A financial plan is an organized way to think about your money and spending habits. With every day activities like eating food, paying bills, and investing in savings you have what we call money management. Money management comes down to knowing where your money goes and how to make sure it does not get spent or invested foolishly.
Having a financial plan means figuring out what you want your life to look like and then making decisions based on whether they are within budget of that goal. For example, if you want to buy a house, you should determine how much house you need to own based on your goals (e.g., having a family) and whether you can afford it.
If you cannot afford the minimum amount needed to meet your goals, you will have to look for more affordable alternatives instead. This could be renting or buying a smaller home, living with parents, moving into an apartment, etc. It all depends on what you feel you can pay now and what you want later!
There are many ways to create a financial plan. Some people organize their documents and notes using index cards, while others use software designed to help track everything. No matter which method you choose, just make sure you stay focused on achieving your short-, mid- and long-term goals.
Do not underestimate the impact of interest rates on your finances
Recent events have made it clear that lowering your expenses now is important to keeping up your financial health. However, you should be careful about reducing your monthly payments too much or too quickly as this can backfire later.
When money is saved, it can easily be spent somewhere else! For example, if you cut your cable bill by $100 per month, you may choose to spend that extra cash on groceries instead.
There are ways to reduce your payment while still staying within your budget. One way is to look into mortgages with lower initial interest rate offers. You may also want to consider getting a second loan or credit line in order to pay off some debt faster.
Consider your insurance needs
It is very important to understand what kind of health, life, disability, long-term care coverage you have right now, as well as what coverage you need to make sure you are protected in the future.
Some people may think they don’t need much medical coverage because they aren’t sick very often, but if this were the case, someone would still be paying their premiums all the time!
A large part of individual financial planning includes figuring out how to maximize your protection while spending the appropriate amount of money on it.
For example, some ways to reduce your medical costs might include finding ways to lower your prescription drug expenses or choosing less expensive physicians that can help you stay healthy.
You can also consider whether or not it makes more sense to buy extended term (life) coverage or short term (medical policy) coverage.
Extended coverage can cost more up front, but it will protect you longer than short term policies and may offer additional benefits, such as accident forgiveness or supplemental income.
On the other hand, short term policies usually cost less per month, but you could lose everything when you get sick.
Create a budget
A budget is a way to organize your money according to what you have and how much you have coming in compared to what you have going out. This can be done at the monthly, yearly or life cycle level depending on which part of your financial life you are working on.
A good budget will clearly state whether or not you have enough money for each item (dental check-up, groceries, etc.). It should also be clear about where your spending is allowed to go – do you have enough for that new couch or movie rental fee?
You can add some extra income to your budget by having savings or paying off debt. How much you need depends on your goals and what you want to achieve!
General recommendations are to save 10% of your income per month with an easy place to access it. That way, as soon as your paychecks come in, you’ll see your savings increase.
How to create a budget
There are many ways to make a budget. Some people keep track of their expenses via receipts, others use apps, and some write down everything they spend and categorize it into categories such as Transportation, Food, Clothing, and Fun.
Whatever method works best for you, just be sure you understand what every line item means before adding it to your total.
Track your spending
A financial plan is not really meaningful unless you know where your money is going! By tracking how much you spend, you can begin to understand whether your lifestyle has become too expensive or if you’ve just been spending more than you make.
If it’s the first option, then you need to find ways to reduce your expenses so that you can save more money. If it’s the second option, then you will have to reevaluate what you want out of life and whether this thing is worth the amount of money you’re spending on it.
Tracking your spending can be done at any time- during the week or month, monthly, quarterly or yearly. There are many ways to do this, so choose one that works best for you.
Start by making a list of all of the things you spend money on (groceries, bills, entertainment, etc.). Now, get some very detailed records of these items – receipts, documents and notes. You should also include whatever information you can get from friends, family and colleagues about these areas. This way, you will be able to make an accurate assessment of how much money you actually have.
In addition to looking at past expenditures, it is important to look ahead and determine how your future spending will affect your savings.
Create a savings plan
The second part of creating a financial plan is coming up with a spending budget and a savings goal. This can be done at once or incrementally, depending on how you feel about money at the time.
It’s helpful to make your saving goal immediately after your daily spending limit, so that there isn’t an opportunity cost in paying attention to both at the same time.
Once you have determined what you want to save for, set yourself a deadline – say one year from now.
Consider a retirement plan
A financial planner can help you create a good financial plan by asking about your current finances, creating a picture of what your future could look like, and helping you prioritize things to put more money into.
A retirement planning professional will go through each area of your life with you, looking at how much savings you have in different areas (for example, retirement accounts such as IRA’s or 401k’s) and how much debt you have that can be retired (for instance, credit cards).
They may ask if you want to start saving for your children’s education, or whether you would prefer to focus on your own personal development first. All of these questions are part of getting rid of unneeded spending so you have left over income to invest.
In addition to talking about investing, a career counselor or facilitator can help you determine which career is right for you, and what courses or training you should consider obtaining to grow in your field.
Overall, having a goal to retire one day and know that you are prepared financially makes it easier to sleep at night.
Write down your wish list of things to buy
As we mentioned, having a budget is the starting place for creating a financial plan. Now, it’s time to add to that by making a “wish list” or “dream list” of what you want to spend money on in the future.
This can include education expenses, debt repayment, saving for a house, etc. While it may be easy to think about spending money now on something like Netflix, we have learned before that this app does not leave you with much savings!
By adding other small monthly expenditures into the mix, these apps can easily rack up quickly. It is important to evaluate whether or not these services are worth the money if you are looking to save cash.
There are many ways to manage your money efficiently, but one of the first changes you should make is to stop buying unnecessary items.
Create a family budget
A budget is a way to track how your money is spent. It’s a good idea to create one when you first start spending money, before you have income coming in.
A budget can be done at any time, but it’s most effective when there are changes happening in your life — such as starting school or job, having a baby, or moving house.
Changes like these can make keeping up with bills difficult because they require adjustments in where you live and what services you need.
It’s also helpful to keep an eye on how much money you have left over each month. This gives you a chance to plan activities and experiences that don’t cost too much, or ask people if you can pay them back later.