Financial Planning for Your Family

Modern life in the city or in the country means lots of expenses, future and present, that you have to plan for. Whether it is purchasing a car or paying for college, the money must come from somewhere and what financial planning does is it helps prepare you for this in advance.

Every business has a plan, targets that need to be met, assumptions since the future cannot be perfectly predicted. Unless you have a plan, you cannot adjust and see what you have to do today in order to meet the future goals that you set. If the company wants to issue new shares or take out new debt financing, it needs to fulfill certain criteria (achieve sales, balance sheet criteria etc) and this is why financial planning is so important.

Going back to family financial planning, it is just as important. Every family hopes to buy a car at a certain moment in time. If you want to buy a new car in three years time, the best way to do so is to plan for this purchase in advance. Where will the money come from? Well, it could be some existing savings, expected price of the old car which can be sold, some extra income from investments. All this can be predicted with some level of accuracy. The same is true for other purchases and income.

If you have a mortgage for example, financial planning becomes even more important. You need to be able to plan since you have to always make the payments due. Most families have a whole category of expenses and payments that need to be made and at the same time income from salaries, bonuses, income from investments. You never want to be in the situation where you don't have the money you need. At the same time having lots of cash in the bank account means you are losing out on making interest on investments that fit your risk profile. You could be making 5% per year on bonds with the money you have in your bank account and this is the opportunity cost that you always have to keep in mind.

The simplest way is to model a basic monthly budget in excel. You can easily make assumptions like one to two holiday trips per year, expected return on investments and simple household expenses like food, clothing, entertainment, utilities. Most of these are more or less fixed.

Once you put all these together, you have a working model which you can then extrapolate to see where you are going and how much you need to save for future investments you wish to make. Planning is vital in any modern environment and can be simplified or made more complicated according to your situation and needs.