Personal Financial Planning: Tips on Setting Yourself Up for the Future
Having a sound financial plan is the only way to ensure that you are ready for the future when it comes to your personal finances. Whether you are already employed and earning an income, preparing for retirement, or just starting out, having a comprehensive financial plan is a critical step in setting yourself up for a secure financial future. Here are some tips on how to put together a financial plan and get yourself set up for success.
Getting Started
Creating a personal financial plan can seem daunting, but it doesn’t have to be. Taking some time to establish it upfront and make adjustments as needed along the way can set you up for a secure financial future. Here are some steps to starting your personal financial plan:
-
Establish Your Financial Goals: Before you can begin to create a financial plan, you need to establish your overall financial goals. What do you want to accomplish? Goals could be anything from setting aside money for retirement, buying a house, or building a safety net of three to six months’ worth of expenses.
-
Track Your Spending: Once you have your goals established, the next step is to track your spending. Identify the essential versus non-essential expenses, and look for areas to reduce or eliminate.
-
Create a Budget: An effective way to stay on top of your finances is to create a budget. As part of this process, review your income, expenses, and existing debts. This includes allocating money for fixed expenses like rent, loan payments, and insurance as well as for flexible expenses like groceries, entertainment, and travel.
-
Identify Opportunities for Growth: After tracking your spending and creating a budget, you can determine where you may have additional money to save or invest. Consider other ways to increase your income or decrease your spending, such as looking for another job, downsizing your living expenses, or turning a hobby into a side hustle.
Essential Components of a Personal Financial Plan
Writing down your financial plan can help keep you accountable and help to ensure you stay on track. Here are some components to include as part of a comprehensive financial plan:
• Emergency Fund: Having an emergency fund is critical in helping you navigate through unforeseen financial hardships. A good rule of thumb is to put aside at least six months worth of living expenses as a safeguard.
• Savings Plan: Establishing a savings plan that is catered to your specific goals can ensure that you meet them. Consider how much you can put aside each month towards saving for retirement, education, a down payment for a house, or other financial goals.
• Investment Strategy: Developing an investment strategy is a key part of building a financial plan. Consider working with a financial advisor to help in mapping out your strategy and selecting the right mix of investments.
• Insurance Plans: Review and assess your insurance needs, such as life insurance, health insurance, long term care insurance, and disability insurance. Utilize online resources to research the various programs and find an option that fits your particular needs and budget.
• Tax Planning: Taking tax into account when creating a financial plan and adjusting contributions as needed can help to save money in the long run. Research state and federal tax laws, and look at strategies to minimize taxes and maximize deductions.
Weighing the Risks and Rewards
Before Diving into any aspect of your financial plan, you must weigh the pros and cons for any decision you make. Granted, there may be elements that you may need to take on, such as car insurance or health insurance premiums, but for most parts of your financial plan it’s important to consider the risks and rewards that may be associated.
• Risk Tolerance: Take into account your risk tolerance to determine how much-willing you are to lose, should the investments you make not perform as expected.
• Investment Horizon: Your investment horizon will all depend on your goals. If you are planning to achieve a goal in a few years, you may be better off investing the money in something more conservative, like cash or bonds. If you have a more long-term outlook, you may be better off taking on more risk and diversifying across different asset classes.
• Costs: Consider the costs of the products you are looking to invest in, such as broker’s commissions, account-keeping fees, and any taxes. Understanding these charges can provide clarity on other aspects of the product that could be more beneficial than an upfront feature or benefit.
Staying on Top of Your Personal Financial Plan
As your life changes, so, too, should your financial plan. Here are some ways to stay on top of your financial plan and make adjustments over time:
• Review Your Progress: After creating your financial plan, review your progress periodically to make sure you’re on track. This is a good opportunity to assess your finances and make any changes if needed.
• Set Goals: Setting goals can help to stay motivated and on track with your financial plan. Whether your goals are short-term or long-term, setting specific goals that are measurable and attainable can serve as a roadmap for your plan.
• Stay Flexible: As life changes and unexpected events pop up, it’s important to remain flexible with your financial plan. Adjusting your plan as needed can help to keep you on track to reaching your financial goals.
• Be Prepared: In order to avoid any surprise expenses, set aside money for potential life events such as car repairs, potential job loss, or an emergency medical expense. Having a small fund to use as a cushion can serve as a safeguard if needed.
Having a comprehensive financial plan is a critical step in setting yourself up for a secure financial future. Following the tips above on setting up a personal financial plan and making adjustments as needed over time will help to keep you on track and ensure that you reach your goals. Taking the time to create a financial plan now can mean the difference between financial success and financial hardship down the road.
