Your financial plan is designed specifically for your life and goals, so no two plans are alike. For your plan to have the flexibility to change as your priorities do, it needs to be built on a solid foundation. Understanding and following a few basic steps can help improve how you handle your finances now, and down the road.
Step 1: Understand Your Cash Flow
If you’ve ever gotten to the end of the month and wondered, “Where did all my money go?” you’re not alone. Give yourself a financial checkup by filling out a simple budget worksheet and adhere to these principles:
1) Pay yourself first-Save before spending,
2) Track all your expenses-use an app or budget worksheet,
3) Pay with cash or debit-card,
4) Make tough choices-spend less or generate more income.
Step 2: Protect Your Family, Income and Assets
Managing risks is a key element of a sound financial plan. Be sure to leverage life insurance, health/disability insurance, property/casualty insurance and eventually long-term care insurance.
Step 3: Develop a Savings and Investment Plan
Money needed in 0-2 years–Save through high yield money markets or saving certificate deposits creating an emergency fund. Money needed in 2-7 years invested in brokerage Etf’s, stocks, bonds, mutual funds or 529 plans. Money needed for retirement, invest in Roth IRA’s/Traditional IRA’s, 401k/Roth 401k or Health Savings accounts.
Step 4: Create a strategy to reduce Debt
Take an inventory of all your debts. Inquire if you can lower or negotiate any interest rates. Determine if you can put extra money towards debt without sacrificing other saving and investing goals. Pay the minimum first on all debts then devote any extra money to the highest interest rate first. There could be times where paying extra on debt may not be the best move like paying more on a low-interest rate mortgage.
How should you allocate your spending to be on track? Follow the 20-60-20 Rule:
20% or more of your income should be saved or invested. Always ‘pay yourself’ first. Save first, then spend.
60% of your take-home pay should go to essential expenses. Housing (<30%), transportation (<10%), groceries, (5-10%), insurance (<10%), children (5-15%) and other debt payments.
20% of your take-home pay can be used for discretionary expenses. Dining out, entertainment, gifts, shopping and vacations can all be a priority, including paying extra on debt repayments.
Remember, money management and financial planning are lifelong processes. Your cash flow situation will change over time, so with each life event (job change, marriage, children, etc.) you should re-examine your cash flow and adjust accordingly.
Now that you’ve begun building a strong financial foundation, the next step is to develop a financial plan. Having one personalized for you can help you reach all your goals and reach a new level of financial confidence!
