Financial planning may seem intimidating at first, especially to newcomers. However, it’s essential that you start somewhere and regularly review your progress. Take steps such as paying down debt and saving for emergencies to make an impactful difference to your long-term financial goals. Incorporating life insurance is also a wise move. Another step towards financial independence is putting together a budget. A budget allows you to identify everything that requires and desires spending money.
1. Know Your Income
To effectively manage your money, it’s essential that you track what money is coming in and out. This includes your salary, wages, and investment income – but remember not all sources of income are reliable; freelancers, sales professionals, and contract workers often work on irregular compensation models.
To calculate your income and expenses, it’s a good idea to review bank and credit card statements as well as an online budget calculator. When documenting cash flow, expenses such as rent/mortgage payments, transportation costs, utility bill payments, and debt payments, as well as entertainment and dining out expenses, need to be included as expenses.
2. Know Your Expenses
No matter if you work with a financial planner or on your own, knowing your spending can help identify problem areas and plan more effectively for the future. Tracking spending regularly will enable you to pinpoint areas in need of improvement and pinpoint where they exist.
Get together all your bills, receipts, and credit card statements. Organize them according to type and category. For instance, if you spend hundreds each month dining out with friends, maybe eating at home more frequently could reduce that expense. Consider keeping track of your other recurring expenses, like subscription services and department store purchases, using envelopes or separate checking accounts to help keep a closer eye on things.
3. Know Your Goals
If you’re feeling lost when it comes to reaching your financial goals, setting SMART plans (specific, measurable, attainable, relevant, and time-bound) may help. They could include as simple an aim as aligning spending with values or paying down debt; more ambitious ones include saving for home purchase or retirement savings.
As part of your financial plan, it is also important to establish timelines. A short-term goal might be achievable within one year, while mid-term goals could take up to five years to accomplish.
4. Know Your Savings Goals
Determining and detailing your savings goals is an integral step in the financial planning process. Goals may range from funding a vacation or buying new furniture to long-term targets like retirement.
Make an accurate assessment of what you need versus what you want to save for, and set achievable savings goals accordingly. For instance, budget half of your income for necessities like rent/utilities/food and transport costs and minimum debt payments; set aside half for wants such as finding cheaper apartments/mobile plans/shopping less.
5. Know Your Investment Goals
Some financial goals are short-term, while others can span decades or even centuries. Paying off credit card debt or building an emergency fund are examples of short-term goals, while saving for retirement, a child’s college education, and home purchases are long-term investment goals.
Reaching your investment goals requires multiple strategies and planning to do so successfully. A qualified financial planner can assist with setting a timeline and selecting appropriate investments for you based on their knowledge of your situation and preferences. SmartAsset’s free tool connects you with pre-vetted advisors in your local area for your convenience.
6. Know Your Debts
Debt can eat up a large chunk of your paycheck, leaving less money available for savings and reaching other financial goals. A budget is a useful way to monitor both debt accounts and savings goals. Not all debt is bad; mortgages can help build equity and wealth; however, consumer debt like credit cards may create unnecessary stress while keeping you from reaching other goals.
Understanding exactly how much debt you owe and developing a strategy to pay it back are both key steps toward becoming debt-free. This could involve cutting expenses, working with creditors, or seeking professional assistance through debt management plans.
7. Know Your Credit Score
Financial planning is an integral component of meeting your goals, helping you manage your budget, save for the future, and lower debt. Furthermore, SmartAsset’s financial planner tool and resources can assist in creating a personalized plan based on your goals, risks, abilities, and current situation.
Your credit report and score offer important insight into how lenders view you, which could influence which products (such as mortgages, personal loans, and credit cards ) you qualify for. Keeping tabs on both will help protect against unpleasant surprises in the form of unexpected costs or potential financial surprises in the form of loans or credit card offers. Being aware of your scores can keep your finances healthy.
8. Know Your Taxes
As part of any comprehensive financial strategy, whether self-managed, with assistance from an online robo-advisor, or with professional guidance from a financial planner, it’s crucial that you have an accurate view of both your current and future financial status. This should include emergency savings plans, retirement strategies, risk mitigation tools, and tax minimization techniques.
Subtracting income and expenses will give you an accurate picture of where money is coming in and going out. Depending on your circumstances, it may be advantageous to accelerate or defer income in order to meet IRS deadlines more easily and meet taxable income limits. Finally, you will need an understanding of both marginal and effective tax rates before filing taxes.
9. Know Your Investment Options
Investment products should match your financial goals, investment time horizon, and risk tolerance. Defensive investments like cash, term deposits, or high-yield savings accounts can help meet short-term goals more easily, while higher-risk assets such as stocks should be saved towards long-term objectives such as retirement.
Many employers offer workplace savings options that can support your retirement planning by matching part of your contributions. You could also utilize tax-efficient investment vehicles such as traditional 401(k) and Roth IRA plans, which allow you to save with pre-tax dollars, making compound interest work in your favor. The sooner you start saving for retirement, the faster your investment could grow through compound interest.
