A financial plan can cover a variety of money topics. These include budgeting, expenses, debt, saving, retirement and insurance, just to name a few. When you understand how each of these pieces work together, you’re laying the groundwork for a solid financial foundation for you and your loved ones.
Today we’re walking you through how to tackle your financial plan in 10 steps. Ready to begin?
1. Define Your Financial Goals
Time to get specific! When you decide what you need your finances to do for you, it’s easier to tap into strategies to make it happen. Establish goals, then create a plan for how you’ll get there.
Here are some questions to get you started with the goals for your financial plan:
- Do you want to contribute to your kids’ college education?
- What’s your ideal retirement age?
- Is getting out of debt a priority for you?
You might even work with a financial planning professional to help you zero in on the most realistic goals. (Watch for our upcoming article on choosing a financial planner!)
2. Set Up Your Budget
If the word “budget” stirs up a little bit of dread for you, you’re certainly not alone – but you can’t skip this step when it comes to your financial plan! A budget is hugely important tool that helps you see exactly how much money you spend, and contrasts it with the amount of income you earn.
Being in control of your spending means noticing where you’re spending too much money and where you might be able to make some cuts and redirect your cash flow to better serve your goals.
Begin by identifying necessary expenses – your house payment, debt payments, insurance payments, and taxes. Next, make note of important expenses that you’re still able to modify to a large degree. For most people this includes groceries, utilities, and work-related expenses.
Finally, decide which of your expenses are completely optional and can be virtually eliminated. This includes expenses like entertainment and vacations.
3. Cut Expenses And Redirect The Flow Of Your Money
Once you’ve organized your expenses into necessary, important, or optional, you may find that you need to make reductions or cut some expenses altogether.
For example, you can reduce your grocery expenses by shopping sales and cutting coupons and opt for a family staycation this year.
Making these kinds of cuts frees up your cash flow – you can now direct more of your money into paying off your debt or your emergency and retirement savings.
4. Create An Emergency Fund
Next up? Setting up your emergency fund – a savings account or money market that holds your liquid cash. You’ll want to have enough to cover 3-6 months’ worth of expenses available when an unexpected expense hits or your income takes a sudden hit. When you can avoid borrowing money to float yourself through tough financial times, your emergency fund will more than pay for itself.
5. Pay Off Your Debt
Once your emergency fund is full, the next step in your your financial plan will be to redirect funds to pay off debt.
There are several different ways to get out of debt, but Dave Ramsey’s debt snowball approach is a great fit for many different financial planning situations.
To begin, concentrate on paying off your smallest debt. Then target the next smallest debt, and so on. As you move onto paying off larger and larger debts, you’ll feel a sense of victory each time you retire another one. You’ll get to eliminate a monthly payment with each debt you pay off – and that means you’ll increase your cash flow, which can be put towards the next-largest debt. And psychologically, there’s something very satisfying about reducing the number of debts you have.
6. Contribute To Your Retirement Savings
We hope you’re already stashing away some funds each month for your retirement. As you get out of debt your cash flow will increase and you’ll be able to save more money for retirement – and for all your other goals, for that matter.
If you haven’t started saving for retirement, today is the perfect day to begin. Start by contributing an amount that doesn’t significantly hurt your cash flow each month. Then, as your income increases, increase your contribution amounts.
7. Save For Your Other Goals
Between the worlds of emergency funds and retirement funds is the strategy of saving up for your near-future goals. This might include saving for your kids’ college educations, a new car, repairs or renovations to your home, and more. Saving up for these intermediate goals lets you have money available (without borrowing) for those large-yet-predictable expenses.
8. Protect Your Financial Assets With Insurance
Insurance is vital when a situation pops up that you couldn’t possible save enough money to cover.
If you’re like most people, you’ll need:
- Life insurance
- Health insurance
- Auto insurance
- Homeowners insurance
It’s easy to forget that insurance protects your financial assets and saves you from draining other financial resources – making it a key part of a smart financial plan.
9. Set Up Your Will
The last piece of your financial plan should be to make arrangements for what happens to your estate after you’re gone.
If you don’t set up a will, at the very least your surviving family members will end up in probate court, working out the distribution of your assets.
Meet with a trusted attorney and set up a will that distributes your estate as you wish. It if feels overwhelming, remember you can always make modifications as your financial details evolve. You might find you feel a certain sense of peace upon completing a will, knowing you’ve done the best they can to take care of the ones they love.
10. Implement Your Financial Plan!
As you tackle these 10 steps that guide you through the basics of your financial plan, keep in mind that wealth building is a marathon, not a sprint. Implement them slowly and plan carefully. The tortoise always wins the race!
*Disclaimer: Citywide Home Loans does not provide financial planning services or any other service apart from lending. You should always consult with your legal, tax and financial advisors to determine which strategy is the most suitable for your specific circumstances.