How a Financial Plan Can Help You Achieve Your Goals
A financial plan is a roadmap to guide you toward your goals. It can help you meet short-term needs, such as paying off debt, and achieve long-term goals, like a comfortable retirement.
A financial plan begins with an assessment of your income and spending habits. It also includes a cash flow projection that shows how much is coming in and going out each month.
Define Your Goals
A financial plan isn’t one-size-fits-all, but most successful ones share certain characteristics. These include creating goals, setting up and following a budget, saving money for retirement and emergency funds and investing to build wealth over the long term.
The first step in developing a financial plan is to set specific, measurable goals for yourself and your family. This can be done using a framework such as the SMART (specific, measurable, attainable, realistic and time-based) goal-setting model, which is popular in many workplaces today.
Once you have your short-term and long-term goals in place, it’s important to create a timeline for reaching them. This will give you a sense of urgency and can help keep you accountable to your plan. You should also consider any events in your life that might impact reaching your financial goals, such as a change in employment, a new addition to the family or even a health crisis.
As you make progress towards your goals, it’s a good idea to review them on a regular basis. This will allow you to identify and address any obstacles that may arise and can also provide opportunities for your money to work harder for you, such as paying down debt or saving more with a windfall from an unexpected source like a tax refund or bonus at work.
Create a Budget
Whether you’re using tried-and-true pen and paper, mobile apps, or budgeting spreadsheets found online, creating a spending plan is an important step in achieving your financial goals. Start by listing all your expenses and income, including what you’re saving each month. Next, separate each expense into fixed and variable. Fixed expenses are those that you must pay each month, such as rent or mortgage, car payment, utilities and insurance. Variable expenses include more flexible items like dining out, gym memberships and entertainment. Once you’ve categorized each item, set a budget for each.
Once you know how much money is coming in each month and going out, it’s easy to identify ways to save more or pay down debt. You can also create milestones for yourself to motivate you along the way. For example, you might want to pay off your highest-interest credit card within two years or save a certain amount each month for six months before purchasing a new car.
Be sure to reevaluate your plan periodically, especially after major life changes, such as getting married, buying a house, or undergoing a medical procedure. That way, your savings or debt repayment goals can reflect your new reality and help you reach your long-term goals.
Set Aside Money for Emergency Funds
An emergency fund helps you manage financial shocks by providing a safety net that protects your budget, income and credit. Typically, you’ll want to save enough to cover at least three to six months of living expenses. The exact amount you need to save will depend on your bills, spending habits, family needs and job stability. Ideally, the emergency account is separate from your regular savings and investment accounts.
It’s important to track your spending meticulously for one month and bank statements for two additional months to establish an average monthly amount of essential expenses, such as housing, food, utilities, debt payments and required medical costs. Then, convert this number into a dollar amount you’d like to save per month.
Once you’ve set a savings goal, commit to saving this amount every month. If possible, set up auto-transfers from your checking account or ask your employer to send a portion of each paycheck directly into your emergency savings account. Be sure the savings account is easy to access and won’t require too much time before you can withdraw funds.
While paying down debt is important, it’s also critical to prioritize building your emergency savings. If you’re struggling to reach your goal, review your budget and identify non-essential expenses that can be reduced or eliminated, such as dining out less frequently or cutting back on subscription services.
Invest
If you want to have more money to invest, financial planning can help you make it happen. It includes identifying your goals and setting them in motion. The plan can also include addressing your debt. Whether you are paying off credit cards or car loans with the avalanche method, or using the snowball method to pay down your mortgage, these steps can give you more freedom to save and invest for future goals.
The financial planning process can also include a review of your income and expenses to make sure you are taking advantage of deductions and credits that can maximize your tax savings. It can also include strategies for protecting your assets and estate, minimizing taxes, and maximizing tax-efficient opportunities such as utilizing health savings accounts, education funding accounts, and other investment vehicles.
Lastly, the plan can include an investment strategy to ensure you have enough saved for your desired retirement lifestyle or other goals. This can be done by determining how much to put into each type of investment, and making sure you are investing in the most suitable vehicles for your goals.
