Don't Understand Financial Planning? Master These 6 Steps and Save Yourself 10 Years of Detours

What Is Financial Planning? And Why Should You Do It?

What Is Financial Planning?

Financial planning is a systematic approach to rationally managing personal or household financial resources in order to achieve specific financial goals and ensure future financial security.

It involves setting financial goals, evaluating your current financial situation, and developing and executing relevant strategies and plans to achieve financial freedom and ensure your financial objectives are met.

Why Should You Do Financial Planning?

Unlike the simple habits of earning, saving, and spending, many people don’t actually have a deliberate approach to managing their finances. That’s why we so often hear questions like “I’m living paycheck to paycheck,” “How do I save money?”, “I can’t afford a house,” or “How will I ever retire?”

Financial planning is actually the best answer to all of these questions, because the steps involved guide you toward achieving these goals one by one.

Financial Planning Step 1: Set Your Financial Goals

The first step in financial planning is to set specific, achievable financial goals. These goals should cover short-term, mid-term, and long-term needs and aspirations. Everyone has things they want to buy, and some of those purchases can’t happen in a day or two. But without a planned approach to goal-setting, those things may never become reality — or buying them ends up being extremely painful.

• Short-term goals (1–2 years): Build an emergency fund, pay off credit card debt, buy new furniture.
• Mid-term goals (3–5 years): Buy a home, start a children’s education fund, purchase a car.
• Long-term goals (5+ years): Retirement planning, children’s college education, long-term investment plans.

Financial Planning Step 2: Analyze Your Current Financial Situation

Before you begin financial planning, you need to clearly understand your current financial standing. This includes:

• Income: Salary, bonuses, investment returns, etc.
• Expenses: Daily living costs, mortgage payments, loan payments, insurance premiums, etc.
• Debts: Credit card debt, student loans, mortgage, etc.
• Assets: Cash, bank savings, investments, real estate, etc.

Income and expenses are the most commonly overlooked financial items, while debts and assets tend to be the most complicated. Since earning and spending happen every single day — work, spend, work, spend — people get used to it and assume everything is fine. But problems often arise precisely because of those unexamined habits.

Financial Planning Step 3: Establish Income & Expense Management Principles

Create a Budget

Creating a detailed monthly budget is the core of financial planning. A budget helps you understand your monthly income and expenses, enabling you to achieve balance and have a surplus for savings and investments. After setting up a monthly budget, it’s best to also create an annual budget, since some expenses aren’t monthly — they happen once a year, such as insurance premiums, income tax, and property tax.

Plan Your Savings & Emergency Fund

Building an emergency fund is extremely important. Your emergency fund should cover at least 3 to 6 months of living expenses to handle unexpected events like job loss or medical bills. Most people have a habit of saving money, but the money they save is just “savings” without any designated purpose. I strongly recommend splitting your money into 3 accounts: an Emergency Fund account, a Monthly Living Expenses account, and an Annual Tax & Fees account.

This way, every dollar has its own designated function — just like recycling. You wouldn’t toss paper into the plastics bin, and you wouldn’t feed plastic bottles into a paper pulping machine. Once you develop the habit of categorizing, you’ll start understanding that each dollar has its own role to play.

Financial Planning Step 4: Risk Management

Buy the Right Insurance — Following the “Right, Enough, Good” Principle

The right insurance, enough coverage, and good premiums — these are typically the hallmarks of proper protection-oriented insurance. Risk management is mainly achieved through purchasing insurance. Here are some common types:

• Health Insurance: Covers hospitalization, surgical expenses, hospital room fees, etc.
• Life Insurance: Typically term life or accident insurance — provides financial security for your family in case of death.
• Property Insurance: Covers losses to homes, vehicles, and other property.
• Critical Illness & Disability Insurance: Protects against income loss due to accidents or illness.

The ultimate purpose of insurance is to use appropriate premiums to reduce the financial loss from your own pocket when illness, accidents, hospitalization, or other medical expenses arise.

Financial Planning Step 5: Asset Planning

Investment Planning

Investment planning requires choosing appropriate investment tools based on your personal risk tolerance and financial goals. Common investment tools include:

• Stocks: High risk, high return.
• Bonds: Relatively low risk, stable returns.
• Mutual Funds: Diversified investments, reduced risk, but higher management fees.
• Real Estate: Long-term appreciation potential (applicable in Taiwan).

In recent years, more and more people have become familiar with ETFs. It’s been about 15 years since I started following 綠角 (Greenhorn), and I never imagined it would take 15 years for the simplest lazy investing approach — index funds — to fully mature in Taiwan. While the “concept” of ETFs is still quite muddled here, with all sorts of strange variations like “market-cap weighted” and “dividend-focused” types popping up everywhere.

Tax Planning

Tax planning is about legally reducing your tax burden to increase your actual income. Let’s look at the most common one — income tax:

Income Tax

• Take advantage of tax incentives. For example, under Taiwan’s new labor pension system, voluntary pension contributions are exempt from income tax.
• Make good use of personal exemptions and deductions to reduce your income tax liability.

While income tax is essentially “earn more, pay more,” your actual tax amount can vary depending on your family situation. Two people with the same income might pay very different amounts of tax.

Retirement Planning

Retirement planning should start early, with savings and investment strategies aligned with your expected retirement lifestyle. Here are some key steps:

• Estimate the living expenses you’ll need after retirement.
• Determine how much you need to save each year.
• Choose appropriate investment tools to meet your retirement goals.

Everyone’s ideal retirement looks different — some want to retire early, some want to retire late, and some have no choice but to retire. But regardless, earning power generally declines with age, so preparing for retirement is essential. Estimating your retirement living costs and income replacement ratio is the core of retirement planning.

Credit Management

Maintaining a good credit record is a vital part of financial health. This includes:

• Paying all debts and bills on time.
• Avoiding excessive debt — keep credit card utilization below 30%.
• Regularly checking your credit report to ensure there are no errors.

Financial Planning Step 6: Regular Tracking & Review

Financial planning isn’t set in stone — it needs to be reviewed and adjusted periodically based on changes in your circumstances and goals. I recommend a comprehensive financial checkup at least once a year.

Personally, I review my financial statements and situation every single month. This has been tremendously helpful in building my financial confidence.

Does Hiring a Financial Advisor Cost Money?

Common Fee Structures for Financial Advisors in Taiwan

Here are the common types of financial planning services available in Taiwan, along with their corresponding fee structures:

Can I Do Financial Planning Myself, or Should I Hire an Advisor?

Doing It Yourself

Of course you can do financial planning yourself — it’s like driving a car. If you have a car and a license, you can drive yourself. But when you’re driving, you need to focus on the road and can’t do other things at the same time.

Hiring an Advisor

A financial advisor is like having a seasoned driver for your finances. They’ve handled many more financial cases and planning projects than you ever could on your own. And by entrusting your finances to an advisor, you’re free to focus on earning more, better, and higher income — and increasing your personal value.

Further Reading

Lazy Conclusion

懶大

金融科技新創 CEO | 獨立財務顧問

Financial planning is a crucial step toward achieving financial freedom and health. By setting specific goals, analyzing your current situation, creating a budget, building a savings plan, managing risks, planning investments, handling taxes and retirement, and maintaining good credit — you can reach your financial goals and face future financial challenges with confidence.

Financial planning takes time and patience, but as long as you approach it with a plan, you will absolutely achieve your financial goals and attain financial freedom and well-being.

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