If you take a closer look at financial planning, you’ll see that the process translates personal financial goals into specific financial plans, which then helps you implement those plans through financial strategies. The financial planning process involves the six steps shown in Exhibit 1.3. In effect, the financial planning process runs full circle. You start with financial goals, formulate and implement financial plans and strategies to reach them, monitor and control progress toward goals through budgets, and use financial statements to evaluate the plan and budget results. This leads you back to redefining your goals so that they better meet your current needs and to revising your financial plans and strategies accordingly.
Defining Your Financial Goals
Financial goals are the results that an individual wants to attain. Examples include buying a home, building a college fund, or achieving financial independence. What are your financial goals? Have you spelled them out? It’s impossible to effectively manage your financial resources without financial goals. We need to know where we are going, in a financial sense, to effectively meet the major financial events in our lives. Perhaps achieving financial independence at a relatively early age is important to you. If so, then activities such as saving, investing, and retirement planning will be an important part of your financial life. Your financial goals or preferences must be stated in monetary terms because money, and the satisfaction it can buy, is an integral part of financial planning.
The Role of Money
About 80% of Americans believe that money is power, and about 75% say that it is freedom. Money is the medium of exchange used to measure value in financial transactions. It would be difficult to set specific personal financial goals and to measure progress toward achieving them without the standard unit of exchange provided by the dollar. Money, as we know it today, is the key consideration in establishing financial goals. Yet it’s not money, as such, that most people want. Rather, we want the utility, which is the amount of satisfaction received from buying certain types or quantities of goods and services, that money makes possible. People may choose one item over another because of a special feature that provides additional utility. For example, many people will pay more for a car with satellite radio than one with only a CD player. The added utility may result from the actual usefulness of the special feature or from the “status” it’s expected to provide or both. Regardless, people receive varying levels of satisfaction from similar items, and their satisfaction isn’t necessarily related to thecost of the items. We therefore need to consider utility along with cost when evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation.
The Psychology of Money
Money and its utility are not only economic concepts; they’re also closely linked to the psychological concepts of values, emotion, and personality. Your personal value system the important ideals and beliefs that guide your life will also shape your attitude toward money and wealth accumulation. If you place a high value on family life, you may choose a career that offers regular hours and less stress or choose an employer who offers flextime rather than a higher-paying position that requires travel and lots of overtime. You may have plenty of money but choose to live frugally and do things yourself rather than hire someone to do them for you. Or if status and image are important to you, you may spend a high proportion of your current income on acquiring luxuries. Clearly, financial goals and decisions are consistent with your personal values. You can formulate financial plans that provide the greatest personal satisfaction and quality of life by identifying your values.
Money is a primary motivator of personal behavior because it has a strong effect on self-image. Each person’s unique personality and emotional makeup determine the importance and role of money in his or her life. Depending on timing and circumstances, emotional responses to money may be positive (love, happiness, security) or negative (fear, greed, insecurity). For example, some people feel satisfaction in their work when they receive a paycheck. Others feel relief in knowing that they can pay past-due bills. Still others worry over what to do with the money. Some young people have a negative attitude toward money. You should become aware of your own attitudes toward money because they are the basis of your “money personality” and money management style. Exhibit 1.4 explores attitudes toward money.
Some questions to ask yourself include: How important is money to you? Why? What types of spending give you satisfaction? Are you a risk taker? Do you need large financial reserves to feel secure? Knowing the answers to these questions is a prerequisite to developing realistic and effective financial goals and plans. For example, if you prefer immediate satisfaction, then you will find it more difficult to achieve longterm net worth or savings goals than if you are highly disciplined and primarily concerned with achieving a comfortable retirement at an early age. Trade-offs between current and future benefits are strongly affected by values, emotions, and personality. Effective financial plans are both economically and psychologically sound. They must not only consider your wants, needs, and financial resources but must also realistically reflect your personality and emotional reactions to money.
Money and Relationships
The average couple spend between 250 and 700 hours planning their wedding, and they spend an average of about $20,000 on the big day. But with all the hoopla surrounding the wedding day, many couples overlook one of the most important aspects of marriage: financial compatibility. Money can be one of the most emotional issues in any relationship, including that with a partner, your parents, or children. Most people are uncomfortable talking about money matters and avoid such discussions, even with their partners. However, differing opinions on how to spend money may threaten the stability of a marriage or cause arguments between parents and children. Learning to communicate with your partner about money is a critical step in developing effective financial plans
Financial goals are the results that an individual wants to attain. Examples include buying a home, building a college fund, or achieving financial independence. What are your financial goals? Have you spelled them out? It’s impossible to effectively manage your financial resources without financial goals. We need to know where we are going, in a financial sense, to effectively meet the major financial events in our lives. Perhaps achieving financial independence at a relatively early age is important to you. If so, then activities such as saving, investing, and retirement planning will be an important part of your financial life. Your financial goals or preferences must be stated in monetary terms because money, and the satisfaction it can buy, is an integral part of financial planning.
