Use these tips to help you plan for this year, and the years ahead
According to a recent survey, 77% of Americans feel anxious about their financial situation. The same survey also found that the largest sources of financial anxiety for Americans came from “not having enough money to retire (68%), keeping up with the cost of living (56%) and managing debt levels (45%).”
The three situations listed above; saving for retirement, keeping up with the cost of living, and managing debt levels are all stressful and anxiety-inducing events. In fact, according to that very same survey, 58% of Americans feel that finances control their lives.
What is Financial Planning?
Financial planning is the practice of creating a strategy to help manage your money and achieve your financial goals. This definition can be applied to almost anything, whether you’re looking to budget for an entire year, save for college, or purchase a new TV.
No matter what your end goal is, a strong financial plan and concrete objectives can provide you with the building blocks for crafting a better tomorrow.
Budgeting
Before you start your financial planning journey, first start by making a budget. A budget provides a clear picture of your finances and how your money is spent and serves as the base of future financial planning.
Creating a budget can also help you save money right off the bat. Often when making a budget, charges and expenses that you have forgotten about or no longer need pop up and provide you with the opportunity to start out on the right foot.
The University of Chicago states “One rule of thumb… is the ‘50/20/30’ Rule: Set aside 50% of your paycheck for your needs, 20% for your savings and debt and 30% for your wants.”
How to Create a Budget
The first step in creating a budget is to understand your income and expenses. Expenses such as rent, insurance, and debt should always be accounted for before anything else. After you have accounted for all your needs, you can then begin budgeting for items and experiences such as clothing, streaming services or dining out.
Creating Financial Goals
The second step in crafting a budget is to list and evaluate your upcoming financial goals. These can easily be separated into three categories: short-term goals, mid-term goals, and long-term goals.
Short-term goals should be anything you hope to achieve in the next year, mid-term goals within the next five years and long-term goals within the next ten years.
Additionally, connecting your goals to a deeper motivation may help them become more achievable. According to Sarah Darr, head of Financial Planning at U.S. Bank Wealth Management, “Understanding the ‘why’ helps you become more committed and understand how the goals are associated with other goals.”
Defining Your Financial Goals Clearly
Yes, “to be richer” is great inspiration for beginning your savings journey, but for many people it may not be specific enough.
Specifying your goals, whether you write them down or not, helps to define what you wish to accomplish rather than an all-encompassing one like “to be richer”.
For example: “I am going to buy a new car this year. I will save 25% of its value for a down payment”, is a specific goal. Specifying your financial goals improves your ability to measure them and ultimately achieve them.
Measuring your financial goal is the final act in clearly defining your goals. The goal “to be richer” has no specific time frame or end date meaning tracking your progress can be difficult. Set specific dates for yourself and regularly check in on your progress.
Set specific dates for yourself and regularly check in on your progress.
Creating a Safety Net
One of the most important steps in planning your financial future is ensuring that you have a “just in case” plan, also known as a “safety net”.
A safety net is not a specific goal that you are saving for, rather it is ensures that if an emergency were to happen, you are able to continue without resorting to last second funding options such as loans and credit cards.
A good rule of thumb to follow when establishing a safety net is to save 3-6 months’ worth of expenses. That is a daunting number at first, but by setting aside small amounts each pay period, your safety net will grow larger and provide you with more runway if something were to happen.
Additionally, it is recommended that you keep your safety net in an account that is easily accessible, so that you don’t incur early withdrawal penalties. Often financial institutions will offer an “auto-transfer” feature that will take a specified amount of money and transfer it from one account to another; making it easier to save on a monthly basis.
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