Financial Planning Basics

When you take control of your finances by budgeting, investing and managing debt, you can plan for and develop a strategy to live the life of your dreams.

Developing a plan gives you insight into your current finances and shows you where you need to make adjustments so that you can allocate your money towards things that matter most to you.

Evaluate Your Current Situation

Without a clear picture of where you stand financially, it will be difficult to formulate a plan for how you plan to accomplish your goals. Spend a month tracking all of your living expenses, which you can easily do through finance tracking apps. Include your rent, car payment, utilities, food and money spent on eating out and entertainment. You might be surprised to find out how much money you are spending on non-essential items. Having this information will help you determine areas where you can cut back and reallocate your money to achieve your goals.

Develop a Budget

Once you get clear on your current situation, your next step is to create a budget. A budget will help you take control over how you spend your money. Using the information you gathered while tracking your expenses, total up all of your expenses for the month. Compare that to your total income for the month. The goal is to have enough income to cover all of your expenses. A good guideline for your budget is to follow what is known as the 50/20/30 rule. The idea is to spend no more than 50 percent of your income on the necessities of life such as rent, vehicles, food and utilities.

The rule also specifies that no less than 20 percent of your income should go to your financial goals, and no more than 30 percent should go towards items such as eating out, entertaining, and clothes. If you find that you cannot quite meet these general figures, review the areas in your budget where can cut back on you expenses. Try some eliminating of the non-essential items such as eating out and entertaining. Monitoring your spending can help you cut out unnecessary costs and develop better spending habits. You should also pay off your credit cards so that you can devote more money to your plan. If you find that you are not able to trim your expenses, you might want to consider taking on a second job to increase your income.

Create Financial Goals

Take some time to evaluate what matters most to you. What are your dreams? What kind of future do you imagine for yourself? Using this information, create a “bucket list” that represents how you envision your life. Try not to limit yourself by focusing on how much money you currently have. Simply write down what it is you want for your life. Make each item on your list specific, tied to a particular date and the amount required to have that item. You will not be able to accomplish everything all at once, so try to categorize your goals into three time frames: short-range, mid-range and long-range. Short-range goals are things that you plan to achieve within six months to one year. Mid-range goals are things that you plan to accomplish within one to three years, while long-range goals are for items requiring more than five years to achieve.

Short-Range Goals

One of the first things you should focus on when defining your goals is to create financial stability. As such, building an emergency fund and eliminating debt should be high on your priority list for short-range goals. Set aside three to six months of living expenses so that you can continue to pay your bills if you experience a major setback such as job loss or illness. Stash your emergency fund somewhere where you have quick access to it without incurring excess fees such as a savings account.

Mid-Range Goals

Many of the items on your bucket list will likely fall into the mid-range category. Things such as saving for a house, buying a new car or taking a vacation would fall into this category. Since you will not need access to this money for several years, take advantage of compound interest by storing the money in an account with a high-interest rate.

Long-Range Goals

Here is where you place your retirement goals. How much money will you need to retire comfortably? What type of lifestyle do you want during your retirement? Once you answer these questions, you can evaluate the best investment vehicle to get there, for example, an IRA or a 401(k). A good rule of thumb is to save 10 to 15 percent of your income in a retirement account. Investing in a retirement account is especially valuable if your employer matches contributions. Take advantage of the free money to build your savings for retirement.

Getting There: Develop a Strategy

Next, determine how much you need to save to accomplish each goal on your list. For example, that one of the items on your list is to take a vacation to Europe next year and it costs $3,000. You would write your goal as: save $1,500 per year for the next two years to take a vacation to Europe in 2020. From there, you can determine how much you need to save each month, or how much you need to set aside per paycheck to reach your goal. Do this for each item on your list until you have a solid plan for accomplishing each item. If you want professional advice or additional help developing a strategy, you should consider meeting with a financial planner. A financial planner can make recommendations on the right investments to reach your goals. They will help you develop a portfolio of stocks, bonds, CDs and retirement funds best suited for your situation. Reassess your plan regularly to ensure you are still on track and if not, make adjustments as necessary.

Some easier ways to save money is through smart shopping, such as using coupon apps to clip coupons or find deals. This is great for necessary purchases like grocery items, and many of these establishments often offer reward and loyalty programs for frequent shoppers. When shopping for high-cost items like electronics or appliances, consider how crucial the purchase is for the household. Some items might regularly go on sale or offer mail-in rebates for a refund of some of cost, so it is best to consider your purchases carefully. With a combination of smart shopping, better spending habits and a constant observation of your expenses, you can learn how to save money and use your savings to contribute to all types of financial goals.

It might also interest you: