Financial planning and forecasting are a key part of any person’s life. From a very young age, we’re taught that money doesn’t grow on trees and that it’s a finite resource. As such we have to invest both time and money to ensure our long-term financial success. We’re also taught that it’s better to be realistic about our financial situation than to be idealistic. For example, we shouldn’t live every day like we’re going to win the lottery. We have to know exactly how much money we have coming in and expect the worst. All of this is a part of what we call financial planning. As kids or young adults, financial planning is a bit easier because we don’t have as many funds to deal with. However, the older we get, the more wealth we accumulate and the more time and money we need to dedicate to planning our financial future.
In this blog, we’re going to take a look at two different terms: financial planning and financial forecasting and how these concepts can help you improve your financial situation.
A comprehensive financial plan is a strategy created by an individual or a company that lays out a step-by-step process that should be followed to ensure financial goals are met. In business, financial plans are the equivalent of business plans in that it lays out exactly how assets should be allocated in order to maximize revenue.
At Anchor Wealth Management, coming up with the right financial plan is twofold. First, we help identify when someone reaches their financial independence. Think of this as a person choosing to go to work because they like their job as opposed to only going for a paycheck. Secondly, a comprehensive financial plan ensures that someone doesn’t outlive their money based on reasonable assumptions. This two-pronged approach provides the client with peace of mind.
Just like it sounds, a financial forecast is a projection of future income. Although it’s impossible to know exactly how much an individual or company will be making a year or two years down the line, there are a number of factors that can be used to approximate. In a way, financial forecasting is a tool that you’ll need to optimize your financial plan.
Why It’s Important
Prioritizing Your Financial Goals
Just like how you learn to prioritize throughout your daily life to make room for work, chores, and entertainment, your finances need to be prioritized. Is your priority to see lots of short-term growth so that you can start investing? Or are you trying to plan for long-term success? This is a fundamental question that you should be able to answer before you even start looking into the specifics. Financial forecasting can be used to help you determine what priority would be best for you or your company.
Changing Your Scope
One very important reason to have a financial plan and forecast is that they allow you to change your scope and see the bigger picture. Although just by going about your daily life, you’ll understand to some degree what your financial situation is, it’s nearly impossible to be able to take everything into consideration and make the best possible decision for your financial future. Projecting your future revenue and taking a look at the whole picture will allow you to make wiser and more educated decisions.
Another reason for financial planning and forecasting is to allow yourself to be more sure about your financial decisions. Although you can spend all your time worrying about your financial situation, most people would agree that this is a bad way to live. Although you can never be 100 percent certain about your future financial situation, a financial plan will lay everything out on the table and ensure that any potential downfalls are accounted for. This is especially important if you’re looking to invest a lot of money because you’ll need to know exactly what the risk is that you’re taking and balance that with the potential reward.
Although it’s always good to have a better understanding of your financial situation and always be following a financial plan of some sort, there are several key moments when you will need to invest a lot of time into your financial planning. For example, if you’ve accumulated enough wealth that you’re having trouble keeping track of it; you’re planning for a major investment like a car or a home, or you’re looking into saving more money for retirement. These are just a few examples of situations where you’ll need a solid financial plan.
Like many things in life, financial planning can be very challenging at times. Here at Anchor Wealth Management, we understand that you have ambitious financial goals, and we want to help you achieve them. If you’re faced with a complex financial situation, our goal is to help you come out on top and be better equipped for future financial planning. Whether you need help saving, investing, or planning for retirement, we are always available to talk. We have offices in both Rockford and Lanark so give us a call today for a consultation.