How do you define success?
I ask this question a lot, and interestingly, the answer frequently incorporates the concept of financial freedom.
Why is financial freedom so attractive? Perhaps it is because so many people limit their ability to turn dreams into reality because of their financial situation.
We all know people in jobs that no longer bring pleasure, but they stay because of their need to maintain a certain income level. How many business owners are treading water in stagnant markets because they are afraid to take steps to change the business until profits reach a certain level? If only they were financially free…
At what point is it ok to take a risk? How much is enough? Do what you love and the money will follow, is that wise advice?
Strategic Financial Planning
What would you do if you were in better financial shape? Assuming you can answer that question with clarity (and if you can’t that comes first), financial planning can help you take steps toward addressing fears and demystifying the unknown by systematically identifying the risks, and evaluating the alternatives.
Let’s take a look at each of the steps in a financial planning process:
1. Setting Goals
Although many people address financial issues as they arise such as a child entering college, a family member dies, or it is time to sell the business, financial planning requires you to anticipate the future by setting goals. Without goals you can’t get very far in the financial planning process, and without a financial plan you may be limited in achieving your goals.
2. Collecting Relevant Data
Comprehensive financial planning requires that a number of critical areas (tax planning, investment management, cash management, retirement planning, estate planning and insurance), are evaluated at the same time within the framework of your goals. Looking at any area in isolation will only tell a partial story, and the best alternatives to any one issue are often missed.
The picture that forms by looking at all of the pieces together is a starting point to creating optimal financial strategies and to making realistic, well-educated decisions.
Identifying Barriers to Achieving Goals
People’s attitudes towards money vary enormously. Our attitudes about money are often influenced by the values that have formed over time from our families and to a certain extent, by how much we have. Our unconscious attitudes play a big part in achieving financial success.
One of the basic tenants of financial planning is that we can choose among a set of options. We can move forward or continue to do what we have always done. If you struggle in this area, a financial coach can help you explore the attitudes that might be holding you back.
3. Setting a Timeframe and Strategies to Achieve Goals
Effective goal setting requires establishing target dates for each goal. Once you have done that there are a variety of concepts, methods and tools that are useful in helping you determine the best ways to reach your goal.
Forecasting – Revenue and expenditure forecasts are a central part of any financial plan. For an individual that might be their salary and living expenses. For a business forecasting includes income and expense projections. If you are thinking of starting a new business or project, before you start looking for financial backing you should be sure that the idea will produce sufficient profits to make the venture viable. Financial forecasts are an important part of planning and control.
Budgeting – Where are you spending your money? If you can’t answer that question very accurately, start by keeping track. When you know how much and where you are spending today you can then begin to see opportunities for improvement. Regular and sensible budgeting coupled with an ongoing process to compare actual results to plan can to highlight areas where costs require attention or a particular product or service line is in trouble. Establishing regular ‘budget reviews’ enables you to take corrective action before it becomes a crisis.
Portfolio Diversification – “Don’t put all your eggs in one basket.” When it comes to investing, if you put your money into a variety of investments with different return potentials and risk levels, you may be able to offset possible losses in one investment type with potential gains in another. As a result, diversifying often reduces overall risk exposure.
If you are running a business, revenue diversification can be achieved with a portfolio of products and services, or by working with companies in a variety of industries. A range of different revenue streams can offset risk and keep you afloat when one industry hits hard times, or one product becomes unpopular.
Market Timing – Nobody knows for sure which direction tomorrow’s markets will go. Instead of trying to guess, “dollar-cost averaging” and asset allocation strategies can help you not have to worry about ‘timing’ the market.
Periodically Re-examining Goals
Conditions change regularly over time. It is important to stay on top of any assumptions that may have changed since your last financial plan review.
If your definition of success includes the concept of financial freedom, don’t let your current financial situation turn you into a deer in the headlights! Define your goals, check your attitudes, do your homework, and move forward with a well-thought out plan. It’s your choice.
Written by Helene Mazur
Helene is the founder of Princeton Performance Dynamics, an executive coaching and strategic planning facilitation company for business and non-profit leaders and their teams. Helene’s passion is helping her clients to focus their goals, see new perspectives on their current situation, put in place realistic, motivating plans, and execute to achieve new levels of success.
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