A financial plan is a record of your current financial situation and your financial goals for the future. Your financial plans lay out a timeline of your financial goals and what you need to do to get there.
You can create your financial plans on your own or enlist the help of a professional to help you map out your journey. Here are five things you need on your checklist to get started:
Evaluate your current financial situation
The first step in developing your financial plan is to assess your current financial situation. You have to take account of your assets and liabilities to determine your current net worth. Your assets include any property that you own, your car, money in your 401(k), and your savings account. Your liabilities include debt from credit cards, unsecured loans, student loans, car loans and outstanding mortgage payments.
Establish your cashflow
Once you have determined your current net worth, the next step is to figure out how much money you’re bringing in and what you are spending it on. You do this by making a list of your recurring expenses like rent, utilities, groceries, etc.
Also take into account your other expenses like money spent on eating out, vacations, and entertainment. You add both these expenses for an entire year and divide it by 12. This gives you an estimate of your cash flow.
Subtracting the money that you earn from the money you spend should give you an estimate of how much you have to save and invest. One way to increase the amount you have available to invest is to cut back on non-essential spending.
Set up your financial goals
The next step is clearly defining your financial goals. Some examples of financial goals could be money to start a business, a college fund for your kid, the down payment on a house, or retiring at 40. IIt could even be on starting a savings plan. Once you have these goals set, you can make investments that will help you achieve these goals within the timeframe you determined.
Settle your debts
One major hindrance to anyone trying to grow their wealth is an outstanding debt. These are particularly for ones that have a high rate of interest. More often than not, these include credit card debt, unsecured loans and pay-day loans.
When you have a lot of debt, particularly from high-interest loans, you end up paying almost twice what you borrowed. One way of chipping away at your debt minus multiple interest payments is to consider debt consolidation. You take out a loan to pay off all your outstanding debt and then pay off just one single debt.
Get started with investing
You can begin by checking if you maxed out your contribution to your 401(k) or your IRA. Not only do these help build a tidy nest egg for life after retirement, but they also help you save on taxes.
In addition to investing in these retirement accounts, you should also stash away some money for emergencies. This will help so you don’t dip into your savings when you’re strapped for cash.
One thing to remember is that your financial plans are not set in stone. You may have to tweak it every now and then to make sure you’re on the right. It is merely a route map for how you achieve your financial goals. Yhere are bound to be detours and shortcuts along the way.
One thing that certainly helps is to revisit your financial goals following a major life change. This could be a promotion that gives you a significant raise, getting married, having a child or a major illness.
If you have trouble objectively creating and managing your financial plans, you can hire a financial advisor. An advisor can help you with managing your investments and even saving on taxes.