We all want to have financial security, so it’s important to establish a flaw-free financial plan for yourself in order to achieve this. A financial plan is a comprehensive snapshot of your current finances, your long-term financial goals, and the strategies you put in place for yourself to achieve these goals. A good financial plan strategy will allow you to save money, prepare for the future, and achieve long-term goals, like saving for retirement or your child’s college education. Everyone’s financial plan will look different. We are sharing six common steps how to create a financial plan.
What Is Financial Planning?
Financial planning is an ongoing process that determines how you will achieve your financial goals and objectives. It can help reduce stress and support your current needs while helping you build a nest egg future needs. A financial plan is important because it helps you create a roadmap for your future so you can make the most of your current assets and help ensure your financial future is comfortable. While you can create a financial plan yourself, it’s best to utilize the talents of a certified financial planner.
Set Financial Goals
The first step in creating your financial plan is setting specific goals that will help you stay on track. These goals will be your foundation for financial success. Your goals can include short- or long-term objectives, like paying off student loans or buying a new car. Avoid having grand, lofty goals like, “I want to be rich” and instead focus on smaller objectives like, “I want a college fund for my kids” so you don’t feel overwhelmed trying to accomplish them. Once well-defined and prioritized, your goals will be the driving force behind your financial plan.
Track Your Financial Activity
One of the more important aspects of financial planning is creating a budget and tracking where your money goes. Having a sense of your monthly cash flow (expenses/savings/income) can help give you an accurate picture of where your money comes and goes each month and help you establish short, medium, and long-term plans. Once you begin to see where your money goes, you can adjust it to better achieve your goals. For an immediate plan of action, try developing a simple budget. You can create one by:
- Tracking your income and expenses.
- Using a budgeting app.
- Utilizing the 50/30/20 budget method. This includes putting 50% of your take-home income toward essentials like housing, utilities, food, and other recurring payments. 30% then goes toward wants like dining out and entertainment. The last 20% goes toward savings and debt payment.
Minimizing credit card debt is an example of a medium-term plan and retirement planning is a typical long-term plan.
Start Saving
After your major goals are set and you’ve been keeping track of income and expenses, it’s time to start saving! Refer to your budget and re-examine your spending accordingly. You can start immediately saving more by cutting your expenses and increasing your income. First, begin by determining where you’ve been spending too much, such as entertainment or dining out. Then, look for ways to save. Next, find out ways to increase your income. This can be accomplished through a second job, asking for a raise, or even a career change. Once your extra income is flowing, ensure you’re putting it into a savings account.
Emergency Expenses
It’s a smart idea to be prepared in the event of an emergency. One of your goals should include putting away extra cash for emergency expenses. Start small—$500 to cover a home repair—and make sure to increase this amount over time to be able to cover a month’s basic living expenses, and so on.
Tackle Debt
Unfortunately, you can’t begin your road to financial success if you’re carrying a large amount of high-interest debt. Between large debt with minimum monthly payments with high-interest rates this could take too many years to pay down as well as damaging to your credit score. It’s important to start paying down this type of debt as soon as feasibly possible. Try creating a debt pay-off strategy and be consistent. Slowly reduce credit card balances and other loans and you’ll feel much better about your financial future.
Review Your Plan Constantly
Plans change, especially when they involve your finances. It’s important to periodically review your financial situation. Quarterly, ask yourself:
- Have my goals changed?
- Has my income (or debt) gone up or down?
- What are the current needs of my health or my family? Have they changed?
If anything has changed, it’s simple to alter your goals to handle these unexpected hurdles. Checking in quarterly can help you stay on track and keep plans from derailing.
We all want to be financially independent and build wealth, and at SD Associates, our goal is to help you achieve this. Deciding to embark on a journey toward financial independence can be scary and you might not know how to create a financial plan that aligns with your future, but with our guidance, we can help create a fresh beginning with your finances and change your life for the better. Contact us today to get started.