What is Financial Planning & How to Make a Financial Plan

When it comes to finances, most of us want to be debt-free and live a life of luxury. However, the reality of our balance sheet can often be far from what we wish it were.

Still, with proper planning, you can achieve most, if not all, of your financial goals. Through effective financial planning, you can set up a framework based on your current income, which maps a systemic way for you to prepare for shocks and achieve your life goals.

You’ll be pleased to note that with the following nine steps below, you can learn to create a financial plan and start your journey to financial freedom.

Step 1: Determine your financial goals

The entire idea of a plan is to help you achieve a particular outcome. Well, you have to determine what you want that outcome to be at the very beginning.

Think carefully about what you want to achieve. Do you want to pay off your student loans, save up for college tuition, or a dream vacation? Whatever your goal is, ensure that it is time-bound. That is, you have a particular month or year you would like to attain your goal. But keep in mind that it should also be realistic and specific.

Step 2: Work on a budget and stick with it

A budget is like a pre-determined plan for your money. You’ll need to take into consideration your monthly income and your monthly expenses. So if you haven’t been tracking how much you spend monthly, start now. You might be surprised to learn how much you spend on fast food or other luxuries.

You could split your income into three buckets, one for necessities like rent and bills, another for luxuries, and a third for savings. If you feel that you don’t earn enough to save, then you’re probably leaving beyond your means and need to find a means of cutting back.

Step 3: Pay off your debts and taxes

You should always avoid falling into the trap of debt or tax evasion. Both can be pretty unpleasant holes to climb out of once you’re in deep. Having outstanding debts or taxes to take care of can also hinder you from achieving financial freedom, so try as much as possible to pay them off quickly.

For debts, start with the largest and pay it off in full, or come up with a monthly plan to pay it off as soon as possible. That way the interest doesn’t eat at you. For taxes, there are several legal tax saving options you could look into.

Step 4: Establish a plan for surplus money

Whether you miscalculated or you got another source of income, you now have extra money on your hands. It’s tempting to want to blow this all in one clean swoop, especially if you’ve already paid off the needs for that month.

However, having a plan for this extra money helps you avoid that. You might consider options like an investment, or putting away some of it for retirement.

Step 5: Prepare for the unforeseen

You’ve righteously been sticking to your budget and putting some money away for your future, but something suddenly happens. A faulty car or a house fire, and the money you’ve put away doesn’t cover it. You have to prepare for accidents and unexpected life events. You can do this by getting insurance for your health, home, or car.

You could also look into setting up an emergency fund, which is a fund that keeps you afloat for a certain number of months, should you cease to earn any income.

Step 6: Create an investment portfolio

You should note that there is a difference between savings and investment. The former is typically for a short time, perhaps for emergencies, while the latter is usually long term.

Finding a way to make your money work for you, even when you’re asleep, is a crucial step to becoming wealthy. Having a basic understanding of whatever you invest in will help you. As a rule, you should never invest in anything you don’t understand. You should also be wary of Ponzi schemes. They are not real investments.

Step 7: Have an estate plan

Your estate plan might not necessarily be for real estate. All your assets that are, your car, house, or savings account make up your entire estate.

You might have the impression that only people with multiple assets need to engage in estate planning. But that is quite untrue. Having a will doesn’t mean you have plans to die soon, it just means you’re preparing should the unexpected happen. It’s also a responsibility you have to protect the right beneficiaries, especially if they are dependent on you.

Step 8: Plan for your retirement

Retirement is an inevitable future for all. Thanks to the improved standard of living and access to health care services, you can expect to live longer than you would have a couple of decades ago. That means you might need a personal financial security net to take care of your needs long after you’re done working. The sooner you start saving up or investing for retirement, the richer you retire.

Step 9: Review your financial plan frequently

Due to unforeseen circumstances and life-changing events, you need to review your plan frequently. Significant life moments that might make you review your plan includes things like marriage, having children, or the death of a breadwinner. This review is to ensure that the plan you mapped out earlier can still optimally cover your needs. If it no longer serves that purpose, then you will need to restructure it. Consider it necessary grooming to ensure your finances is always in check.

In addition to these tips, there is a great financial planning software that can help you. Whatever your current financial needs are, there is definitely software perfect for you. You should consider employing the use of one as they help you understand the basics of financial planning, and increase your efficiency with money.

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