The Role of Money
About 80% of Americans believe that money is power, and about 75% say that it is freedom. Money is the medium of exchange used to measure value in financial transactions. It would be difficult to set specific personal financial goals and to measure progress toward achieving them without the standard unit of exchange provided by the dollar. Money, as we know it today, is the key consideration in establishing financial goals. Yet it’s not money, as such, that most people want. Rather, we want the utility, which is the amount of satisfaction received from buying certain types or quantities of goods and services, that money makes possible. People may choose one item over another because of a special feature that provides additional utility. For example, many people will pay more for a car with satellite radio than one with only a CD player. The added utility may result from the actual usefulness of the special feature or from the “status” it’s expected to provide or both. Regardless, people receive varying levels of satisfaction from similar items, and their satisfaction isn’t necessarily related to thecost of the items. We therefore need to consider utility along with cost when evaluating alternative qualities of life, spending patterns, and forms of wealth accumulation.
The Psychology of Money
Money and its utility are not only economic concepts; they’re also closely linked to the psychological concepts of values, emotion, and personality. Your personal value system the important ideals and beliefs that guide your life will also shape your attitude toward money and wealth accumulation. If you place a high value on family life, you may choose a career that offers regular hours and less stress or choose an employer who offers flextime rather than a higher-paying position that requires travel and lots of overtime. You may have plenty of money but choose to live frugally and do things yourself rather than hire someone to do them for you. Or if status and image are important to you, you may spend a high proportion of your current income on acquiring luxuries. Clearly, financial goals and decisions are consistent with your personal values. You can formulate financial plans that provide the greatest personal satisfaction and quality of life by identifying your values.
Money is a primary motivator of personal behavior because it has a strong effect on self-image. Each person’s unique personality and emotional makeup determine the importance and role of money in his or her life. Depending on timing and circumstances, emotional responses to money may be positive (love, happiness, security) or negative (fear, greed, insecurity). For example, some people feel satisfaction in their work when they receive a paycheck. Others feel relief in knowing that they can pay past-due bills. Still others worry over what to do with the money. Some young people have a negative attitude toward money. You should become aware of your own attitudes toward money because they are the basis of your “money personality” and money management style. Exhibit 1.4 explores attitudes toward money.
Some questions to ask yourself include: How important is money to you? Why? What types of spending give you satisfaction? Are you a risk taker? Do you need large financial reserves to feel secure? Knowing the answers to these questions is a prerequisite to developing realistic and effective financial goals and plans. For example, if you prefer immediate satisfaction, then you will find it more difficult to achieve longterm net worth or savings goals than if you are highly disciplined and primarily concerned with achieving a comfortable retirement at an early age. Trade-offs between current and future benefits are strongly affected by values, emotions, and personality. Effective financial plans are both economically and psychologically sound. They must not only consider your wants, needs, and financial resources but must also realistically reflect your personality and emotional reactions to money.
Money and Relationships
The average couple spend between 250 and 700 hours planning their wedding, and they spend an average of about $20,000 on the big day. But with all the hoopla surrounding the wedding day, many couples overlook one of the most important aspects of marriage: financial compatibility. Money can be one of the most emotional issues in any relationship, including that with a partner, your parents, or children. Most people are uncomfortable talking about money matters and avoid such discussions, even with their partners. However, differing opinions on how to spend money may threaten the stability of a marriage or cause arguments between parents and children. Learning to communicate with your partner about money is a critical step in developing effective financial plans
Your parents should play an important role in your financial planning. As they age, you may have to assume greater responsibility for their care. Do you know what health care coverage and financial plans they have in place? Where do they keep important financial and legal documents? What preferences do they have for health care should they become incapacitated? Asking these questions may be difficult, but having the answers will save you many headaches. As we noted before, there are many distinct money personality types. One person may be analytical and see money as a means of control, another may use it to express affection, and yet another may use it to boost self-esteem. When couples have very different attitudes toward money for example, if one person likes to prepare detailed budgets but the other is an impulse shopper conflicts are bound to arise.
The best way to resolve money disputes is to be aware of your partner’s financial style, keep the lines of communication open, and be willing to compromise. It’s highly unlikely that you can change your partner’s style (or your own, for that matter), but you can work out your differences. Financial planning is an especially important part of the conflict resolution process. To gain a better understanding of your differences, work together to establish a set of financial goals that takes into account each person’s needs and values. For instance, you may be a risk taker who likes to speculate in the stock market yet your more cautious partner wants to put all your money into a savings account in case one of you loses your job. If you can first agree on the amount of money you should have readily available in low-risk investments and savings accounts, then you can allocate a specific portion of your funds to riskier investments.
The best way to resolve money disputes is to be aware of your partner’s financial style, keep the lines of communication open, and be willing to compromise. It’s highly unlikely that you can change your partner’s style (or your own, for that matter), but you can work out your differences. Financial planning is an especially important part of the conflict resolution process. To gain a better understanding of your differences, work together to establish a set of financial goals that takes into account each person’s needs and values. For instance, you may be a risk taker who likes to speculate in the stock market yet your more cautious partner wants to put all your money into a savings account in case one of you loses your job. If you can first agree on the amount of money you should have readily available in low-risk investments and savings accounts, then you can allocate a specific portion of your funds to riskier investments.
.
Thanks for the informative blog.
ReplyDeleteChicago Financial Planning Services
Thanks for a very interesting blog. What else may I get that kind of info written in such a perfect approach? I’ve a undertaking that I am simply now operating on, and I have been at the look out for such info. Houses for sale in port elizabeth
ReplyDeleteThe financial planning process involves defining goals, gathering and analyzing financial information, developing and implementing a plan, and regularly reviewing and adjusting it as needed. By following these steps, you can create a structured approach to managing your finances, achieving your goals, and ensuring long-term financial stability. Best Cash Flow Forecasting Software | Financial Forecasting Tool
ReplyDelete