Structure is the key to growth. Without a solid foundation – and a roadmap for the future – it's easy to spin the wheels and float through life without making any progress. Good planning can help you prioritize your time and measure the progress you've made.
This is especially true of your finances. A financial plan is a document that will help you Track your monetary goals to measure your progress towards financial literacy. A good plan allows you to grow and improve your reputation so you can focus on achieving your goals. As long as your plan is solid, your money can do the job for you.
Fortunately, a solid financial plan doesn't have to be complicated. Here is a step-by-step guide on how to create a financial plan.
What is a financial plan?
Financial planning is a tangible way of organizing your financial situation and goals by creating a roadmap to help you achieve them. When deciding where to start, you should consider what you currently own, what long-term goals you have, and what opportunity cost you are willing to pay to meet your monetary goals.
Financial planning is a great strategy for everyone – whether you're a budding millionaire or still in college. If you make a plan now, you can move forward in the long run. If you want to create a roadmap for a prosperous future, create a financial plan in 11 steps.
1. Evaluate where you stand
Creating your financial plan is similar to creating a fitness program. If you don't have precise steps to take to achieve your goals, you can do random exercises with no progress. To create a successful plan, the first thing you need to understand is where to start so that you can openly address weaknesses and set specific goals.
Determine your wealth
One way to find out your financial status is to determine yours Net worth. To do this, subtract your liabilities (what you owe) from your assets (what you own). Assets include things like the money in your accounts and your home and auto equity, while liabilities can include any debt, loan, or mortgage. How to calculate your net worth based on your assets and liabilities.
Your asset-to-liability ratio can change over time – especially as you pay off debts and put money into savings accounts. In general, positive net worth (your assets are greater than your liabilities) is a monetary health signal. You should keep an eye on your assets regularly to keep track of the progress of your financial plan.
Track your expenses
Another way to evaluate your financial planning process is to measure your cash flow, or how much you are spending versus your earnings. Wealth is a great way to understand where you are financially. However, by measuring cash flow, you can ensure that you are going in the right direction.
Negative cash flow means you are spending more than you make, resulting in credit card debt and bankruptcy. Conversely, positive cash flow means you are making more than you are spending – a great step towards achieving your money goals.
After you have an idea of your net worth and cash flow, it is time to set your financial goals.
2. Set the SMART financial goals
By setting SMART financial goals (specific, measurable, achievable, relevant and time-bound), you can use your money for your future. Think about what you ultimately want to do with your money – do you want to pay back loans? What about buying a rental property? Or do you want to retire before 50?
First, make a list of your goals and dreams, from running a dog daycare to living in Paris. Even if it feels outrageous, your financial plans should help you work towards your long-term goals.
SMART goals help you break down your larger financial planning process into actionable pieces. Do you remember that dream of moving to Paris? With SMART goals, you can make your dream of living on the Seine a reality. How to create your SMART goals:
Set specific goals You may stay motivated and accountable so you spend less money and stay on budget. Remembering your monetary goals can potentially help you make smarter short-term decisions to invest in your long-term goals.
It is important to understand that your goals are not static. If your life goals change, your financial plans should follow suit.
3. Update your budget
Creating a budget can help you determine how to create a financial plan and meet your long-term monetary goals. If you draw up a budget If you stick with it, you can understand which areas you can afford and where to save.
An excellent method of budgeting is that 50/30/20 rule, made popular by Senator Elizabeth Warren. To apply this rule, break your after-tax income into three categories:
Essentials (50 percent)
Wishes (30 percent)
Savings (20 percent)
The 50/30/20 rule is a great and easy way to meet your financial goals. This rule allows you to include your goals in your budget in order to stay on track for financial success.
Regardless of what financial goal you are working towards, it is important to have an updated budget and plan to achieve it. For example, if you are planning a wedding, you might eat less to cut down on your wedding Food budget every month.
