Many people do not understand the basics of sound financial planning. Financial planning can be pretty intimidating if you don’t know where to start. If you stay focused and commit yourself now you can have a sound financial future free of debt and a comfortable retirement and a home paid off well before you retire. Your financial plan should include your goals, dreams and factor in your expenses both the stable and expected expenses and also situational expenses. Situational expenses include saving for your next car, you may have a very good car right now that is not in need of repairs or replacing but sooner or later it will give out on you. Pre-planning for life’s big expenses helps us to avoid debt and be better prepared for all of life’s challenges.
Financial planning is the long-term process where you manage your finances in such a way as to realize all of your dreams and goals while navigating all the financial barriers and pitfalls we all face in life such as unexpected expenses. It takes dedication and will power to properly carry out a sound financial plan since all planning starts with a healthy budget. Weather you want to save for college, your dream home or retirement it starts with saving and possibly investing some excess money to earn multiple streams of income. In order to plan for your goals you need to lay them all out and figure out roughly how much it will cost to realize that goal. Possible goals include:
Where you want to live and saving for the down payment, points on the mortgage to reduce the long term debt of a mortgage and planning to pay for the monthly payments. You also need to think about what if you lose your job, will your mortgage be insured for loss of income or will you set up a special savings account that will have several months worth of mortgage payments saved up in the event that you lose your job or income.
This includes all of the expenses that go towards your entertainment and that which enriches your life such as travel. Everyone needs these things and they should be factored into any well written financial plan.
You need to figure out what kind of life you want when you are retired. The rule of the thumb is you should save and invest to have 70% of the cash you make monthly now for retirement. This means when you are retired that your income would be 70% of what you make now. This can be achieved through setting up multiple investments and savings for retirement such as 401ks, Roth IRAs and stock investments to supplement your Social Security payments. Planning on having only social security is setting yourself up for a lousy retirement.
How you plan to increase your income weather this be due to raises at work, setting up investments, or starting your own business full time or part time.
Now that you have your goals and now that you know what amount of money you need for retirement comes the hard part. Budgeting and sticking to your budget, that’s the hardest part of financial planning. how we spend our money and whether or not we save for our goals determines if we have control over our finances. without a budget you could have serious meeting your goals since without a budget it will be extremely hard to fund those goals. It is far easier to spend money than it is to save it for when it is needed most.
To realize your goals you should start cutting out expenses. Anything you can do to cut down on expenses and divert to savings or better yet some form of an investment will help you reach your goals. Some things you can cut out or cut down on include reducing your cable plan, nights out on the town, or eating out less, and cutting down on picking up things that you do not need such as 7 dollar frappuccino. Unless you are very frugal chances are you have some areas you can cut down on to put into savings and investments. You can budget for entertainment and other expenses. You also need to cut down any debts you have and make a plan to pay them off as early as possible. Budgeting is not fun, but the effects of it are everlasting and rewarding. People who learn how to budget well always land on their feet after unexpected life events and expenses and always seem to be ahead in life.
Remember that financial planning and budgeting while it can be very hard can be a life saver. Those who budget and put away savings and who pay off their debts and manage their credit well end up with excellent credit. They also manage to weather with ease life’s unexpected events such as unexpected layoffs, becoming sick or hurt, when your car needs serious repairs, major home repairs such as flooded basements or a new roof, or spending $2000 at the vet because your dog got ill you will be able to meet these expenses or qualify for a low interest loan. Not only will you qualify for low interest loans if you manage your finances well over many years, you will have the ability to pay those loans off quickly and with ease. So while the journey to financial freedom and responsibility is a hard long road, the rewards are well worth the effort.
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