No matter the size or scope of your financial goals, a financial plan can help make them a reality. Financial planning is the process of looking at the current state of your finances and making a step-by-step plan to get it where you want it to be. This may mean devising a plan to become debt-free or figuring out how to save enough money for a down payment on a new home. This process can include many aspects of personal finance, including investing, debt repayment, building savings, planning for retirement, and even purchasing insurance. Anyone can engage in financial planning—it’s not just for the wealthy. You can get started on making financial goals on your own, and if you choose, you can work with a financial professional to help devise the smartest plan to make those goals a reality.
1. Define Your Financial Objectives
By defining your financial objectives, you’ll have a clear idea of what you need to accomplish to make them happen. Your objectives should be realistic and actionable and include a timeline of when you want to achieve them. Setting an objective to pay off credit card debt by a specific date, for example, would be an appropriate financial objective that will set you up for success. Without clearly defined objectives, it’s easy to lose direction and motivation, making it much more challenging to achieve your financial goals.Creating your financial objectives involves more than just thinking about them—you need to write them down and specify the steps required to achieve each one. For instance, if one of your objectives is to save $10,000 for a down payment on a house, break it down to how much you need to save every month or even every week. This makes the goal seem less daunting and more achievable. It’s also beneficial to periodically review your objectives to ensure they still align with your long-term vision and life circumstances. Adjust them as necessary to stay on track.
2. Create a Spending Plan
Having a clear picture of your finances will make it easier to achieve any financial objectives. A spending plan can help you understand where your money is going each month. It can also help you identify where you may be overspending, giving you opportunities to cut back and allocate that money elsewhere. One of the easiest spending plans to start with is the 50/30/20 plan. This plan allocates your monthly income into three categories: essential expenses (50%), savings and debt repayment (20%), and discretionary spending (30%). This is just one of many types of spending plans out there.A spending plan should be a guide to help you understand your monthly finances and devise smaller goals that will bring you closer to your long-term financial objectives. You likely won’t always follow your plan down to every single penny; keeping this in mind will help you stay on track, rather than getting discouraged and giving up on the plan altogether. Additionally, there are apps available that make spending plans much easier by helping you visualize your spending and savings choices each month. Some apps even give you the option to enter your financial objectives directly into their platform to help you stay on track. Using a spending plan will not only make your financial journey more manageable but also more transparent and less stressful.
3. Establish an Emergency Fund
Establishing an emergency fund will help ensure that a financial emergency doesn’t become a catastrophic financial event. Experts usually recommend having six months’ worth of living expenses saved to cushion you, should the unfortunate unexpected happen, such as losing a job. But six months’ worth of money can be unattainable for those who may be struggling financially, or those living in tight financial means each month. However, any safety cushion is better than none, and starting small is better than not starting at all.You can start establishing an emergency fund by setting a few dollars aside each paycheck. Start with a small fund goal of $100 to $200 to establish your fund. From there, you can create other smaller goals that will add up to a larger financial cushion. Some apps also give you the option of rounding up to the nearest dollar in transactions and funnel that spare change toward your savings. Gradually, your emergency fund will grow, providing you with the financial security needed to weather unexpected events. Remember, building an emergency fund is a slow and steady process but is an essential step in any comprehensive financial plan.
4. Lower Your Debt
Having to make debt payments each month means you’ll have less money to allocate toward your purchase goals. Plus, carrying credit card debt can be expensive; every month, you’re accruing interest on your balance, which can make it take longer to pay off. There are a variety of debt payoff methods out there. Two of the most popular include the debt snowball and debt avalanche methods. With the snowball method, you’ll pay off your smallest balance debts first, then make your way to the ones with the higher balances. The debt avalanche, on the other hand, starts with higher interest rate debts first.Choosing the right debt reduction method for you depends on your financial circumstances and psychological preferences. The snowball method is excellent for those who need to see quick wins to stay motivated, while the avalanche method will save you more money in the long run by paying off high-interest debts first. Whichever method you choose, the key is to stay disciplined and stick to the plan. Lowering your debt not only frees up money for other financial goals but also improves your credit score, making future borrowing more affordable. This step is crucial for gaining long-term financial stability.
5. Invest for Long-term Goals
Although risky, investing can help grow your money, even if you’re not wealthy. You can get started with investing by enrolling in your company’s 401(k) plan or opening a low-or-no fee account through an online broker. Keep in mind that investing always involves some risk; you could end up losing the money you invest. There are also robo-advisors that automatically recommend investments based on your objectives and risk tolerance. Investing is an essential step for building long-term wealth and achieving significant financial goals such as retirement or buying a home.One way to mitigate the risks associated with investing is through diversification. By spreading your investments across different asset classes like stocks, bonds, and real estate, you reduce the impact of any single investment’s poor performance on your overall portfolio. Additionally, regularly contributing a fixed amount, known as dollar-cost averaging, can help to smooth out the highs and lows of the market over time. Understanding your risk tolerance and investing horizon will also guide you in choosing the appropriate investment strategy. When done thoughtfully, investing can be an effective way to ensure your future financial security and achieve your long-term objectives.
