Almost 22% of adults in the US do not have an emergency savings fund. What’s even more shocking is that around 28% of non-retired adults have no retirement savings at all. It demonstrates the lack of awareness of financial planning among the people.
Although Washington is one of the states with the highest savings, many people still lack basic knowledge of financial planning. If you haven’t started financial planning and seek guidance on the same, you can contact a nearby CPA in Seattle, WA.
Understanding the necessity of financial planning
Financial planning is the ultimate strategy for tackling unpredictable future financial issues like recession and inflation. People often mistake savings for financial planning. However, financial planning is much more than just savings.
Financial planning takes various economic factors into account to ensure that you have financial stability in the long run.
- Impact of inflation over the value of money.
- Strategies to tackle the recession.
- Borrowing cost due to fluctuation in interest rates
- Market volatility and unemployment
- Changes in tax laws, government policies, etc.
Exploring the steps of financial planning
Financial planning is a continuous process that considers your current financial situation and formulates strategies to achieve your financial goals. The following are the elements of a good financial plan.
- Setting up a financial goal: A financial goal drives your entire financial planning; it may encompass short-and long-term goals like buying a house, paying off a student loan, buying a car, etc.
- Tracking your income and expenses: Tracking your money by evaluating your income, expenses, and payments to come up with a savings plan like the 50/30/20 principle is a vital part of financial planning. The 50/30/20 rule states that you should spend 50% of your income on your needs, 30% on your wants, and 20% on your savings.
- Making a budget for emergencies: You must have an emergency fund to support your living expenses for at least six months. You can start small and gradually increase your savings until you’ve saved enough.
- Managing high-interest debts: Paying off high-interest debts like credit cards and payday loans will enable you to save more. You can take out a debt consolidation loan to pay less interest and penalty charges.
- Retirement planning: Contributing to a 401(k) or IRA will ensure you have enough funds to support you after retirement financially. They allow your income on investment to grow tax-free.
- Tax planning: You can invest in various tax-saving schemes to save money that would otherwise go to taxes. You can also review your W-4 to learn how to save more on taxes.
- Investment planning: Smart and systematic investment can allow you to set aside extra money that will eventually become a lump sum fund.
- Estate planning: Estate planning helps individuals smoothly transition wealth to the younger generation with better control and ensures good care during old age.
