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Financial planning is one of those activities that some people particularly enjoy because they like the oversight or the sense of the challenge. For others, the fear of picking investments rivals a trip to the dentist because of the concern that mistakes will be made. People aren't necessarily afraid of making certain mistakes in life, but if people make the wrong decisions in regard to financial planning, they may jeopardize long-term plans, goals, and dreams. Therefore, it is important for people to understand the basics of personal financial planning.

Goals

In order to establish a financial plan, people have to establish their particular goals. This means that people have to differentiate between actual plans and "someday" goals. If people genuinely want to work towards something, that should be part of their financial plan and it should have some specifics. Otherwise, it might have to go into the column of things that the person might do if they win the lottery or inherit a large amount of money.

Timetables

Financial planning is almost always dictated by timetable. There are certain financial instruments that should not be included in a financial plan if there are particular timetables in place. For example, if a person or family is planning to use their assets toward a house in the next 1-2 years, they should probably not put their money in high-risk funds or particular stocks. While they may increase their funding, they might also lose a great deal, which would inhibit their immediate plans. On the other hand, if people are planning on retirement in 30+ years, they can afford to invest in riskier funds and stocks because they have time to absorb shifts in the market.

Instruments

In addition to goals and timetables, people must understand the different types of financial instruments. This includes stocks, bonds, mutual funds, certificates-of-deposit, money market funds, and others. Each different type of investment has a particular function in a portfolio and it is important for people to understand at least some of the technical language. This helps them make decisions on risk, return, and management of various instruments.

Maintenance

Financi al planning requires some level of ongoing attention. People can't just put their money into funds and then forget about it. They have to be aware of fund changes, news, and fluctuations in the market. This puts them in a position to make changes if they are needed and to shift priorities as time goes by. Granted, some people monitor their money so closely that they are prone to panic when things go badly. Some of these people are the ones that sell quickly when the market goes down, rather than being patient and waiting for things to improve.

Risk

Finally, financial planning must be understood in the context of risk. There are no guarantees in investing, and smart people lose lots of money every day. This is the inevitable result of financial planning. For some people, this is why they leave their planning to other people. There is no way to totally eliminate risk, but careful planning, research, and patience can help to avoid major pitfalls.

Learn more about this author, Todd Pheifer.
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