If you’re making ends meet, you might be operating under the misconception that strategic financial planning is reserved for people with a boat load of savings to their name. Or maybe you feel like things like retirement planning, investing, and planning your estate are out of your reach, so why build a financial plan?
The truth is, no matter how much (or how little) money you make, comprehensive financial planning is worth the effort for everyone. After all, you likely have financial goals you want to reach at some point in your life, and if you want to reach those goals, you’ll need a financial plan in place. So, with this in mind, we’re going to talk about what a financial plan is, why it’s important, and go over some important things for you to consider during the financial planning process.
What is a Personal Financial Plan?
If your current financial standing is the starting line, a financial plan is the map that is meant to lead you to your financial goals. Inevitably, some of the finer points of your plan will likely change along the way.
Why? Well, it’s rarely a straight path to any finish line, and things like marriage, finding new employment, having children, and any other life event you can think of is going to change your financial trajectory to one degree or another. With that in mind, it’s important to remember that a well-functioning financial plan is not meant to be a static document, and you’ll need to remain flexible along the way.
Why is Financial Planning Important?
Like we’ve said, the financial planning process can shift at any moment, and its goal is to provide a pathway for you to reach your financial goals. It does this by ensuring that you manage your finances in a smart and responsible way. How? Well, any well-oiled financial plan should account for all aspects of your life, including your needs, what you decide to prioritize, and your general lifestyle. By taking a holistic approach, you can properly analyze your personal situation, project the outlook of certain aspects of your finances, and help to provide yourself with a realistic path forward.
Just remember that there’s no wrong time to start learning about the key components of financial planning. If you feel like you’re too young, too old, or don’t have enough money to make it worth the effort, shake this idea out of your head. While your goals may shift depending on what stage you are in your life, it’s always a good idea to have a plan in place to help you achieve them.
7 Important Financial Planning Tips to Consider
Now that you have some idea of what a financial plan is and why it’s important for you to have one, we can start to look at some of the key components involved with putting one together. While these financial planning tips are fairly broad, they’re important to keep in mind as you go through this process.
1. Set Financial Goals
If you want to put together a financial plan, you’ll need somewhere to point the ship. You could come up with short-term financial goals, like paying down debt on a specific line of credit
, or long-term goals, like buying a house. Or, ideally, you can come up with a mix of both. In any case, setting goals is an important step, as they can provide the inspiration you need to start financially planning in the first place. Think about what you want to achieve, what you want your life to look like, and what is going to fulfill you in the long run, and gear your goals towards achieving these things.
2. Set a Budget
In order to come up with a plan, you’re going to need a clear idea of your current financial situation. This includes how much money you have, how much is coming in, how much you’re spending, and what you’re spending it on. A budget can help you get an idea of these things.
If you don’t have a budget, it’s never too late to start using one. There are all sorts of budgeting methods
out there, like envelope budgeting
or using budget percentages
. Spend some time doing research to figure out what might work best for you.
Use the insights you gain from your budget to help you properly assess your situation and chart a path to reaching your goals. Do you need to cut back on your spending in certain areas? Do you need to find a job that’ll pay you more? Maybe a part-time job would do the trick? These are important questions to answer which will likely be made easier with the use of a budget.
3. Prepare for Emergencies
Nothing can derail a financial plan like an emergency expense. One of the biggest mistakes people make is not accounting for any unexpected expenses that might come your way, so it’s important you don’t fall into this trap.
The best thing you can do is to build an emergency fund
. This will help you to have money on hand specifically for emergency situations and can help you to avoid having to deviate from the financial plan you’ve set for yourself.
If you run up against an unexpected expense and you don’t have the money to deal with it, you might need to look at some potential alternatives like an emergency loan
. Applying for an online loan
may be able to provide you with the cash you need to deal with your emergency. The application process for these types of loans
is sometimes fairly quick and straightforward, so if you’re approved, you may be able to get the money you need to deal with your emergency quickly.
4. Pay Off Debt
Paying off your outstanding debt may very well be one of the short- or long-term financial goals you’ve set for yourself. And for good reason. Reducing debt can be one of the pillars of comprehensive financial planning, and can go a long way in helping you to direct your money towards the goals that’ll provide you with the life you’ve always wanted.
While it won’t always be easy, take some time to research ways to pay off debt
, and try to incorporate healthy financial habits. These may help you to not only reduce your debt, but also stay out of debt in the future.
5. Take Advantage of Employer-Sponsored Matching Programs
Some employers will offer programs to match the contributions you make to your 401(k) or your retirement fund. Even if they only match a small percentage of your contribution, make sure you’re taking advantage of this. Small matching contributions can add up to a significant amount over time. After all, this is essentially free money, so make sure you don’t miss out!
6. Stay Insured
We know that with certain things, like with your house or your car, being insured isn’t optional, it’s mandatory. But this isn’t the case with everything. For any optional insurance policy, it’s often a good idea to consider getting covered if you’re not already.
For example, let’s consider the implications of not having tenant insurance when you’re renting your living space. If something goes wrong with your residence, there’s a good chance that your landlord is going to have some protection. But if you don’t have insurance and your things get stolen or get destroyed in a flood or fire, you probably won’t have any way of recouping your losses.
Another thing you might want to look into is getting life insurance. There’s a wide variety of things that could be covered depending on your needs, so you should take the time to explore what might be available, assess your needs, and see if there’s a policy that aligns with what you’re looking for. This can be an important part of family financial planning.
7. Plan for Taxes
Depending on your employment situation, your income, and all sorts of other factors, you might be hit with a big tax bill when tax season rolls around that can be tough to deal with if you haven’t planned for it. For starters, check with your employer to make sure that they’re reducing the right amount from your paycheck.
On top of that, make sure you know what tax credits you might be eligible for and take advantage of these. Aside from that, if you get a tax rebate, make sure you use it responsibly. You can consider using it to pay down debt, contribute to your retirement savings, or put it towards your emergency fund.
Be Smart About your Finances
Like we’ve mentioned, your personal financial plan isn’t meant to be set in stone. All sorts of things can change along your path to achieving your financial goals, so you’ll have to remain flexible and roll with the punches. One of the key things to remember is to revisit your financial plan often, assess your progress, and see if you need to make any adjustments. And if you’ve made any mistakes along the way, don’t panic! Do your best to correct them, learn from them, and move on. Be sure to stay up to date on any financial planning tools or resources for financial planning that could give you a leg up, and stay committed to your goals!
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