When your finances are in good shape, you feel better. When you’re older, you have a greater understanding of how to manage your money and save for your future. You can sleep soundly at night, knowing that your wealth is in good hands.
Sounds good? A vast majority of Americans lack personal financial planning skills. How bad is this problem? According to CNBC, most adults are not good at managing their money and are just guessing at what to do. Bankrate has determined that 28% of adults have no cash reserves.
The findings are problematic, especially because inflation might happen in the future. True, you can’t stop inflation from happening. You can protect yourself from financial hardship in the future by saving money now.
You don’t need to be an expert in finance to create a personal financial playbook. Anyone can start small and become more cash savvy. Wealth is beautiful because it’s never too late to make smart decisions.
What Is a Financial Plan?
Financial planning is the process of creating a roadmap to achieving your financial goals. This involves looking at your current financial situation and setting realistic goals. When trying to figure out where to start, you should think about what you have now, what your goals are for the future, and how much you’re willing to give up to reach your financial goals.
Financial planning is a strategy that is beneficial for everyone. If you are in college or if you are planning for retirement, creating a plan now can help you in the future. If you want to make a roadmap to a successful future, here’s how to create a financial plan:
Create a Household Budget
Money management begins with knowing how much money is coming into your wallet and ends with knowing how much money is flowing out of your wallet. Create a spreadsheet documenting all of your monthly income from various sources such as your paycheck, side gig, child support, etc. You should keep track of all the money you spend, even the small amounts like quarters and dimes.
After you have a record of all the money you are bringing in, start keeping track of what you are spending. Keep your to-do list for the next month in your spreadsheet updated to make the process easier and ensure you don’t forget anything. Make a list of every purchase you make in a day, no matter how small. This includes your morning coffee from your favorite cafe or the vegetarian pita you bought from a street vendor.
After summing up your total revenue and expenses, you will then have a clearer understanding of your financial standing. You want your income to be greater than your expenses. If it’s not, go back to your expenses. What could you cut? Many people are surprised to find out how many unnecessary things they buy when they start this exercise. If you spend just $10 a day, that adds up to an average of $300 a month.
With a budget in hand, you can start to answer all those nagging questions: Why can’t I save more? Why do I never seem to have any money left when my paycheck comes? If you can see things only in black and white, you will have the opportunity to start making better financial decisions.
But there are often lots of other costs that can quickly sneak up on you and impact your bottom line If you’ve ever made a budget, you know the basics like rent, loans, and groceries can add up quickly. But there are often other costs that can impact your budget. But what other expenses should you consider? The price of your daily latte may seem small, but it can add up over time. It’s important to be aware of all the different expenses you may have in a month. When updating your budget, here are some of the most common items to include:
- Rent / Mortgage
- Groceries
- Dining out
- Household maintenance
- Emergency fund
- Subscriptions and memberships
- Travel and transportation
- Prescriptions
- Bank account fees
- Car registration or lease
- Pet costs
- Entertainment
- Clothing
- Personal care
- Charity
You should now have an understanding of what needs to be included in your budget. Now what? View our budgeting tips to learn how to create a budget that works with your financial plan. If you want to start planning your future, you can use a spreadsheet, a piece of paper, or a budgeting app to create your financial plan today.
Save for an Emergency
40% of adults wouldn’t be able to cover an unexpected $400 expense. A lot of people don’t have any savings, so if they have an unexpected expense, it could disrupt their lives because they wouldn’t be prepared for it.
Saving money during the good times is important to help you to be prepared for the bad times. This is especially true these days for the many people facing unexpected money problems. If you want to be financially literate or have been saving money for a while, it’s a good idea to check your emergency funds to make sure they would cover your current expenses.
You should save money in case something bad happens. Did you know you should have two savings accounts, one for a rainy day and one for an emergency fund? You should have more than one backup fund in case of an emergency.
Shop Around Before Buying
You should always try to get the best deal possible no matter what you are buying. Whether you’re looking for a home warranty or a safe family vehicle, it’s important to do your research. Why? If you’re being honest, you tend to lose your perspective on money when you make any purchase suddenly.
What impulse buys have you made in your life? Perhaps you spent too much money on an item you didn’t need. If you saw a piece of technology that you really liked but it had an outrageous price tag, would you buy it? Businesses rely on customers making impulsive decisions to help them stay afloat. However, if you spend money without being objective and practical, it can lead to financial problems.
