Financial planning is a smart thing to do.
Everyone should do it. Everyone needs to do it. Not everyone takes it seriously enough to do it.
Let me ask you a question.
Do you shudder at the words budget, savings, credit score, debt, investments, retirement, 401(k), IRA, emergency funds, spending, credit cards?
For a lot of people, those are some scary words!
Fear around those words come from the fact that many people don’t actually know what to do about their money. I understand the fear surrounding those words.
When it comes to finances, there are plenty of words and phrases floating around like the ones above. That just proves that there are plenty of things to think about when it comes to finances and creating a personal financial plan.
But wait. What exactly is a financial plan and why do I need one?
Great question. In the simplest terms, a financial plan is understanding your current income so that you can help plan for your future income. The more you understand your financial plan the better you can be prepared. That’s why it’s so important to really spend time making a financial plan that works for you and for your family.
Whether you’re in your 20s or your 60s, it can actually be quite simple to create a financial plan. Now, of course, a lot of factors go into making a financial plan that works for you and your family. No two to family’s finances are the same.
Regardless of what your finances look like, I want to encourage you to spend some time creating a financial plan, regardless of what age you are or where you’re at financially in life.
So let’s boil down some necessities to help you kick start your super simple financial plan.
Create a budget
Of course, creating a budget has to be the first thing on this list.
Everyone needs a budget from teenagers all the way to people in their retirement. Personally, I think budgets are cool and sexy. But, I know that a lot of people feel differently about budgets.
Budgeting can be one of those scary words that people tend to ignore and avoid. Trust me when I say that having a budget is one of the most helpful tools you can do for yourself and your family when it comes to your money.
If you’re like me, then you like your money and want to keep it. To make sure that you have the best control over your money then make sure you have a solid budget.
For your financial plan, if you don’t have a budget then you really don’t have your foundation. If you aren’t sure how to start a budget here are my recommendations.
Get into the habit of saving money first
Saving money. Ugh. *rolls eyes*
Who likes saving money? Well, the truth is I do. And I know a lot of people do.
I also know that a lot of people not only don’t like to save money, but they’ve never made saving money a priority. I actually have a really good friend who didn’t open a savings account until her late 20s. And by late 20s I mean 28 years old.
I was always under the assumption that everybody had a savings account and that everyone actively saved money. Apparently, not everybody learns to save money at a young age as I did.
So, why should you get into the habit of saving money first?
Many people think that they should save money after they spend their money buying everything they want. I believe that after you have successfully paid all of your bills for the month, the next step is to set aside money to save and then spend money on things like social outings. That way saving money is a priority each and every month.
There are a few ways to make sure that saving money becomes a habit. My favorite way is to automate savings to your bank account. You can set up a feature where your bank automatically transfers money from a debit account to a savings account each month. You can even set a fixed rate.
For example, if you want to save $100 every single month, you can tell your bank to transfer $100 from your debit account to your savings account every month on the same day.
Another way to make sure you’re saving money is to add a savings goal in your budget.
Remember that budget I talked about earlier? Feel free to add in a line dedicated to saving money. Just like you have to pay your rent, your car insurance, and buy groceries, add a line in your budget to where you have to put money into your savings account.
I highly recommend that you put saving money as a top priority for your super simple financial plan.
Build your credit
Credit! This one is fun because for some people, credit is really good and for other people, credit is really bad.
It’s my goal to help encourage everyone to have really good credit. So, when is the best time to start building credit? The sooner the better.
Building credit doesn’t mean making purchases on a credit card.
While that obviously helps, there are plenty of ways to build an excellent credit score. If you want to take the credit card route, shop around first to make sure to find the perfect credit card for you.
Not all credit cards are created equally.
You’ll want to select a credit card that either has a great reward system in place for cashback or for travel rewards. You’ll also want to select your credit card based on the APR and the limit that you can potentially qualify for.
