Steps for a personal financial plan
It's never too early or late to begin financial planning.
Having a financial plan is a way to help you attain life goals. Many people mistakenly believe that a financial plan includes only investing for retirement. While saving for your golden years is an integral component of any financial strategy, you shouldn't forget other fundamental financial plan items like establishing a budget, setting financial goals, investing early and regularly, estate planning and saving for college. Regardless of your experience level, it never hurts to get professional advice on how best to reach your financial goals. Here are a few things to focus on in developing your plan.
Establishing a budget
A budget is the key to managing your spending and saving. If you don't follow a budget, you're likely spending more than you realize, and saving less than you could be. This monthly budget worksheet is a great resource for getting started.
Begin by tracking your spending for a month. The easiest way to do this is by going about your life as usual, writing down every bill you pay and item you buy, from groceries to your daily coffee. At the end of the month, compare what you earned with what you spent. Ask yourself: Were all my expenditures necessary? Did I live within my means? What can I cut out, or at least cut down on?
Next, balance and prioritize your expenses and needs. Obviously, some expenses are fixed, like food, housing and utilities. But when it comes to your other needs, figure out what you can do without — but be rational and reasonable. You can't cut out every seemingly unnecessary expense; a luxury-free budget is about as sensible as no budget at all. Completely depriving yourself could set off a seriously budget-damaging spending spree, and that doesn't help anyone.
Setting financial goals
Your budget will be easier to follow if you have financial goals that are important to you. Set some short term goals like paying off credit card debt, buying a new car or taking a vacation. Set some long-term goals that may include saving for the down payment on a home, retirement or your children's college tuition.
Once you've identified your goals, give yourself a timeline for achieving them. You'll then know how much of your budget to set aside each month, and the wisest investments to choose.
Review your goals periodically so they're always fresh in your mind. If you go off course, don't get frustrated and give up. Simply reassess and continue working toward your goals.
Saving regularly - even small amounts
Having a savings plan and starting with small actions today can lead to big changes over time. It's never too late to make saving a habit.
Many people don't believe they have enough money to become savers. But you don't have to save a large amount of money initially, or regularly. It's perfectly fine to start slow and small and stay small while you adjust to your new financial habit. If you're able to, have the money taken directly out of your paycheck — you probably won't even miss it. We call this "paying yourself first".
Your savings plan should include a strategy for increasing your contributions. After a few months of investing, when you've adjusted to living on less money, boost the amount you're saving up just a percent or two. You can also look for ways to save lump sums of money, such as when you get a bonus, a monetary gift or your tax refund.
Looking at estate planning
Although estate planning is very important, it can also be discouraging and hard for many to get started on the task. In a Caring.com 2020 wills survey, they found that fewer people are engaging in estate planning than in prior years. Too few people have estate planning documents in place, such as a trust or a health care power of attorney for financial or health care matters.
A will is a good place to start. Your will ensures that your assets, such as your possessions, home, other property, savings, and investments, are passed on according to your wishes after your death. If you die without a will — called dying intestate — your assets and possessions will be distributed according to your state's law. Chances are, your state will not share your intentions for dividing up your assets.
Your estate plan should also include a living will, which addresses the health care measures you would or wouldn't like taken if you're ever unable to make such decisions for yourself.
Planning for your child's education
Most parents would love to pay for their children's college education, but some may not think they could ever save enough to cover the ever-increasing cost of higher education. Thankfully, the federal and state governments have options for funding your child's education, such as the Coverdell Education Savings Account, 529 education savings plans, or custodial accounts under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA).
If you consciously make college tuition planning part of your financial plan, along with budgeting, estate planning and saving, you'll stay on the right path toward achieving a lifetime of financial success.