A Step-by-Step Guide to Build Your Own Financial Plan
Financial planning is a tricky subject to many. People tend to overlook the importance of planning their finances and often instead choose to live above their means.
Credit cards are a perfect avenue for people to overspend and live beyond their financial capabilities.
I remember, in the past, I never had a financial plan and was happy to live from salary to salary. However, at some point, the realization comes in — the money I earn should serve a better purpose and bring financial security in the future.
Maybe you’ve tried creating your financial plan, or perhaps you haven’t started it. Don’t worry. I’ve put it all in one place for you. Just start with one task and keep going.
Set financial goals
It’s always good to have a clear idea of why you’re saving your hard-earned money. Think it through and list down several things that come to mind. Your goals can be long-term as well as short-term.
No matter what your goal is (short-term or long-term), having it will help you create a better financial plan.
Create a budget
Now list down all the income sources you have and count how much income you get every month. All types of income (no matter how small they are) count.
Similarly, list down all the fixed expenses you have, such as rent/mortgage, petrol, gym membership, phone bills, utility bills, donations, subscriptions, groceries, etc. — basically, everything that drives your money out of your wallet.
Once you know your income and your expenses, try assigning monetary values to different categories. For instance:
Once you set your budget, try to stick to it and avoid moving money from one category to another. If you have unused money in one category, better keep the balance for the next month. Likewise, if you overspend in one category, assign a lower budget for the next month.
Build an emergency fund
Life can be unpredictable, and you should be ready for an emergency. Having financial means to sustain yourself financially in difficult times is essential. Ideally, you should save at least three times your monthly salary and keep that money untouched in your emergency fund.
If you have a lot of debt (credit cards, student loans, car loans), pay off these first and allocate your budget based on the remaining balance. The last thing you want is to keep the debt growing. You know that the interest charges on your debt might be very painful and will cause you to lose much more money.
Protect yourself with insurance
Get insured to avoid unexpected costs in case something happens. Health and personal insurance are the most important ones that you should get sorted out first. If you can afford it, get insurance on your house in case burglary or fire happens.
Plan for retirement
Even if it’s a long way off, think about what you want your money to do for you when you retire and create a plan to make it happen. Keep in mind that you won’t be able to work and earn a salary forever; thus, having a clear plan when you are over 60–70 years old is very beneficial.
Investment while young is a great way to start saving and making your money work for you. The younger you start, the higher your risk appetite can be and the more you’ll be able to contribute to your retirement.
I always like to think that I want to retire at least five years before the official retirement age. It doesn’t mean I will; it just helps me to put a more robust financial plan to achieve the target amount I wish to retire with.
Create an estate plan
Protect yourself and your loved ones with a will. You don’t have to be wealthy, old, married, or a parent to need an estate plan. An estate plan is a critical component of your financial plan, and it also lays out who makes financial and healthcare decisions for you if you can’t make them yourself.
Moreover, you will be sure that your assets and possessions will be distributed to people who you want to inherit. Having a will will also help you save on execution costs and prevent assets from being frozen.
Isn’t it simple? Once you finish, keep your financial plan somewhere accessible to you, and don’t forget to review it regularly. The reviews are essential to check whether you’re on the right track and make any amendments should your life change.
You should review your financial plan if your income changed significantly; if you changed your job, the family dynamics changed (e.g., you got a newborn), you inherited some assets or lost a source of income.