At first, shopping around may be difficult for you. Purchasing items right away provides instant gratification. However, this is not always the best option. You will come to realize that taking the time to weigh all your options will give you more confidence. You can track your progress and determine whether your spending is helping or hindering your financial goals.
You don’t have to completely abstain from buying things you want, like a pack of gum or flowers from a farmer’s market. Allowing yourself small treats can help you feel like you’re not being too restricted. You should still evaluate any purchases that cost more than a certain amount of money. This could be $5 or $100 or $1,000. You get to choose. Just make sure you stick with the process.
Pay Down Your Debt
It’s frustrating to have to use your hard-earned money to pay off debt. But if you prioritize these payments it’ll pay off in the long run. The key to successful debt repayment is to be disciplined with your budget, no matter which repayment option you choose. If you miss even one or two payments, it can mess up your financial plans, so it’s very important to make a budget you can realistically stick to.
You should create a spreadsheet that outlines your current debt in the same way that you created a spreadsheet for your budget. Remember that debt should include any money you owe. This means mortgages are debt. This includes any high medical bills that you are paying off in monthly installments. Once you have all your debts in front of you, you can tell if they’re good or bad.
Start setting aside money to pay off the debt as soon as possible. An example of this would be if you were to pay double or triple the minimum monthly charge on your credit card. Not only will you save money on fees, but you will also reduce the amount of bad debt you have.
Set Short-term and Long-term Financial Goals
A financial plan is not complete without a clear purpose. Consequently, you’ll want to set aside some objectives. This means setting financial goals for both the short and long term.
Some common financial goals people have are buying a new house, paying off student loans or other debts, or being able to give more money to charities. May your goals be significant to you and based on your current situation. It is important to put the following measures into place immediately, even though you may want to make some adjustments to them later.
When creating objectives, be as specific as possible. Saying that you want to save up for retirement is not enough. This is a good beginning, but it does not give you any additional information. Instead of saying that you want to be a millionaire by the time you’re 60, you might want to say that you want to have one million dollars in savings by the time you’re 60.
Try to avoid setting unrealistic financial goals that can’t be met within the given time frame. Make sure your goals will not lead to discouragement. Set goals that you can reasonably achieve to hit money management milestones.
Organize Your Investments
While investing may appear to be a complex topic, you can let your money generate more money without having to constantly monitor it if you have a basic understanding of how it works. To begin investing, you should first determine how much money you want to initially invest. It doesn’t matter how much money you invest, whether it’s $50 or $5,000, investing now is a great way to plan for financial success in the future.
There are a few things to consider when creating a financial plan, one of which is budgeting a fixed monthly amount to invest in a portfolio. Eventually, the small amounts of money may become larger sums of money. Although investing takes patience, it will be worth it in the end. This is not a quick fix and you will not see results overnight. You will need to be patient and wait at least five years to see any significant changes.
Get a Handle on Your Credit Score
The average credit score in America is nearly 700. With subprime credit just under 620, a score of 700 is good. Nonetheless, you shouldn’t just accept your credit score as-is. The better your score, the more options you will have when it comes to spending money wisely.
You can find out your credit score online soon. Each of the three major credit bureaus – Equifax, Experian, and TransUnion – will provide you with a free credit report once a year. You just need to sign up for an account on their website. A credit report will show you an estimate of your score, as well as a list of all debts you have not yet paid.
Don’t like the credit score that you see? If you’re worried about your credit score, don’t be. Credit scores can recover quickly. To improve your credit score, you can pay your bills on time, keep your debt-to-income load low, have the right mix of debt, and report any errors to the credit unions promptly. In addition to standard credit scoring, Experian also offers Experian Boost to give your score a boost by factoring in your paid utility bills.
Prepare for Retirement
When creating a financial plan, it’s important to think about your long-term goals. If you start planning for retirement now, you will have a much better chance of having a prosperous retirement income, rather than just barely getting by.
The more you save for retirement early on, the better off you will be. If you start saving for retirement in your 20s, you will have been contributing to your retirement fund for over 30 years by the time you retire. The more you contribute to your retirement fund, the older you are. A good rule of thumb for saving for retirement is to set aside 10-15% of your income each year.
Retirement Plan Types
There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):
- IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
- Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
- 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions.
Leave a Reply