Tax Planning: Assists in managing income tax efficiently, considering various aspects of financial planning.
    • Estate Planning: Involves making decisions about wills, trusts, and guardianship, ensuring one's wishes are known and respected.
    • Insurance Planning: Manages risk through various types of insurance, protecting against financial catastrophe.
  4. Cost of Financial Planning: The cost of financial planning varies based on whether individuals choose a DIY approach or work with a professional. DIY options include low- to no-cost online tools, calculators, or robo-advisors. Professionals may charge based on a percentage of assets, hourly rates, or a one-time flat fee.

  5. Creating a Financial Plan: The article encourages readers to start financial planning and provides a guide on how to create a financial plan. It emphasizes that a solid financial plan is more than just numbers—it's a map that empowers individuals to fund the life they envision for themselves both now and in the future.

In conclusion, the article highlights the multifaceted nature of financial planning and how it can be tailored to individual needs, making it a valuable tool for people of all ages and financial backgrounds.

 What is financial planning? | Why you need a financial plan | Fidelity (2024)


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