If you've never engaged in financial planning and are unsure how to get started, this article is for you. A financial plan starts by evaluating your current financial situation and future expectations and can be created independently or with the help of a financial professional. In short, financial planning involves:
- Examining long-term financial goals and creating a strategy to pursue them
- Calculating current net worth and cash flow
- Analyzing personal and family situations, risk tolerance, and future expectations.
- Creating a financial plan that is comprehensive and individualized
As you gather information to begin your financial planning journey, we've outlined ten easy steps to help you get started:
Step 1: Think about the end goal. This first step is where you envision what you want out of life, your investment goals, and your timeline of when you'd like to reach them. Write out your short-term goals (two to three years) and long-term goals over several years to help track your progress as you move closer to reaching them.
Step 2: Understand where your money goes. Understanding your spending habits day in and day out is essential to help you track and organize your expenses. Using a debit card can help since cash is hard to track for everyday purchases. Your online banking portal can also provide insight into reoccurring and fixed costs and uncover unnecessary expenses such as unused subscriptions.
Step 3: Evaluate your net income. Your net income is what's left after your 401(k), Roth IRA, or other retirement savings, health insurance, and other benefits deduct from your paycheck. Your net income is the amount you have available each paycheck to invest, save, and pay living expenses.
Step 4: Calculate your net worth. To calculate your net worth, add up your assets first, then subtract your liabilities:
- Your assets: This may include a home and a car, cash in the bank, money invested in a 401(k) plan, and anything else of value that you own.
- Your liabilities: This includes credit card debt, student debt, an outstanding mortgage, a car loan, and any other debt obligation is as a liability.
Your net worth helps determine your overall financial health. If your assets exceed your liabilities, you have a positive net worth. Or, if your liabilities are greater than your assets, you have a negative net worth.
Step 5: Review all of your income sources. If you own a business or have income from multiple sources, you must include all income sources to understand your complex financial situation.
Step 6: Pay yourself first. Invest in yourself by automating your retirement savings contribution each month to help ensure the money doesn't spend elsewhere. A pay yourself first strategy can help create a disciplined plan that forces you to live within your monthly budget while saving for your retirement goal.
Step 7: Order your credit report. Understanding your credit score will help you determine your overall credit usage, how lenders view you, and if any discrepancies that need to be corrected. Also, if your credit score is in the moderate to high range, you may want to consider refinancing or consolidating your debt.
Step 8: Organize your financial life. Collect and organize all of your financial information to have it in one place. Data to collect includes life insurance policies, investment statements, bank account statements, your will or estate plan, and other relevant financial information such as spreadsheets and a copy of your financial plan. Consider keeping statements in a secure virtual vault or computer drive, and remember to shred any document on paper that you no longer need.
Step 9: Start using online tools. Budgeting and financial planning tools can help you sync your bank accounts, credit card accounts, and investment accounts to one place. Online tools enable you to track expenses, build your budget, and work towards your savings goals.
Step 10: Create a budget. Now that you have a clear understanding of your financial life, it's time to create a monthly budget to help you spend less and save more for your financial goals. Making meals at home, canceling unused subscriptions, shopping less, and only 'treating yourself' once or twice a month can help keep your spending in check.
While not all financial plans have the same format, they all do the same thing- provide you with valuable insight into your financial life to help you work towards your financial goals.
Ready to get started on your financial plan?
A financial professional can help you design a financial plan for your specific situation. Contact us to get started today!