If you’re looking to build credit without necessarily using the credit card route, there are plenty of ways to do so. Below are a few of the most popular ways to build good credit.
- Rent an apartment
- Have your own phone plan
- Work a full-time job
- Make consistent payments on your student loans
- Lease a car
Beware of credit cards
One more thing on credit cards before we can officially move on from it.
Credit cards can be extremely dangerous. I know people who have run up their credit cards just by eating out all the time. It might seem fine to spend $10 here and $20 there, but left unchecked that credit card debt can get you into a lot of trouble.
It’s important for your simple financial plan that you understand how many credits you have, how much debt you owe, the APR, and then set a deadline to get everything paid off.
The less debt you have the better.
And if you feel like you’re someone who can’t trust yourself with credit cards, try using only cash or your debit card. That way you aren’t spending money that you don’t actually have. Nothing will ruin your financial plan like a bunch of debt.
Pay off debt
Not a lot of people can say they live a debt-free lifestyle. And, for the sake of this one, we won’t count on a mortgage as a debt.
When I say that it’s a good idea to pay off debt, I’m talking about credit card bills, student loans, and car notes.
Typically, there are two ideas of debt. Some people considered certain debt as good and other debt as bad. I personally like to think about all debt as bad because that’s money that you owe to somebody else.
But if it makes you feel any better, good debt is student loan debt, a mortgage, and car debt. Bad debt is credit card debt.
If you are in debt right now, make sure to write into your simple financial plan a way to get out of debt as soon as possible. That means that if you need to pay off your student loans to get out of debt then make it a top priority. Or, if you need to pay off your car note, make that a priority.
Establish a retirement now
You might be thinking that retirement is too far away to be thinking about it right now. While that might be true, it’s never too soon to start preparing for your retirement.
The first step is to find out if your job currently provides a way to build your retirement. If they do, find out the perks that they offer. For example, does your job match the amount that you put into your retirement from each paycheck? If so, what is the match percentage? Are you maxing out that percentage?
Those are the kind of things that you want to get the answer to a soon as possible.
If your job does not pay into retirement, then you want to set up some sort of method to start saving money. One way to do that is to get a Roth or a Roth IRA. These are accounts that will help you set aside money so that when you retire you can have hundreds of thousands of dollars if done correctly.
Don’t screw your 60-year-old self over. Make sure your retirement is an important part of your simple financial plan.
Establish an emergency fund
Emergency funds are extremely important.
All you have to say is the word coronavirus to know why it’s important to have emergency money set aside. Emergencies are events that we can’t prepare for and we can’t prevent.
The only thing we can do is our best to make sure that we have money set aside in case something were to happen to our income. The best thing to do is to establish your emergency fund right now.
It doesn’t matter what bank you do this with or where you’re stashing your money, just make sure you are doing something.
And don’t forget to write in emergency money into your financial plan because emergencies will happen.
Analyze your spending habits
Part of your financial plan is understanding how to prepare for your future.
That means that you need to first understand how you typically spend money. If you are the type to spend money recklessly, you’ll probably want to either write that into your financial plan or start to make changes.
If you’re the type of person who is pretty cautious with their money, then you might be able to plan on having a little bit more money in the future. I suggest that you look at your online banking for the past three months to see any reoccurring spending habits so you can notice what your patterns are.
You’ll want to look for things like how often do you eat out, how often you go to the grocery store, the type of items you’re spending your money on and so on.
This activity is always surprising to people because you learn things about yourself that you never really knew before.
When you’re creating your personal financial plan, it could be easy to see the big picture only if you want to buy a house or a car or save a certain amount of money for retirement. It’s possible to get so focused on that large number that you forget to have fun.
Don’t forget to travel, go on vacation, buy something for yourself, buy something for others! Life is stressful and money is fickle.
Don’t let it control you. Instead, make sure you are the one who is in control of your money. Having a simple financial plan is a great start to make sure that you control your financial destiny.