Financial planning is an essential part of managing your finances and saving for retirement. It’s also extremely useful for achieving life goals such as buying a car or a home, travel, paying off student loans, starting your own business, or starting a family. Many of these goals are expensive and need to be budgeted for. That’s where having a financial plan can be vital.
But if you’re new to financial planning, where do you start?
Look at What You Currently Have
A good place to start is by looking at what you currently have. What is your current net worth? Your credit score? How much do you have in assets? How much do you have in your savings and checking accounts? What amount of debt do you have in student loans, credit card debt, mortgage, car loan, or other type of debt? Having a clear picture of your assets and liabilities is the best way to start a financial plan. You can’t plan for the future if you don’t know where you’re starting.
Decide on Your Financial Goals
Once you know where you’re starting from, you can decide where you want to go. A financial plan is like a road map that can guide you towards meeting your financial goals. These goals will be what steers your financial plan. Imagine your life in five years. Where do you want to be? Where do you see yourself in ten years? What about twenty? When thinking about your financial goals, you should divide them into short-term goals, mid-term, and long-term goals. In your list of financial goals, you should also include a relative timeline for each and how much money you’ll need to achieve them.
Create a Budget
Once you know where you want to go, it’s time to determine a budget. You’ll need to prioritize where you put your money in order to meet those goals. Some goals will be more urgent than others to meet and depending on how much money you have coming and how much you owe, you may not be able to work towards all of your financial goals at once. You’ll need to decide where it’s most important for your money to go first.
Save for an Emergency Fund
One of your financial goals should be to have an emergency fund. You never know what might happen. The COVID-19 pandemic saw many people either laid off or furloughed from their jobs as companies complied with lockdown restrictions to help prevent the spread of the virus. Anyone who didn’t have an emergency fund might have struggled to make ends meet during that time. There were stimulus checks, but for some this may not have been enough.
Prioritize Your Goals
As much as you might want to buy a house, paying down your credit card debt is the smarter financial decision. Any debt that is high-interest should be paid off first. It’s also important to save for retirement so that your money has more time to grow. Your financial goals should be prioritized not necessarily based on what you want first but also on how meeting each financial goal will affect your finances and future financial health.