If and when you’re ready to get your financial life in order, building a financial plan is the first place you’ll want to start. Whether your goal is to purchase a home, invest for retirement, or save for a rainy day, a financial plan will help you reach them by creating a framework and timelines that you can easily follow.
Most importantly, a proper financial plan enables you to focus the way you manage your money (and time), so you can do the things you want to do in your life. Without one, your financial goals may seem far out of reach, and there’s a good chance that you will also be under-prepared to deal with unforeseen events or circumstances.
Here’s why getting started with building a financial plan is in your best interest.
1. Evaluate what’s working—and what’s not
Your financial plan will help you evaluate what’s currently working in your finances, and what isn’t. When you have big dreams and goals that you hope to accomplish, a financial plan helps to form a big, cohesive picture. We often refer to that as your blueprint or your roadmap.
When you evaluate your current money management and investment strategies, you may learn that better options exist for your unique goals. Even the smallest changes in your financial plan can make a big difference in your overall ability to grow wealth.
2. Easily define and prioritize goals
It can sometimes be challenging to define what you want from your money. Most people have multiple life goals and aren’t quite sure how to achieve all of them successfully. A financial plan can help with this. Your goals could include:
- Becoming mortgage-free
- Early retirement
- Funding a child/grandchild’s education
- Buying a vacation home
- Travel
- Leaving a financial legacy
Your financial plan will take a holistic view of your goals and should push you to set priorities and timelines. When you know what, why, and when you want to accomplish your goals, you can build your budgets and investing strategies in reverse to form the foundation of your entire financial plan.
3. Regularly manage a budget
Your budget is an essential part of making your overall financial plan work. Without one, you risk overspending and will find it difficult to reach important financial goals.
While budgeting can be tricky, it’s absolutely necessary in order to have financial success and security. A large part of your success will depend on your ability to take control of your savings and spending habits.
If you’re new to the idea of budgeting or need a refresher, using a monthly budget calculator can help paint a better picture of your current savings and spending habits.
4. Prepare in advance for significant life events
Having a financial plan will prepare you for the significant events and milestones in your life. Unless you plan for larger purchases and investments, such as buying a home, funding your wedding, or paying for your children’s education, you won’t be able to afford them.
If you plan for these life events ahead of time, you’ll be ready when they happen. And if they never do, you’ll still be better off financially because you’ll be debt-free with money in the bank.
5. Set-up an emergency fund
Financial planning is a great way to start saving for a rainy day and can help you manage sudden financial changes that can affect your life and financial health. The earlier you start padding your emergency fund, the easier it’ll be to handle life’s inevitable hurdles.
Being prepared for uncomfortable circumstances such as a job loss, an economic slump, or a death in the family, will ensure that you’re financially secure until you get back on your feet.
6. Efficiently manage debt
Having a financial plan makes it easier to find ways to save money and to find extra money to get out of debt.
Credit card debt, overdraft, and personal loans can seriously damage your financial health, leading to a financial mess. A financial plan will not only improve your financial stability but will enable you to better manage your money in order to achieve your other financial goals.
The Savvy Debt Payoff App is a financial tool that maps out a debt-payment plan for you by showing you exactly how you should be paying off your debts to save you thousands of dollars that would have otherwise gone to paying interest.
7. Establish a regular savings habit
To create long-term wealth, you must save with discipline. Essentially, this is known as your savings rate, and it’s arguably one of the most critical components of your financial plan. It’s also what you often have the most control over.
You can calculate your current savings rate by dividing your monthly savings amount by your monthly gross income (total income earned before taxes and other deductions). The more money you save each month, the more you can accumulate towards retirement, a down payment, your emergency fund, or any other financial goals you might have.
8. Properly oversee your investments
If your investments are scattered, and you’re unsure about where you’ve invested your hard-earned money, it’s time that you readjust your portfolio.
A solid financial plan will consider your personal circumstances, your goals, as well as your overall risk tolerance. It should act as a guide when you’re choosing the right type of investments for your specific needs.
9. Build a roadmap to retirement
Planning for retirement is probably your most significant long-term financial goal. Yet, the average person has no idea exactly how much they need to save to be able to retire. And if they do, their projections are usually way off, forcing them into later retirement. That’s why it’s important to start saving for retirement early in life.
A financial plan is crucial to understanding the level of savings needed to retire and live a similar lifestyle as the one you’re currently living. It will show you what changes you need to make to reach your goals, or if you need to adjust your retirement goals to be more realistic and attainable.
| *Tip* Use this free retirement calculator to determine your retirement age, retirement income, and what you can do to improve your retirement outlook. Just remember that this is meant to be a stepping stone and you should ensure it mirrors your overall financial plan. |
10. Calculate the correct amount of insurance
In case of unfortunate circumstances, health and life insurance ensure that your family members can maintain the same standard of living even in your absence. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.
Many people don’t understand how much life and medical coverage they should sign up for. A holistic financial plan will take into account your income, expenses, and goals amongst various other aspects to determine the optimal amount of coverage you need.
11. Manage your taxes with confidence
Even just the thought of taxes can be stressful—but it’s crucial that you understand how important they are and the role they play in your financial stability.
Carefully managing and planning for your tax obligations is a key element of a well-crafted financial plan. Essentially, tax planning involves trying to accomplish all of the other aspects of your financial plan, but in the most tax-efficient manner possible.
12. Reduce money-related stress
A financial plan helps to reduce your stress and gives you peace of mind. By following a financial plan as a guide to your expenses and savings, you’ll be able to sleep better at night knowing you have financial security.
Keep in mind that feeling financially secure about the future is as important as feeling secure in the present moment.
How you can get started
Creating your financial plan is the first step. You’ll then need to make a budget and break down your goals into manageable pieces, so they aren’t out of reach—remember to be realistic.
The most critical part of creating an effective financial plan is committing to following it. If you’re dedicated, your plan can help you make major financial decisions in each of the stages of your life while pursuing your dreams
