Financial Planning in 5 Easy Steps

Daniel Penzing
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Read on to find out how to create a financial plan.

The best way to save money is to plan for events in advance. Knowing what will happen down the road helps in planning for the future. Have you ever been disappointed at the last minute when the money you were planning to spend has suddenly become unavailable?

In the world of finances, events such as purchasing a home are complicated. You should probably have an idea of how much owning a house will cost you. You should always review your financial statement and be prepared for a financial emergency. In the midst of these financial problems, many people tend to forget to think about the future. Some even refuse to plan for their future because they believe that it is planning for their death.

The five easy steps in planning for your financial future are:

{1}. Planning.
This is the first and most important step to reaching a successful future financially. You should know how you want to spend money in the future and how much money you need.
{2}. Saving and Investing.
We all know that saving and investing is the most obvious way to become financially stable. Save and invest everything you can today so you won’t have to spend more money later.
{3}. Preparation.
Prevention is better than cure. Being prepared helps you from spending more money when something goes wrong. You should be financially prepared for any event that might happen to you.
{4}. Prioritizing your wants.

Step 1: Know the Flow

Savings accounts, IRAs, 401(k)s, stocks, bonds, mutual funds, and other financial products are all investments that channel your funds into specific activities.

However, it is critical for you to understand where your money is going: Is it being used to pay off debt, for investment, for living expenses, or for your future? Only when you know the flow of your money, you can attach real meaning, purpose, and results to your financial planning ideas.

To get the full picture, you will need to have a clear idea of how much money you are spending on basic necessities like housing, food, and transportation. Be sure to take inflation, taxes, and other variables into account.

Next, you will need to save for the future, such as college education and retirement.

Finally, make sure you save enough money to meet your short-term financial goals.

Once you make the money you save flow to the right place, you can adapt the level of savings that is right for you.

Step 2: Set a Goal

After being married and making some financial mistakes yourselves, you have now decided to get your act together, save and grow your money and plan for the future.

You’re determined to make this the start of your life together, and you have no intention of ending up in financial chaos again. This time, you want to start with a goal in mind.

You start a spreadsheet, and enter your goals.

Maybe you want to go on a long holiday trip around the world, buy a bigger house, or a car. Whatever you decide to enter, make it specific.

Don’t think at the moment – just put down what you want.

Once you have your list laid out, you need to start asking some serious questions.

How much do you need to save, and how much will your longer-term goals cost?

This is the first time you are sitting down and looking at your financial goals and your future potential income. You want to make sure you lay out a plan that matches the both of you.

There are many websites that help you with this.

Sit down with a coffee and look at your budget online. You can enter the goals in a variety of ways, and they will help you estimate how much you need to save.

Step 3: Make Sure Your Time Frame Is Realistic

In step 3, you should define the time frame for your financial planning. This step is very important because it is easy to get carried away with thoughts of the future and to forget what you really need to be doing.

Refer back to your answers from step 2. If what you thought you wanted at this time of your life five years from now is vastly different than what you think you want in five months from now, then you probably need to re-evaluate your time frame.

If there is a lot of contrast with your thoughts on the present versus your thoughts about the future, reorient yourself now by writing a list of what you want right now. This may include items such as buying a house, fostering financial security, or buying your first car. It doesn’t matter what it is, just make another list with the top items on it that you want now.

Now review the two lists. Do you have items on both lists? Then you are in the right area; if not, it is time to reevaluate where you are now and where you want to be later. This is a good time for outside assistance, so think about engaging a financial planner if you haven’t already done so.

Step 4: Establish Your Asset Allocation

It is important to create a diversified portfolio of investments that can help you avoid significant losses during bear markets. The investment risk that you can tolerate is highly personal. If you are starting to save late in life (or have funds outside of your 401(k) and IRA accounts), you may be more willing to take risk. If your primary concern is preserving capital, you may want to be more conservative.

Asset allocation will help you smooth the ups and downs of the stock market. Although your provider will set the default asset allocation for your 401(k), you can select a different portfolio if you like.

You may also elect to allocate a portion of your investment dollars to other assets such as bonds or real estate. Funds can also be designated to a target retirement date. This option allows your provider to tune the asset allocation so your portfolio is more diversified than would otherwise be possible. For example, according to Vanguard, a 40 year old investor has 60% of an S&P index fund invested in stocks. A 35 year old investor has 75% of the fund invested in stocks. A 20 year old investor has just 30% of the fund invested in stocks and a lot more invested in bonds and cash. When the young investor retires in 40 years, all of their assets will be in bonds and cash, significantly reducing the risk associated with the portfolio.

Step 5: Keep Checking

In the modern world, we are constantly inundated with messages and notifications and distracted from our money matters. Just setting dates for regular reviews can help with this, but put them in your diary and calendar to remind yourself!

Finally, although you may have undertaken several strategies to increase your income or keep your expenditure under control, stick to the strategies that are successful and keep the ones that aren’t.

The key to any financial strategy is one that is sustainable. You want a cliff edge with as many financial steps as possible. If your financial strategy is a good one, you’ll find that the steps become smaller and smaller as you follow it.

Remember to keep checking your finances, be realistic about your financial expectations and, most importantly, be consistent.

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