Financial Planning: A Step-by-Step Guide
Personal finance plans are meant to closely examine all aspects of your finances (income, expenses, savings, debt, investments) and develop effective strategies to help you achieve your financial goals.
Financial planning is crucial if you want to improve the quality of your life and feel confident about your future. The majority of people understand that saving money is important, whether for big purchases, retirement, or emergencies. Still, not everyone takes their finances seriously.
In this article, you can learn more about creating a financial roadmap, the stages of this process, and what kind of help you can receive.
9 STEPS FOR CREATING A FINANCIAL PLAN
Once you have decided to start your personal financial planning journey, you should begin with specific stages.
1. Set clear financial goals
You should think about what purchases you want to make and how you envision your life. If you want to save money for a child’s education, you should have a sum in mind that you divide by a specific number of years and months. In this way, you know how much to save.
2. Build a personal financial inventory
The next step is to see exactly how much money you spend and what you spend it on. A good way to do this is by writing down all your expenses in spreadsheets for 1–2 months. Once this is done, you can group expenses into different categories and see how they can be optimized.
3. Make a budget for your income and expenses
When you have an idea of your spending, you can create a budget using the 50/30/20 principle. According to this method, 50% of your income covers your needs (bills, healthcare items, food), 30% is for wants (entertainment, vacations, etc.), and 20% is for savings.
4. Create an emergency fund
A good financial plan always includes emergency savings. You can start with just a few hundred dollars and then increase the savings to one month’s living expenses. It is always a good idea to have an emergency fund that can last you three to six months.
5. Manage debt
Another element of financial plans is to take into account your current debts. If you have high-interest debts (private student loans, credit card balances, etc.), you should always prioritize paying them off. Creating a debt management plan can be helpful if you have issues with these payments.
6. Save and invest in your future
Investing comes in many different forms. Anything from opening a brokerage account to saving for retirement using the 401(k) plan is considered investing money. Even with small sums, you still have the opportunity to buy parts of the shares.
7. Plan your taxes
While saving is a surefire way to accumulate money and build a reserve, don’t disregard tax planning. We pay compulsory levies annually, and properly handled taxes can help you minimize your tax liability, maximize your deductions and credits, and keep more of your hard-earned money. Consider tax incentives and benefits you are eligible for that will help you save without compromising your lifestyle too much.
8. Protect Your Assets
Ensure you have adequate insurance coverage, including health, life, disability, homeowners, and auto insurance. Create or update your will, establish trusts if necessary, and designate beneficiaries for your accounts.
9. Review and adjust your plan regularly
Inflation and any changes in your life may eventually make your financial plan less relevant. While you can make adjustments at any moment, it is recommended that you review your plan at least once a year to ensure that it still makes sense for your life.
WHAT ARE THE OPTIONS FOR GETTING HELP WITH FINANCIAL PLANNING?
Financial planning may seem overwhelming when you have never done it before. However, the need for financial planning is hard to argue. So, here are the ways you can handle your finances.
Plan finances on your own
The benefit of independent financial planning is that it’s free. The cons of this approach are that it’s time-consuming and requires knowledge. Also, a financial plan involves adjustment and constant tracking, so be prepared for this.
Use specialized tools
Another option is to use specialized online services or a robo-advisor designed for automatic investment management. The pros of robo-advisors are fairly low fees, lower account minimums, and ease of use, while the cons include limited flexibility and personalization.
Hire a financial planning professional
If you need hands-on help, you can hire an expert to do personalized financial planning for you. They can provide you with expert advice, answer questions, and create the most suitable plan for your circumstances. The advantage is that they will help you stick to your plans and free up your time. The problem is that finding one you can trust can be challenging, and their fees may be high.
FINAL THOUGHT
Financial planning cannot be underestimated, as it allows you to feel secure about your life and gives you more confidence in decision-making. A good financial plan has to be constantly reviewed and adjusted according to any changes and your goals. You can always turn to professionals for help, or you can deal with your finances on your own.
