Examining your present financial status—either alone or with a professional’s assistance—and devising plans to meet both short- and long-term objectives constitute financial planning.
A financial plan: what is it?
A financial plan is a list of your present financial situation, your financial objectives, and any plans you may have for achieving those objectives. Constant financial preparation offers you the assurance to overcome setbacks and make the most of your resources.
7 stages to creating a financial plan
1. Set financial goals
Your financial objectives serve as a guide for a sound financial strategy. Savings will feel more purposeful if you approach your financial planning from the perspective of what your money can accomplish for you, such as helping you buy a house or retire early.
Make your financial objectives motivating. What kind of life do you wish to lead in five years? How about in ten or twenty years? Which should I buy, a car or a house? Do I wish to have no debt? pay off my education debt? Are children present in the image?
Setting and completing specific goals will help you take the next steps toward realizing your objectives and will serve as a beacon of hope.
2. Track your money
Recognize the amounts coming in and going out of your monthly budget. Making a financial plan requires having a clear image, which can also show where additional funds might be allocated for debt repayment or savings. Developing short-, medium-, and long-term strategies might be aided by understanding where your money is going.
Making a budget, for instance, is a common immediate plan. NerdWallet suggests adhering to the 50/30/20 budget guidelines: thirty percent goes toward wants (eating out, clothes, entertainment), twenty percent goes toward savings and debt repayment, and fifty percent goes toward necessities (housing, utilities, transportation, and other recurring expenditures).
A typical long-term goal is to save for retirement, while reducing credit card debt and other high-interest debt is a popular medium-term plan.
3. Budget for emergencies
Leaving money for unforeseen expenses is the foundation of any budget. You can start small; $500 will take care of minor repairs and emergencies, keeping credit card debt at bay in the event of an unforeseen need. Your next target might be $1,000, and after that, one month’s worth of necessities, and so forth.
Another strategy to shockproof your budget is to build credit. When you need options, having good credit makes it possible for you to receive them, such as a reasonable rate on a car loan. It can also help you save money on insurance premiums and eliminate the need for utility deposits.
4. Tackle high-interest debt
Any financial plan must begin with paying off high-interest debt, such as credit card bills, payday loans, title loans, and rent-to-own payments. Some of these may have interest rates so exorbitant that you have to pay back two or three times the amount you borrowed.
A debt management plan or debt consolidation loan could help you combine many monthly bills at a reduced interest rate if you’re having trouble paying off revolving debt.
5. Plan for retirement
A financial advisor will make sure to inquire if you have a 401(k) or other employer-sponsored retirement plan, and if so, does your employer match any portion of your contribution? While it is true that 401(k) contributions currently reduce your take-home income, it is still worthwhile to think about contributing enough to receive the full matching amount.
6. Optimize your finances with tax planning
While taxes are a major concern for many of us during filing season, careful tax planning entails considering options beyond the Form 1040 you file with the IRS annually.
For instance, receiving a large refund on a regular basis could indicate that you’re living on less money than you should all year long. You may take charge of your future by knowing when and how to evaluate the W-4 form you fill out for your company. By modifying your W-4 withholdings, you can either reduce your tax liability or retain a larger portion of your income.
7. Invest to achieve your future objectives
Investing may seem like a luxury reserved for the wealthy or for those who have established careers and families. It’s not. Investing can be as basic as opening a brokerage account (many have no minimum to get started) or as simple as contributing money to a 401(k). Financial plans make use of a range of instruments to invest in real estate, education, and retirement.
To protect yourself from financial setbacks, consider increasing retirement contributions, padding your emergency fund, and using insurance. Term life insurance, covering 10- to 30-year periods, is a good fit for most people’s needs, while increasing contributions to retirement accounts and preparing for essential living expenses.
