Financial planning is a personalized process involving setting goals and creating an action plan to reach those goals. It can be done on your own or with the help of a financial professional.
Start by identifying what you want out of life. Financial goals should be SMART: specific, measurable, achievable, relevant, and time-bound.
1. Identifying Your Goals
Financial goals are any money-related objectives you want to achieve. These could be as simple as buying a house or saving for a vacation. Whatever your aspirations, they will all require adequate money at the right time to be fulfilled.
You can use a financial goals worksheet or find a financial advisor to help identify your specific aspirations and create a plan for reaching them. Make sure your goals are SMART (specific, measurable, attainable, relevant, and timely) to increase the likelihood of success.
Also, break your goals down into short-term and long-term categories so that you can focus on the things that are most important to you. For instance, a short-term goal might be to set up an emergency fund, while a long-term goal could be to retire in 15 years. These clear, actionable goals will keep you on track to reach your financial dreams.
2. Creating an Emergency Fund
An emergency fund is an essential component of financial planning. It allows you to cover unexpected expenses such as a medical crisis or job loss. Financial experts advise setting aside funds in an easily accessible savings account that can cover three to six months of living expenses.
Create a dedicated savings account for your emergency funds to reach this goal. You can request that your employer allocate a portion of each paycheck to this account. Another option is to arrange for automatic transfers from your checking account. Additionally, look for ways to trim expenses, such as canceling unnecessary subscriptions or cutting back on dining out, to free up money to save.
It’s also a good idea to break down your goals into short-term and long-term categories. It can help you determine which ones to tackle, such as creating an emergency savings fund. Then you can go on to longer-term, more complex objectives, like retiring or purchasing a home.
3. Creating a Budget
A budget serves as a guide for your financial decisions. Make a list of all of your monthly expenses, both recurring and one-time (rent, utilities, auto payments, credit card balances, and food). It’s helpful to categorize your financial goals as short- or long-term so that you can prioritize and plan accordingly.
Start by calculating your income, including salary, side gigs, investment returns, and even that $5 you find on the sidewalk! Consider any other regular money you receive, such as gift cards or tax refunds.
Next, subtract your mandatory expenses from your income to discover how much you can allocate to other goals or spending. Discretionary expenditures, such as a new smartphone or an exciting trip, can be fun to plan for and work toward. Make sure you save at least 10% to 20% of your income, depending on your financial goals. You can also automate savings by having a certain amount of each paycheck directly deposited into an interest-bearing account.
4. Investing
There’s a famous saying: “If you don’t know where you are going, you will probably end up somewhere else.” That’s especially true when it comes to your finances.
To reach your financial goals, you must first create a SMART plan (specific, measurable, achievable, relevant, and timely). You can do this on your own or with help from a professional.
One of the first steps involves determining your net worth by evaluating your assets and liabilities. Once you have this information, you can set savings and investment goals.