What to include in your budget
If you've ever tried putting a budget together, you've probably considered the basics like rent, loans, and groceries. But what other expenses should you consider? Over time, these daily slats can add up. This is why it is important to think about the many different costs you can incur over the course of the month. If you're upgrading your budget, here are some of the most common items to include::
to eat out
Subscriptions and memberships
Travel and transportation
Bank account fees
License plate or leasing
This is how you know what to include in your budget. What now? Check out our Budgeting tips to create your budget in line with your financial plan. When you're ready to get the ball rolling for your future, use a table, piece of paper, or one Budgeting app to create your financial plan today.
4. Save for an emergency
Did you know that? four in 10 Wouldn't Adults Be Able to Cover an Unexpected $ 400 Cost? With so many people living from paycheck to paycheck with no savings, unexpected expenses can seriously affect someone's life if they are not prepared for the emergency.
It's important to save money during the good times to account for the bad ones. This is especially true in these days when so many people face unexpected financial challenges. Whether you are just getting started on your path to financial literacy or have been saving for years, it's a good idea to review your emergency finances to make sure they are adequately meeting your current needs.
They already know that in case something goes wrong, you should be saving money. But did you know you should save up for both of them? rainy day and Emergency fund? It is important to have multiple backup funds to hold you in the event of an unexpected crisis.
5. Pay off your debt
It can be frustrating to use your hard earned money on saving and paying off debt, but prioritizing those payments can lead you to long-term success. With two key methods of paying off debt, understanding the difference between them is important so that you can make the smartest decisions about your financial future.
Regardless of the repayment option you choose, this is the key to success to pay off a debt is to be disciplined with your budget. Skipping a month or two of debt repayment can get a grip on your financial plans. So it is important to have a realistic budget that you can stick to.
6. Organize your investments
Investing may seem like a difficult topic, but you can put your money and grow your wealth passively if you understand the basics. To begin investing, the first thing you should do is determine the initial amount you want to deposit. Whether you're investing $ 50 or $ 5,000, investing your money now will help you plan for financial success later.
When deciding how to create a financial plan, you should consider budgeting a set amount each month to get straight into your investment portfolio. This is your contribution amount. Over time, these little pieces of money can grow into larger and larger sums of money. However, it is important to note that investing is a long game. If you want serious results, you will have to wait at least five or more years.
Are you ready to embark on your path to long-term financial success? Check out our Investment calculator to create goals, forecast metrics, and find ways to grow your wealth even further.
7. Prepare for retirement
When thinking about how to create a financial plan, it is important to consider your goals well into the future. Although retirement feels like a world away, planning is now the difference between a wealthy retirement income and passing by.
The sooner you can start saving for retirement, the better. If you start saving for retirement in your 20s, you will have more than 30 years of consistent contributions to your money by the time you retire. In general, the older you are, the more you should try to contribute to your retirement fund. A good rule of thumb, however, is to save around 10 to 15 percent of your after-tax income in a retirement account each year.
Types of retirement plans
There are several types of retirement plans, the most common being an IRA, a Roth IRA, and a 401 (k):
IRA: One IRA is an individual retirement account that you open personally and finance without being tied to an employer. The money you put into this type of retirement account is tax deductible. It is important to note that this is deferred tax, which means that you will be taxed at the time of the payout.
Roth IRA: ONE Roth IRA is also an individual retirement account that is opened and funded by you. However, with a Roth IRA, you will be taxed on the money that you have now deposited. This means that you will not be taxed at the time of the withdrawal.
401 (k): ONE 401 (k) is a retirement account that a company offers its employees. Depending on your employer, with a 401 (k) you can choose whether you want to make contributions before or after taxes (Roth 401 (k)).
8. Start your estate planning
Thinking about estate planning isn't fun – but it is important. If you're trying to figure out how to create a financial plan, it is important to start with estate planning to describe what will happen to your assets when you are away.
To create an estate plan, you should list your assets, write your will, and determine who has access to the information. Estate taxes can get steep 40 percentSo having a plan for setting up your estate can reduce the financial burden of passing on loved ones.
