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When you were a child, financial planning was nothing more than putting your allowance in a piggy bank to save enough money for that new bike you wanted. You eagerly waited for that day when you could ride your new bike to school and show all your friends. The anticipation was almost as enjoyable as that first ride!
Financial planning as an adult is much more complicated, and it certainly isn’t as much fun. However, financial planning is important if you have financial goals such as buying a house, paying for college, or simply being financially independent. When you’re in debt, you can feel stuck, and a secure financial future is unimaginable when you’re living paycheck to paycheck. That kind of thinking keeps you in debt, where you’ll remain until you do some forward thinking and financial planning.
Financial planning is simply that, putting together a plan for your finances. In doing so, you’ll get a full understanding of where your money is and where it’s going, which will help you develop a realistic, comprehensive plan for a secure financial future. Many people turn to financial planning when there’s a big event in their lives, such as a wedding, job loss, impending retirement, a birth, or a death. However, it’s something that should be done as soon as you have a real job with regular money coming in.
Making the Plan
The ideal first step in anything is having a good plan in place, and that’s even more crucial when it relates to your financial well-being.
Start your financial plan by setting your goals. These should include short-term goals (less than a year), mid-term goals (2-5 years), and long-term goals (6+ years). Define them clearly. Do you want to buy a house? Are you saving for college? Are you thinking of starting a new business? How much do you want to have saved when you retire? Having clear goals and various timeframes will help you stay on track, and things won’t seem so out of reach.
Determine your net worth
Look at your current financial situation, including all assets and liabilities. Be honest about this. You may not want to admit how much debt you have, but the point of financial planning is to get yourself on good financial footing to meet your goals.
Analyze your cash flow
How much money do you earn each month? Where is your money going? How much are you currently using for debt repayment? How much is going to savings or into your retirement accounts? Record everything you spend money on each month to see where it’s all going.
Make a retirement strategy
No matter how young you are, retirement should be an important part of your financial planning. Make as large a contribution to your 401(k) as you can afford.
Start an emergency fund
The general rule of thumb is that you should have three months’ worth of income saved for an emergency in case you find yourself out of work due to layoff, injury, or illness. That way, you’ll have something to fall back upon instead of going further into debt. If you don’t already have an emergency fund, it’ll take some time to save one. Try to make this a mid-term goal.
Prepare for the worst
When there’s a death, injury, fire, or other catastrophic event, people can lose everything. Having appropriate insurance for you, your family, and your property will protect you from financial ruin.
Set a budget
Once you have a clear picture of your financial situation, including all your assets, liabilities, cash flow, and protections, it’s time to set a budget. It’s important to create a realistic budget that includes some wiggle room for entertainment. While wanting to scrimp and save every penny is admirable, it’s unrealistic, and if you don’t include an allowance for something you enjoy, you won’t stick to a budget for very long.
Use this as an opportunity to cut some unnecessary spending. Do you really need that morning latte? How much can you save by packing a lunch? Cut out some of the waste you found when you did your cash flow analysis and use those savings to make larger payments toward your debt.
Make an estate plan
If you have any assets at all, it’s important to plan what will happen to them in the event of your death. A living will is also an important consideration.
Track your journey
Use a spreadsheet to track your earnings, spending, and goals. Be diligent. As you found out when you studied your cash flow, it’s easy for money to get away from you. Tracking it closely will keep you moving forward toward your goals.
Your financial plan will change along the way. Old goals will be met, and new goals will arise. You’ll get raises or take on new expenses; your family will grow; children will move out. Your journey won’t be a straight line.
The Value of Professional Financial Planners
Financial planning takes work and dedication, and you may be wondering if it would be better to employ the help of a professional financial planner to do the work for you. Firstly, taking control of your finances, whether on your own or through a financial planner, will be hard work. A financial planner will give you knowledgeable guidance, not take your finances completely off your hands. There are, however, advantages to hiring a financial planner to help.
They’ll give you objective advice as to what’s best to control and grow your money. They’ll look at your financial situation and advise you based on objective knowledge without any emotional attachments.
They can save you money
They’ll make sure you’re taking advantage of all tax breaks allowed to you, and will be able to spot other ways you may be overspending.
They see the big picture
A financial planner looks at your entire financial picture and can make sure you’re getting the best rates on insurance, help you clean up your investments, make sure you’re getting the best interest rates, and help you make informed decisions about your finances.
They can save you some time
They do all the organizing for you, and can manage your portfolio.
If you do decide to hire a financial planner, do your homework. He or she should be a Certified Financial Planner. Most will have a four-year degree relating to business or finance, and will have a plan for tackling your finances without trying to sell products to you.
Whether you decide to use the services of a financial planner, or you choose to take control of your finances yourself, the time to act is now. The sooner you take control over your financial situation, the sooner you’ll be on your way to meeting your goals.