Critical Steps to Creating Your Best Financial Plan

If you’re serious about achieving your financial goals, creating a financial plan is a great place to start. A financial plan is beneficial for anyone, regardless of age, income, or net worth. Though it may not be easy to create a financial plan that you will abide by, it’s an investment of time and money that you’ll thank yourself for later and one that will pay dividends–both literally and figuratively. Let’s go through the recommended steps in making that financial plan, including helpful tips and tools that can make the process as seamless as possible for you.

Creating a financial plan can help you meet your financial goals.
Creating a financial plan can help you meet your financial goals.

1. Start with an honest assessment

The first and most crucial step in creating a financial plan is to start with a complete and honest assessment of your financial situation. Rather than guessing or estimating, document every euro you made, spent, saved, or invested. Then, evaluate what areas you could improve. Where do you spend most of your income? How can you cut back on your spending to save and invest more?

2. Build your emergency savings first

An emergency fund can help prevent your financial plan from being derailed.
An emergency fund can help prevent your financial plan from being derailed.

While savings are far from glamorous and usually lose value every year they sit in the bank, an emergency fund is a crucial component of your financial plan. Emergency savings are so important because they can help keep your financial plan on track when the unexpected occurs. Without an emergency fund, an unforeseen expense could force you to pull money out of your investments at inopportune times, or worse, force you to take on bad debt. If left uninvested, your emergency savings fund could lose 2% of its value to inflation every year. Still, credit card interest can cost you 20% or even 30% annually, in addition to hurting your credit score and causing a massive headache.

3. Write down your goals

Your financial plan should be unique to you and your specific goals. Do you want to buy a house in the near future? Has it always been your dream to travel the world? Perhaps you want to retire early. Whatever your financial goals are, take time to think about what you’re working towards. Keep in mind that this can change. A financial plan isn’t something that you create and forget about. Set attainable goals that you know will satisfy you. These goals are meant to be reached, re-set, and reached again. You can even write down a list of short and long-term goals, prioritizing more pressing goals like paying off bad debt over investing in the stock market.

4. Work in reverse order

Let’s say you want to buy a house that costs €200,000. You want to save 20% for the down payment, which is €40,000. If you have €10,000 saved up already, and you want to buy the home as soon as possible, figure out how much you can save every year, and reverse engineer it from there. Are you able to save €10,000 per year, so you can buy the house in three years? If so, then you’ll have to save €833 per month. You can use this approach with any financial goal. Determine what your goal is and how much you’ll need to achieve it; then, break down the amount you need into manageable chunks so that you can stay on track in pursuit of that goal.

5. Use technology to your advantage

Budgeting apps are an excellent tool for creating a sound financial plan.
Budgeting apps are an excellent tool for creating a sound financial plan.

Leveraging technology can help you create and execute your financial plan. There are countless technological tools and apps that make financial planning more manageable, and everyone can–and should–take advantage of them.

You can use technology to automate credit card payments, savings deposits, and investments. Many people choose to have a certain amount of money automatically transferred from their paycheck to stay consistent with their savings and investing. By eliminating the need to move money from one place to another manually, you’ll be less likely to deviate from your financial plan.

Budgeting apps like Mint, Personal Capital, and Simplifi allow you to track all your financial accounts in one place, including setting goals and organizing expenses into different categories. These apps allow you to gain better insights into your spending and savings in a single place, and if you link your accounts within the app, all your transactions will update automatically. Particularly if you’re a visual learner, these budgeting apps will present you with a clear and concise picture of your financial situation.

Many budgeting apps can also be a boon to your financial plan by helping you get rid of unwanted and unused subscriptions. Nowadays, it’s all too easy to get stuck with subscriptions that automatically renew, costing you hundreds of dollars per year. Apps like Truebill and Bobby track and manage your paid subscriptions, so you can see what you’re paying for and eliminate any unnecessary expenses.

6. Other helpful tips

The essential part of creating a financial plan is setting realistic goals and sticking to the budget you create. It might sound simple, but it isn’t easy. Here are some helpful tips to keep in mind as you create your financial plan.

Give yourself some breathing room

It might be tempting to jump in with both feet and try saving every cent of your income. A financial plan is a long, slow game that favors discipline over passion. When creating your budget, remember to set aside some money for discretionary spending on what you enjoy. While saving is absolutely a top priority, a small portion of your hard-earned money should still be spent on the occasional treat for yourself.

Enlist the help of a professional

You’re likely already aware of the thousands of professionals whose sole job is to help people plan financially. If you’re the type of person who prefers to have someone else to keep you accountable, or if you’d like to learn from the expertise of an industry professional, you may benefit from consulting a financial planner or financial advisor.

Spend less than you earn

It seems silly, but most people are unsuccessful in spending less than they earn. In many European countries, people have a debt-to-income ratio exceeding 100%. These figures can be misleading due to much of the debt coming from mortgages. Nevertheless, spending less than you earn is a tenet that will take you far in your financial planning and propel you toward your goals.

Keep your credit up

Credit is an essential component of a financial plan because it allows you to make large purchases without saving up the entire amount in cash. One of the reasons credit is so important is because it allows you to use your existing cash to make more money than the cost of borrowing. For example, if you want to take a mortgage with an interest rate of 4%, and you invest the cash you would have otherwise spent on your home, the average stock market returns of 8-10% far outweigh the 4% you’re paying to the bank for the mortgage.

Life insurance and estate planning

No one wants to think about their own mortality, but to have a genuinely complete financial plan, you should have adequate life insurance and a will in place. Life insurance and a legal will are the tools that help protect your family and preserve your legacy. Having these safeguards in place can help ensure your family has enough money and provide the peace of mind that your financial plan will continue to work for your loved ones when you’re no longer there.

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