Often, people delay making a long-term financial plan because it seems like a monumental task. Kicking the can down the road always seems more straightforward than putting in the challenging work of sitting down and making an achievable plan.
You may be at the perfect time in your life to create an inspirational and successful plan. While this may sound like a monumental task, it does not have to be. If you are organized, the project can be very satisfying and a great help in assuring you have an effective and productive plan. Even if “organized” is not part of who you usually are, proper planning will still get you where you want to be.
Where do you Start?
You cannot make an effective plan without information. You must gather several documents before proceeding to the actual plan. A suggested list includes:
- Bank statements
- Four to six months’ worth of your bills, such as credit cards, phone, cable, and gas and electric bills
- Any tax bills, car registration fees
- Insurance bills, such as auto insurance, house or rental insurance, and other insurance bills
- Student loan payments
- Mortgage or rental payments
- List of funds you are already putting away, like savings and 401 K
- Any other financial obligations you have
Don’t forget to review any regular sources of income as well. That includes pay stubs and any side gigs that you may have.
After gathering and reviewing these documents, you might even find that you are paying for multiple subscriptions or redundant ones. There may also be subscriptions that automatically charge your credit card, which you no longer want or need. Your financial planning can already be making you richer by showing you what you might need to cancel some, and how you can save extra money. That money should be put into a savings account at once!
Before moving ahead with your financial plan, it is essential to clarify your goals. Where do you want to be in five years, ten years, or retirement? Do you need to plan for major expenditures in the future? Do you want to buy a house or open a business? Will you travel in the future? How about buying a new car, upgrading what you currently drive? Will you need to pay for a wedding or a child’s education? You should create an emergency fund with six months’ worth of expenses in case you need immediate money.
Next Steps
No financial plan will succeed without a budget. Must it be stringent or impossible to maintain over the long term? Absolutely not!
Your proposed budget should be reasonable and relatively easy to follow. It should be divided into three categories.
- Your needs, like housing, groceries, and utilities
- Your wants, like social experiences with friends or family
- Your savings, putting away money for long-term goals
Financial experts recommend a 50-30-20 percent allocation for these three goals. They also suggest creating a spreadsheet to help you stay on target.
Debt is a Major Concern
Unfortunately, many people have accumulated substantial amounts of credit card debt, often on multiple credit cards. Others have student debt, while others have large car payments and other purchases. With this debt, people are paying significant amounts of interest and fees. One of the first steps you need to take is to plan for reducing and eventually eliminating that debt.
Financial experts recommend starting with the credit card with the smallest outstanding balance. By paying it off, you can achieve an early win, which will motivate you to continue the process. Others suggest the opposite, that paying off the card with the highest interest rate will save money.
Of course, at the same time as paying off your cards, you should try to eliminate adding to any high interest accounts you have.
Don’t Leave Money on the Table
Many employers encourage their employees to save for retirement through various vehicles. These include 401(k), IRA, and other retirement accounts. Some employers will match the funds that you put in with a percentage of the company’s money. These percentages vary from employer to employer but typically fall within the 2-4% range.
When you do not contribute, you are forgoing that extra money. It would be wise to consider claiming it while adding from your paycheck to the account. While this account balance builds up, you are also harnessing the power of compound interest to your advantage.
Plan for the Future
While you are in planning mode, consider the future, regardless of your current age. You need to adequately take control of parts of your financial life that you would prefer not to. For example, do you have a will or an estate plan in place? Even if you think you are too young to be concerned about that, you need to reconsider. Accidents happen when you least expect them to, and you may have possessions that you want to control the disposition of after you die.
While in planning mode, consider the several types of insurance you need. Do you need life insurance to help take care of loved ones? Do you need car insurance because most states require it? If you are older, consider purchasing long-term care insurance.
The One Thing All People Hate
All people hate paying taxes. Whether you are rich, poor, or in the middle, no one wants to use their hard-earned money to pay taxes. It is, however, an unpleasant fact that you must pay them.
If you haven’t planned for this, come tax time, you may be caught off guard with a surprise bill for owing money to the government, state, or federal authorities. If you don’t pay on time because you don’t have the money, penalties and fees will add to your bill.
You must review what you paid in the prior year, how much more you earned for the current year, and any other relevant financial information.
Last But Not Least
All this may seem overwhelming to you. It is always a clever idea to consult with a certified financial planner. You may find that the investment is worth its price.