Life gets tougher every day. The products of our everyday necessities are continuously increasing thanks to inflation. And this increases the overall cost of living, too, especially if you live in the city. In order to survive today’s fast-paced, ever-evolving world, you have to have a solid financial plan that helps you get a better picture of your future. If you haven’t heard of a financial plan or want to know simple steps to create one yourself, this article is for you. Read on.
A financial plan is like a map you create to achieve your financial goals. It includes tallying your current financial situation with your plans for the future and setting out what you should do to close the gap between them. Using a financial plan, you’d be able to create a safety net for unexpected expenses on rainy days.
You can consult a certified financial planner to help you create your financial plan. But if you’re determined to make one yourself, here is the basic step-by-step guide for a basic financial plan.
In order to map out your financial plan, you first have to gain a better understanding of your finances. To do this, you can start by listing down every asset and liability you have.
From there, you can calculate your net worth and know where you stand financially. You should also look back at your past expenses to determine your current habits. If you haven’t recorded your expenses before, we recommend that you start doing so.
Do you know why you want to create a financial plan? Do you know where you want to financially be in the next few years? Financial planning boils down to your financial goals. Setting goals that follow the SMART method is one of the best ways you can create realistic goals.
Also, consider setting a goal timeline. It is composed of both short and long-term goals. These goals will serve as milestones from each other, and it makes your overall goals more realistic and attainable.
An example of a short-term goal is spending a certain amount of dollars less starting next month. And a long-term goal is saving up a certain amount after a few months.
An effective way to know your financial goals is to really think about why money is important to you. For who or what will you spend whatever money you save in the future? Your answer to this question helps you realize what your priorities are and develop your specific financial goals.
Once you’ve set your goals according to your current financial situation, you can proceed to create a sustainable budget that will help you reach these goals. This budget serves as a way to set boundaries for your spending. It also includes how much you can set aside to use for different investments or be the capital for the business you’ve been meaning to start.
Tracking your income, expenditures, and cash flows will enable you to study the cycle of your monthly income more carefully. It includes the habits that possibly led you to your current net worth.
And after implementing your financial plan, you will see the trends on spending using this tracker as well. There are many apps you can choose from for free if you want to digitally track your expenses. Just remember to pick a platform you can be consistent in updating conveniently.
We’ve all heard about emergency funds, 401K or retirement funds, or general savings. These are all important if you want to achieve financial freedom, and you can aim to build them up by applying the first four steps.
One of the easiest ways to build up funds is to find additional ways to earn money either from passive or active income. For starters, you can think about starting a side hustle or a business that you can focus on with your current lifestyle.
If you’re not talking to a financial planner, you have to do your own research for ways to meet your financial goals. For example, if you want to reduce debt to start slowly building a savings fund, you have to try out debt reduction strategies like the debt snowball or avalanche methods.
If you think that you have enough income but end up spending it on things that don’t matter, you can try effective budgeting techniques such as the famous 50-30-20 rule.
Now that you have evaluated your financial situation and set goals according to what you want to do, you can now write a detailed action plan. An action plan is a set of specific steps you would take in order to improve your net worth.
If you noticed that your liabilities currently outweigh your assets, your action plan has to revolve around eliminating these liabilities. Did you know that paying off debt is actually an investment? Allocating some resources toward debt reduction now may prevent higher interest rates from draining your income.
After finishing your plan and implementing it for some time, you should remember to reassess your plans. Revisiting your financial plan is essential whenever you reach milestones in your financial goals or want them changed. Reviewing this plan will let you know if you’re on track with your goals or if your strategy is working as you intended.
As an adult, if you want to track what happens to your hard-earned money, you need to know how to make a financial plan that works for you. Just remember that financial plans are nothing without execution and commitment. Continue working hard towards your financial goals and setting yourself for greater heights, and our financial plan will be there to guide you.
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