Devising a financial plan can help give you a road map for managing your money so that you can cut stress and build security. It is imperative to meet goals like purchasing a home or creating a nest egg that will last long beyond your final paycheck. Below, Daniel Calugar shares the four steps you need to follow to create a financial plan.
You can create a financial plan on your own; even a very simple run-through of these steps will help you attain a better handle on your finances.
Set Financial Goals
This first step is the most important. Just like you have to know your final destination before you can draw a map, you have to set your goals to create a financial plan. These goals might be personal, or they may be something you share with a partner. Take your time developing your goals – they will form the basis of your financial plan.
Your goals should be as specific as possible. Merely saying you want to save money is too vague. A goal should include as many details as possible to be actionable: “I want to save $300,000 before the age of 55.”
Create a Budget
Now that you are armed with your financial goals, it is time to look at your spending versus your income. Use your bank and credit card statements to determine your average monthly expenditures. You should include fixed expenses (housing, car payments, utilities) and variable expenses (clothing, entertainment, food). Don’t forget to include periodic expenses such as holidays and vacations.
Now compare your monthly expenses to your monthly income. You should have enough money left over each month for savings. If you are dissatisfied with your budget, you have two options: spend less or make more.
Pay Off Debt
This is one of the most critical steps in your financial plan. This will be more difficult with some debts, such as a mortgage or car loan. But credit card debt can ruin any solid financial plan. If you are only making the minimum payments, you will never get ahead, especially if you continue using your credit cards. Refer back to your budget and find any extra expenses you can cut. Then apply that extra money to your debt every month.
Your emergency fund should be your first priority. Aim to save at least 3-6 months of living expenses. Knowing that you have enough cash on hand to handle any unexpected financial setbacks will give you a sense of security.
Once you have built up your emergency fund, your next move should be to save for retirement. How much you put aside each month will depend on several factors, including your current age and the age at which you would like to retire. There are numerous online tools to help you determine how much to put into your retirement fund each month.
As your life changes, you may have to adapt your financial plan. But following these steps will give you a solid starting point.