Wherever you see yourself in life, it will take financing to do so. Being able to achieve your goals means having financial goals and making the right plan to bring those to life. That is where a financial plan can be the best course of action.
There are a lot of reasons why a financial plan is necessary, but the major reason to make a financial plan is to keep track of your income and expenses in order to better manage your finances.
How to Make a Financial Plan?
The overarching idea of creating a financial plan is not the most complicated. Of course, the major reason to make a financial plan is to better manage your finances. There are a few simple truths to creating that financial plan.
Any good financial plan is guided by the goals that you or your family have set forth. This is the approach as to what your money can do for you. Those goals can range from buying a home or planning for retirement.
Those financial goals also help to illuminate the path forward. Where do you want to be in five years? Where do you want to be in 10 years? Are you looking to buy a car? What about a house? Have you planned for kids?
These are some of the most common financial goals. But the simple fact of the matter is that they are necessary to make it clear just what kind of financial steps need to be taken to bring those goals to life.
Tracking Your Money
Another major mistake that people make when it comes to their money is not tracking spending. Everyone should know not only what is coming in but what is going out as well. Getting a sense of that cash flow can make the financial picture a lot clearer.
The key to any financial plan is to reveal more ways to save money and pay down debt. Knowing where your money goes can give you the tools needed to develop plans in both the short- and long-term.
There are some principles out there that can help. The 50/30/20 plan is a simple one: 50% of take-home goes to needs such as transportation, housing, utilities, and more; 30% goes towards wants like entertainment, clothing, and eating out; while 20% goes towards paying down debt and putting money in savings.
A crucial aspect of a financial goal, such as saving for retirement, is taking advantage of employer-sponsored retirement plans. The most common is the 401k, and there are many employers who will match your contribution up to a certain percentage.
Though it can reduce your take-home pay now, putting as much as you can in now is definitely worth it. Consider it free money as the more you put in, the more your employer may potentially match. The longer that you make these contributions, the more that they add up, aiding for major financial goals like retirement.
We have all been in an emergency situation in one way or another. One of the major pillars of financial planning is having money put away to navigate emergencies. It can start small, with something like $500, to help cover small repairs and emergencies so that there is no need to run up debt.
The next goal should be $1,000, then a month of expenses, then three months of expenses. Another great way to keep your budget shock-proof is to build up your credit. That is the true purpose of credit: to be there in emergency situations. Good credit has far-reaching impacts, and it cannot be understated how valuable it is.
Cut Down High-Interest Debt
Debt is a very real issue with millions of people. Those high-interest credit cards keep users in a cycle of debt. Those minimum payments are enough to keep balances down or to prevent overages from happening, but they continuously feed interest fees to credit card companies.
Interest rates can wind up being so high that you will end up paying anywhere from two to three times what you initially borrowed. Revolving debt can be a struggle, which is why something like a debt consolidation loan can wind up being helpful. The goal should be to lower those interest payments to cut down on what you wind up paying in the long run.
Believe it or not, investing is not something that only exists for the rich. The major reason to make a financial plan is to better manage your finances, and part of that happens through investing your savings and building your net worth.
Savings are a great thing, but the money is ultimately just sitting there. Turning those savings into investments—like your 401k—means making your money go to work for you. There are any number of ways to build that money, with slow, steady gains over a long period of time, which can add up substantially.
All of these steps are meant to build a layer of financial protection that keeps both you and your family safe from any potential setbacks. The further you get into your career, the more you will be earning. That means increasing contributions to make your eventual retirement a successful one.
Always try to pad emergency finances in the event of the unexpected. And make sure that you use insurance to protect that financial security wherever possible.
A financial plan won’t magically fix financial problems, but it is a necessity for creating a healthier financial future. From setting financial goals to tracking money spent and coming in, the right plan can give you the tools needed to be stronger financially.
There are a few foundations for the right financial plan. It starts by setting your goals. Know where you want to be and the path to “how” will become illuminated.