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How To Start Your Financial Plan

Creating a financial plan can help you achieve your financial goals and create a roadmap for your money. You can do this on your own or turn to a professional financial planner. Your financial plan will be a comprehensive overview of your existing finances, your future goals, and strategies to achieve them. 

It probably comes as no surprise to you, but each person’s finances are different. There’s no one-size-fits-all plan to help reach goals and maximize wealth. It will take a little work on your part to create a plan that is suited to your needs, but it will be worth it in the long run.

What Is Financial Planning?

Financial planning is the task an individual takes to determine how to achieve their financial life goals. Essentially, it helps you review your income, debt, expenses, and investments, then provide a way to manage your money to reach your financial goals. 

Start By Setting Financial Goals

The first thing you want to do in the financial planning process is to start setting your financial goals. This includes short-term goals, medium-term goals, and long-term goals. You will want to include things like establishing an emergency fund, debt management, life insurance, retirement plan, and beyond. There are three main rules you need to consider when you start setting your financial goals. 

Rule One: Make It Measurable

Ask yourself ‘how do I measure this goal? Do I have a way to gauge the progress?’ You need to clearly define what will make this goal successful.

Rule Two: Make It Realistic

When you create a goal, make sure it is realistic. If you make $50,000 annually, having $1,000,000 in savings in the next two years is likely unrealistic. However, if you currently are saving $5,000 comfortably yearly, consider upping it a little more to push yourself slightly, while still being realistic. 

Rule Three: Write Down Your Financial Plan

There is something to be said about writing down what you want to accomplish. It gives your goals life and becomes more significant if you can see them in writing.

Identify Your Income And Expenses

The next step in your financial plan is to identify all avenues of income and all your expenses. You want to track what is coming in and what is going out. This can either be done on a monthly or annual basis. 

Find Ways To Save Money

After you have a clear picture of your income and expenses, you can find ways to start saving money. The accurate picture of your finances is key to start saving. Once you know where your money is going, you can adjust your budget as necessary to find extra places that allow for savings!

How To Create A Budget

A budget is necessary to track your expenses, control your spending, and help you reach your long-term goals. It allows you to have a well-defined vision of the money coming out monthly, limiting your stress and improving your financial wellbeing. With proper planning, it can even help you save money!

Step One: Find The Right Budget Method

There are many different budget methods that all work! Since we are all unique individuals, you might gravitate to one over the other. 

The first budgeting method is to use envelopes or cash systems. This simple, cash-based budgeting system subtracts your expenses from your income and puts them into their own envelope for that specific category. You can do this literally, or figuratively with the help of apps. 

Another great budgeting method is using percentage breakouts. You will look at your total household income into percentages, then plan your spending and savings based on a percentage. Most commonly, people use a 50/30/20 model – meaning 50% of your income goes to essentials, 30% goes to non-essentials, and 20% goes to savings or debt repayment.

Zero-based budgeting is another great system. In this form of budgeting, you plan for every single dollar. So instead of having a specified dollar amount left over each month, you will have zero left – on paper of course. 

Step Two: Use A Spreadsheet Or An App

Which should you use? That’s up to you. Use whichever budgeting application that is easy to understand and helps keep your budget on track.

Step Three: Stick To It

Budgeting does not always have to be rigid or overwhelming. Once you get into the swing of things, it gets easier and easier every month. If you continue to stick to your budget, you will be on your way to paying off debt and reaching your financial goals!

Plan For Taxes

Planning ahead for your taxes now can go a long way in the future. Take a look at ways to decrease your tax burden and increase your wealth. You can do this through retirement account contributions, taking advantage of flexible savings accounts and health savings accounts, and adding money to a 529 college savings account.

Pay Off Your Debt

Dent management is an important step in preparing for your financial future. Just like setting your financial goals, with debt management you should write down each creditor you owe, and the current balance, interest rate, and payment required. 

After you have a detailed list of your debt, you can start working towards paying it off. Some people prefer to list their debt in order of smallest to largest balances, while others prefer to knock out the debt with the highest interest rate first. There is no right or wrong here, it is entirely personal preference. 

Types Of Debt 

There are various forms of debt, coming in all shapes and sizes. Things from credit cards to car loans, mortgage payments to small business loans. They all come with their own implications.

Secure Debt

Secure debt requires collateral for the loan. When you borrow from the lender, you are using collateral as a means of financing. If you default on your loan, your collateral will be taken to repay the funds borrowed. This is most common with mortgages and auto loans. 

Unsecured Debt

Unsecured debt does not require collateral. If you default on your loan, the creditor will have to take you to court to collect the outstanding balance. Common types of unsecured debt are credit cards and personal loans. 

Revolving Debt

Revolving debt is an open credit line that allows you to borrow against it as needed and pay back only the portion utilized, with interest of course. The best example of revolving debt is credit cards.

Steps To Paying Off Debt 

To reach your long-term goals, you will likely need to pay off your debt before it negatively impacts your life. Having too high of a debt-to-income ratio can impact your ability to be approved for future loans, like a mortgage.

Step One: Organize Your Debt

As mentioned above, you will want to write down all the debt you have. One of the best organizational methods is to consolidate your debt, however it may not always be possible.

Step Two: Utilize Your Budget

Find pockets of extra money in your budget that you can allocate to paying off your debt monthly. Even an extra $50 per month on your car payment can go a long way.

Step Three: Find Extra Ways To Make Money

If you are looking to pay off your debt faster, consider taking a side job or using your skills – from a design or construction trade – to earn more money. You can allocate all the funds earned to paying off your debt. 

Work On Starting An Emergency Fund

No matter how well you plan, life can always throw you a curveball. If you are not prepared financially, it can crush your budget. Setting aside funds for emergencies will come in handy in case you need them, and not wreck all the progress you’ve made for your financial future.

Create An Investment Plan

Creating an investment plan should go beyond your typical 401(k). If your goals include investing your money wisely, consider hiring a financial planner to help guide you toward an investment path. They can provide details on stocks, equities, options, and beyond. Approach your investments with your goals in mind. 

Get The Right Insurance Coverage

Life is unpredictable. People who are looking to create a plan for their financial future should take a hard look at their insurance policies. From life insurance to disability, and everything in between, having the right insurance coverage can protect you in case of any emergencies. 

Build A Retirement Plan

While it might seem too far in the future, your retirement plan is not something you should put on the back burner. Envision what you would like your retirement to be like. How much money will it take for you to live comfortably? Once you have an idea in mind, determine how much savings and investing it will take to help you reach your retirement goals. 

Create An Estate Plan

Estate planning is necessary for everyone – no matter the size of your estate. Within your estate planning you should include your will, names of your beneficiaries, durable power of attorney, and have all your files organized. It will provide your family with your wishes and ensure that your estate is handled properly in the event of incapacitation. 

Insure Your Assets

Be sure to protect your assets with adequate insurance. Having insurance policies that cover your assets, of any kind, will give you peace of mind knowing that the insurance company will compensate you if your asset is damaged or destroyed. 

Your Financial Plan Is Never Finished

Life is wonderful and unexpected. With it comes many surprises including job changes, marriages, and children. It also comes with some unfortunate challenges like divorce, unexpected debt, or losing your partner. When life throws you these curves, be sure to look at your financial plan and adjust as needed.

The good news is you don’t have to go it alone. Find a financial advisor in your area that you trust to help guide you. They will make sure you hit your targets to reach your financial goals, no matter what life throws at you.