If you want to attain financial independence, you must first have a strategy in place. Without a budget plan, you won’t know whether you’re getting off track. A financial plan can help you stay accountable, which will help your financial health. Additionally, having a strategy may provide your life with structure and significance.
A recent poll found that 75% of Americans are winging it when it comes to financial planning. Are you one of them? This should make you nervous if it doesn’t already.
Your time and effort spent on creating a personal finance plan is an investment in your future self. You also don’t need to hire an expensive professional financial advisor to do it for you. In fact, you probably shouldn’t. With these guidelines in mind, you’ll be able to create your personal financial plan in no time.
Document Your Goals
Planning your own financial future is a lot like putting together a puzzle. Your spending, buying, debt, and investing activity are all components of this financial puzzle. The image on the box stands for what you want to achieve. The puzzle pieces must properly align with one another for the task to be successful.
But to get there, you first need to establish your goals. This is when the SMART goal framework comes in handy.
The acronym S.M.A.R.T. stands for:
- Specific. You’ll have a better chance of success if your goals are clear and well-defined.
- Measurable. Success may be easily defined when working toward a definite goal. The problem is either resolved or not. There’s just no middle ground.
- Attainable. Your goals shouldn’t be impossible to achieve.
- Realistic. Do not set yourself up for disappointment by dreaming about impossible outcomes.
- Timely. You will be more motivated to achieve your goals if you give yourself a deadline. People are more productive when they have a deadline to meet.
Determine Your Net Worth
The key to financial security is careful preparation on an individual basis. Knowing your current location is crucial for reaching your destination.
Create a complete inventory of your possessions and financial resources, including cash on hand, investments, real estate, and other valuables. Even vehicles. When figuring up your net worth, everything matters. The next step is to compile a complete accounting of your financial obligations.
Your net worth is your asset value minus your liability value. As long as this figure is positive, you are doing better than the majority of your fellow citizens in the United States. However, don’t worry if the result is negative. In fact, this can happen occasionally and it implies that you can’t afford to be careless with your financial planning.
Make an Emergency Fund
When you’ve calculated your financial standing, it’s time to start saving for the inevitable emergencies that may arise. No amount of careful budgeting should be in jeopardy in the face of unexpected expenses such as hospital bills, and house or auto repairs.
According to a recent study, roughly one-quarter of Americans had no money set aside for unexpected expenses. Having no savings in case of an unexpected event is risky because it will be hard for you to stay on top of your personal finances if you incur a sudden debt.
It is recommended to have at least three to six months’ worth of costs saved up in case of an emergency. The standard recommendation from financial advisors is to save around 20% of your monthly income.
Your emergency fund should be treated as a different entity from your regular savings account, so if possible, set aside a small portion of each salary specifically for it. You should avoid using emergency funds or, even worse, taking on more debt to cover an unexpected need.
Personal financial planning is greatly aided by the creation of a reasonable budget. The 50-20-30 rule is the unofficial rule of thumb for budgeting.
- Needs. At least 50% of every paycheck has to be allocated to fixed costs including housing, transportation, food, clothing, and medical care.
- Savings. Savings should account for 20% of your income. The most important aspect of personal finance is saving money.
- Wants. All other discretionary expenses may be covered with the remaining 30% of your income. Everything that isn’t required to sustain life, such as entertainment, clothes, and technology.
Planning your finances in advance might improve your chances of financial security in the future. You’ll get a keen sense of where your financial resources are most useful as you gain greater financial independence. Affording the life you want for yourself requires some forethought, budgeting, and perseverance on your part.