How to Create a Financial Plan
You need a financial plan. Creating one is much easier than you may think. Even if you work with a professional, a plan can go a long way towards sharpening your goals, making your meeting with a financial planner much more useful.
If you’re not sure where to start, just follow these easy steps.
Take stock of your current income and expenses. Categorize your expenses to see where your money is going. Most financial institutions make this process easy by providing details on all transactions. Include credit cards in this first step as well. Go back several months to give you a clear idea on just where your money is going. This process can be an eye opener, so be prepared.
Write down some basic financial goals. They can be as simple as saving to buy a house, or wanting to retire at age 45. Be as specific as possible, and start doing everything you can to realize those goals. If your main goal right now is to buy a house, start driving around, looking at neighborhoods, or attend an open house or two. These simple acts will make buying a home less abstract and more of a goal that you are actively working towards.
Create both short term and long-term financial plans. While your home-buying goal is short-term, wanting to retire at age 45 will require a more specific financial strategy. Start taking the steps needed to attain your short-term goals. Look at your current income and expenses. If you’re spending hundreds of dollars eating out each month, make a commitment to dining in more. If you have significant credit card debt, funnel some of the money you’ll be saving eating in directly to those credit card companies and pay that debt off. You’ll reach your home-buying goal faster, while improving your credit score as well.
Put money in a savings account. Whether you’re saving for a down payment on your new home, or just want a cushion, it’s important to maintain some liquid assets for an emergency.
Contribute to your employer’s 401(k), if one is offered. If you’re self-employed, or your employer doesn’t offer an investment option, open a Roth IRA. Both play an important role in that early retirement goal you’ve set for yourself.
Be sure your plan is fluid. A financial plan is a living document, and should be updated as your circumstances change. Events like marriage, divorce, a job change, of the birth of a child can have significant impact on your financial goals, and your ability to attain those goals. Make sure your plan changes accordingly.
As your plan and your goals expand, consult with a financial advisor who can help you with larger goals such investing in the stock market, early retirement, or financing a business.