If you’re concerned about your financial stability, creating a personal financial plan can be a game changer. It’s a great way to manage your money, budget for daily needs, and save for future goals or emergencies. But where do you begin?
Our expert guide is here to help you make a financial plan that suits you perfectly. We’ll cover everything from budgeting to investing, showing you every step to reach your financial goals and still have some money saved for a rainy day.
What Is Financial Planning?
Financial planning involves analyzing your current financial situation to create strategies and plans to achieve your short- and long-term financial goals. Short-term goals may include paying off a debt or creating an emergency fund. Long-term goals are meant to improve your financial well-being over time, like getting a house or retirement.
Sometimes it can be hard to manage short-term necessities and long-term goals while also planning for emergencies. This is where financial planning comes in.
Why Is Financial Planning Important?
Financial planning is an ongoing process that helps you meet your current financial needs and wants while saving enough money to achieve long-term goals like buying a house or a new car. A comprehensive financial plan will help you focus on your goals, fulfill your everyday financial needs, and prevent unnecessary spending.
A good financial plan also prepares you to deal with unforeseen circumstances like health emergencies, losing a job, or economic downturns. It will help you take control of your money and ease your worries about the future.
Once you’re on top of your financial planning, you will be free to pursue your dreams, financial plans, and personal goals without a second thought.
How to Create a Financial Plan for Yourself?
Making a financial plan is quite a game changer, but many people have trouble figuring out when to get started or how to make a personalized financial plan. They may also worry about the cost of hiring a professional financial planner. The good news is, you can create a financial plan by yourself very easily even if you can’t afford professional help.
The following steps will help you make a sound financial plan that will eradicate all your money problems and help you reach your financial goals and achieve financial stability.
Budgeting Basics! – Two Cents
Assess Your Current Financial Situation
This is where you begin the financial planning process. You need to know where you currently stand financially in order to improve your situation. Track your monthly cash flow and bank statements to see what your regular and irregular expenditures are. You can divide these into categories like personal needs, fixed expenses, etc. The most common fixed expenses include rent, food, phone bills, electricity, water, and gas. Irregular expenditures may include buying a new appliance for the home or getting a haircut.
This is where you find out where you can cut costs and save money. You can eliminate unimportant expenses like Netflix and video games or you can try shifting to cheaper services. Focus only on essential living expenses like rent or food so that you have more money to put toward your future goals.
Set Your Future Financial Goals
Once you’ve figured out your spending, you need to set your short- and long-term financial goals so you know where you’re headed. You need to be very specific about your goals so that you have a clear direction and motivation. Instead of saying, “I want to save money,” you can try saying, “I want to save $3000 by the end of the year.”
Short-term financial goals may look something like, “I’ll save $200 this month.” Since short-term goals are easier to achieve, they serve as motivation to keep doing better. Long-term goals, on the other hand, give you a direction in life.
Get Rid of Debt
Everybody has debts. What matters is how much debt you’ve raked up. Being a few hundred dollars in debt may not be a crisis, but if you have a high-interest debt like a student loan or mortgage, you might have trouble saving or planning for the future. Debt weighs you down and makes it impossible to save any money or put any money towards emergencies or retirement plans.
You need to make a solid financial plan to get rid of your debts. Your priority should be high-interest debt. Focus on paying off these loans without investing in anything else. Once you’ve paid off the big loans, you can start working on less problematic debts like credit card debt or a car loan. Once you take action to become debt free, you’re already on the road to achieving financial independence and stability.
Create an Emergency Fund
Emergency funds act like a safety net for everyone. No matter how financially stable you think you are, an unexpected emergency like medical bills or the loss of a job can turn your life upside down.
There is no fixed amount of money to put in an emergency fund, but the rule of thumb is to save enough money to cover at least three to six months’ fixed expenses and maybe a little extra for entertainment or recreational activities.
Emergency funds are a necessity if you have a variable income, health problems, or a poor credit score.
Create an Estate Plan
Estate planning refers to making arrangements for your finances and estate in case of death or incapacitation. An estate plan isn’t just for old or wealthy people, or those with children or dependents; it’s for everyone.
What happens to your money after you die and who takes control of your finances and debts when you’re unable to are important matters to be considered and tackled.
Estate planning includes your last will and testament, power of attorney, healthcare decisions, and guardianship nomination. It may not be a fun thing to think about, but it keeps you protected in case anything bad happens.
Now that you have the wealth to create a financially secure future, you need to start investing and saving. Investments aren’t just for wealthy people. You can make investments even with a low income. There are different kinds of investment plans you can go for, like opening a brokerage account to trade stocks and mutual funds.
You can also open up a savings account as an emergency fund or just to stash extra income. They offer higher interest rates than regular bank accounts, so you’re making a profit. However, the interest rate is much lower than other forms of investment.
Another great investment is a retirement account. Retirement accounts are tax-deferred or tax-advantaged accounts that can help you build up your retirement savings significantly. If your employer offers a retirement plan, you should opt in to fast-track your way to retirement.
You can even get investment advice from a financial advisor and discuss your investments, retirement, and savings goals with them so they can help you make the perfect plan for your financial journey.
It’s important to get insurance so that you don’t always have to break into your emergency funds or savings accounts every time you’re in a pickle. Getting the right insurance can protect the assets in your life from damage. You can invest in health insurance, home insurance, and car insurance to cover the most basic ground. With the right insurance in your financial plan, you can stay on top of your savings goals even when things get rough.
Review Your Financial Plan
Your job isn’t done once you have a financial plan. You need to actively review and track your progress on your plan. Financial plans require reviewing when you experience a significant life change like a new job, new home, change in monthly income, change in dependents, or new goal.
Check in every couple of months to see if you’re on track. When you actively track your financial plan, you are more likely to secure your financial future.
Financial planning is crucial to achieving your goals and living your best life. With the constant anxiety of monetary problems off your mind, you can focus on better things in life and improve your lifestyle.
You may decide to consult a financial planner to come up with a perfect financial plan for you or to review the financial plan you came up with yourself. If you don’t want any professional help, you can still stay on top of your game by regularly tracking and updating your financial plan on your own.