Using an attorney for estate planning
Using an estate planning attorney can solidify financial plans that you don't want to leave to chance. By clearly outlining your estate plan, you can protect yourself from any potential litigation or missteps that may arise while weeding out your estate. If you want to hire an estate planning attorney, you need to know the following:
Find an estate planning specialist: Like doctors, lawyers specialize in all areas. You wouldn't expect a dermatologist to perform knee surgery. So why should you expect a lawyer with a different specialty to create your estate plan?
Clarify clarification costs: Estate planning fees can vary significantly depending on the lawyer and your specific needs. Some lawyers charge fees because of the complexity of the plan. others charge a flat or hourly fee. There's no right or wrong about estate planning fees, but you should have a preliminary talk with your attorney to determine which method will work best for you.
Find a lawyer you can trust: Estate planning is a very personal matter, so find an attorney with whom you will be happy to share personal matters.
9. Insure your assets
As your wealth grows over time, it is worth thinking about how to protect it in an emergency. While insurance may not be as exciting as investing, it is just as important.
Insuring your wealth is more of a defensive than an offensive financial move. When deciding how to prepare a financial plan, you want to get insurance to protect yourself from unforeseen difficulties that could affect your success.
Types of insurance
There are a few Types of insurance You could protect your wealth. Here are some of the most important things to keep in mind when planning your financial future.
Life insurance:: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the funds they need after your death.
Homeowner insurance: As a homeowner, protecting your home from disaster or crime is important. Many people's homes are the most valuable asset they own. So it makes sense to pay a premium to ensure protection.
Health insurance:: Health insurance is protection for your most important asset: your life. Health insurance covers your medical expenses so you can get the care you need.
Car insurance: Car insurance protects you from the costs of theft or damage to your car.
Disability insurance: Disability insurance is a reimbursement for loss of income due to an injury or illness that prevented you from working.
10. Plan for taxes
Taxes can be a burden, but understanding how they work can make all the difference to your long-term financial goals. While taxes are a given, you may be able to reduce the burden by doing your tax planning efficiently. When planning taxes, consider the following:
How to reduce your taxable income: You can take advantage of tax saving investment options like 401 (k) or 403 (b) to save money by reducing your taxable income (while putting more money away for your future).
How to list your prints: Tax deductions are a way of reducing taxable income as a full or part-time self-employed taxpayer. You can deduct incurred expenses from doing business to reduce your taxable income.
11. Review your plans regularly
Figuring out how to make a financial plan is not a one-off thing. Your goals (and your financial situation) are not stagnant, so neither should your plan be. It is important that you regularly reassess your plan and adjust your goals to continue preparing for success.
As your career progresses, you may want to be more aggressive with your retirement plan or insurance. For example, a young 20-year-old is likely to have less money to write to their retirement and savings accounts in their early years than a person in their mid-30s with an established career.
Keeping up to date with your financial plan also ensures that you are accountable for your goals. Over time, it can be easy to skip a payment here or there, but concrete metrics can give you the boost you need to achieve a future of financial literacy.
After figuring out how to create a currency plan, you should review it about once a year. However, this is just a basic metric. Therefore, more frequent reviews may be required if a significant life event occurs.
It's always a good idea to reevaluate your financial plan when you do marry, Have children or quit your job. Take some time every few months or so to review your progress and assess problem areas. Take the time to celebrate milestones – this can keep you motivated in the future.
Ask people you know for feedback on your financial plan. Your best friend may point you out a few things that you forgot, such as: B. Your desire to have a dog or live in a downtown loft. You can also have it done by a professional who can provide objective insight and professional knowledge of how to prepare a financial plan.
It is important to remember that the path to financial success is a personal one and should be taken at your own pace. However, the sooner you start, the better prepared you will be for a strong financial future. Download Mint to take control of your finances today.
Sources: CNBC | Federal Reserve | IRS | IRS