Financial planning and future goals go hand in hand. Every person should have a financial plan that will need to include many different areas of one’s financial prosperity, which will include investments, debt, income, and all of the other essentials of one’s current financial situation. But what exactly is a financial plan, how does it help your finances and why should you have one? Here’s how.
Financial plans are a dynamic process that is made to help individuals reduce their anxiety and stress regarding money, support you during times of need, while also supporting your plans for retirement along with building your investment portfolio, more on that topic here How to Build a Portfolio from Scratch. A financial plan should be a broad overview of all your financial goals and the path to the goals. The overview of one’s financials shows how all of your finances are working as a cohesive unit all striving to reach your goals.
The first step in creating a financial plan is assessing your current financial circumstance. Knowing your current position in regards to your finances will allow you to plan accordingly and will allow you to set achievable financial goals that are also beneficial. To get an insight into your current financial position, one would need to determine your current net worth, which is all of an individual’s assets, minus all of an individual’s liabilities. If you have more assets than liabilities, then you have a positive net worth. If you have more liabilities than assets, you have a negative net worth. So what are assets and liabilities?
Assets are everything an individual owns that has a value, tangible or intangible. Liabilities are the opposite of assets, they are money that is typically borrowed and used for purchases, such as a mortgage, car note, or credit card. Liabilities is money that is essentially owed to a party, whether a bank or a store for example. Below is a list of many types of assets and liabilities:
Assets
- Cash and cash equivalents such as certificates of deposits, checking & savings account, and treasury bills
- Investments such as stocks, bonds, pensions, life insurance, 401k, mutual funds, and retirement plans
- Equity portion of a property such as a home or land.
- Personal property such as furniture, jewelry, vehicles that have been paid off, and tools for example.
Liabilities
- Mortgage on a home
- Owed taxes
- Car loan
- Credit card debt
- Student loans
These are just some examples of assets and liabilities that will need to be added in order to get your total net worth. Once calculated we can start on the next step, which is starting on your financial goals. Although financial goals will differ from individual to individual, setting financial goals will give you a direction for your plan, a road map to the goal, allowing you to reach your destination smoothly.
When it comes to financial goals, they are many different types that you can set. From monthly income, retirement investments, monthly savings, or being able to pay off all of your debt. Financial goals can also take the form of experiences, which are directly related to one’s financial wellbeing, such as being able to visit Hawaii for a week, go to the louvre, or visit the beaches of Portugal. In personal finance, using S.M.A.R.T. is an excellent way of starting to set goals and it stands for specific, measurable, attainable, realistic, and time-based.
Using S.M.A.R.T. as a basis for your goals will allow you to reach your short terms goals while also being able to reach long-term goals. Examples of types of time-based goals can be saving $300 a month to have a down payment on a more reliable car, eliminating all of your student loans whose monthly payment of $450 will now go towards a down payment on a house allowing you to save on rent and increase your net worth as the value of your home increases.
Individuals can have the perfect goals for their future, but you will need to find new courses of action to reach those goals. For example, currently, you have a negative net worth due to student loans and a car loan and you would like to reach a positive net worth. How would you go about paying off all of the debt that you currently have? You will need to find alternate ways to save money and/or increase your monthly income, ideally both.
There are many ways in which individuals can save money and earn money on the side, amounting to hundreds of dollars a month, if not thousands. For example, meal prepping for a week when the price of certain food ingredients are on sale, thrift shopping, carpooling, and eliminating cable television are just some of the few ways that add up to hundreds a month. On the other hand, individuals can increase their monthly income by offering their services on the side as well. These services can range greatly, from graphic designing logos, and book writing to selling crocheted items. No matter how small the service may seem, it is always important to have more than one steam of income. You could also start a part-time job on the weekends at restaurants, bars, or as a lifeguard for example.
An aspect that is quite important in keeping yourself protected in the event of unexpected expenses is to have an emergency fund on hand, ready for anything. The emergency fund is designed to keep you afloat without forcing you to go into thousands in debt, incurring significant interest, and putting you in a hole that would be hard to get out of. Many unexpected things can happen without a warning, such as a medical emergency, car repairs, or sudden loss of income. The amount in the emergency fund can range from $3,000 up to $10,000 depending on the individual, but the minimum recommended would be $4,000 – $5,000.
There are many ways that can help you get to your financial goals faster, such as taking full advantage of employer 401K matching, eliminating high-interest rate debt as fast as possible, building a well-diversified investment portfolio, keeping track of your spending and savings using apps such as Mint, PocketGuard, and Acorns. With financial apps, it becomes incredibly easy to keep track of spending, savings, and budgeting, which you should be doing frequently. This would allow you to adjust your spending or saving habits based on the circumstances in your current life while keeping an eye on your goals.
Reaching your financial goals will not be an overnight endeavor nor will it be an easy road. Becoming financially independent and secure will take dedication and discipline to achieve. As you continue to improve your financial situation, you will continue to find new ways of increasing your income and finding new ways to save money in order to reach the goals you have set. It will take some time to find the perfect equilibrium of spending and saving, you will face obstacles and you will make mistakes. It is all part of the learning process. It may be hard to stay on course when others are buying the latest and greatest vehicles, tech, and fashion, but in the end, it is you that will be financially secure. This post was written by Financialquazar on Fiverr, I hire Fiverr who are proficient in the areas they write about so that we can all learn more. Subscribe for more business, sales and investing posts. Have a lovely day.
