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Financial planning is all about how a person manages and controls their own financial situation. It starts with dreams – provide aging parents with some financial help, retire early, travel, start a small business, or fund education for children or grandchildren.
There is a common misconception that only wealthy individuals undertake financial planning: they have a lot of money, so it`s better to manage it properly. However, all people should plan their financial future and take the matter seriously.
Given that 80 percent of Americans are coming up short in reaching their retirement goals, not so many know how to reach long-term financial success.
Let`s see how a proper financial planning can help to meet personal financial goals.
How to Start
Financial planning is a truly personal process. Every goal and dream depend on individual interests, family situation, and income. To achieve the best outcomes, it is highly recommended to develop a strategy that fits income expectations, considers risks, and ensures that most of the goals will be met.
Unfortunately, the future is unpredictable and changes could go in unexpected ways, so have a plan to keep your dreams alive. For that, the financial plan should be highly flexible and allow to protect personal assets and maintain usual lifestyle.
If a person does not plan their financial future, it means they rely on attorneys, bankers, and accountants. In this case, the person only knows how much is there on their bank account and estimated costs of their car and home. That`s not enough.
In addition to knowing how much money is left on the bank account, one should know how the aspects of financial life are working for or against achieving the goals. Financial planning is not just about saving.
A Personal Guide to Financial Success
The following 8-step guide contains important financial considerations and preparation to the success.
Step 1: Accept responsibility and accountability
Before one embarks on the journey to financial success, one must accept the fact that it`s a huge responsibility. There is no way one could achieve success without being responsible and accountable. And it really does not matter whether you have financial education or not.
Ask yourself the following questions to begin:
The purpose of these questions is to keep you deeply involved and attentive right from the beginning. Even the simplest aspects such as paying electric bills can teach you a lot about the importance of managing personal finances.
Step 2: Determine your financial goals
Remember that dreams we talked about in the beginning of this article? The ones about an early retirement, providing aging parents, and traveling? They are the next step towards personal financial success, and a very easy one.
All one has to do is set SMART goals: Specific, Measurable, Achievable, Realistic, and Time-based. Every major aspect of your goals needs to be determined to maximize the probability of implementation. For example, if you plan a trip to Europe, you need to determine its cost, including emergency fund, pocket money, tickets, accommodation, etc.
A good way to complete this step is to define goals and classify them. For example, your final results could look something like this:
Step 3: Create a cash management strategy
One needs to manage finances with confidence to achieve success. A cash management strategy can be very helpful here because it outlines the actions needed to be completed to have a good future.
In addition to identifying everyday expenses and ways to optimize them, it aims to balance maximum liquidity with higher returns and provide one with a clear understanding of financial needs as well as an emergency fund in case unthinkable happens.
Here`s an example of cash management strategy:
This strategy should meet your needs first and then the wants that you can afford. Focus on covering all expenses and consider reducing some if the income is insufficient to meet all needs.
One good online tool that can help you with calculating and budgeting is free Budget Calculator from Mapping Your Future website. It helps to create a personalized spending plan by comparing income and expenses.
Step 4: Follow the cash management strategy and stick to the budget
To begin implementing the cash management strategy, one needs to take a smart approach to spending and pay off debts.
First, spending. The most important thing to remember here is to spend less than your earn. Yes, it sounds really simple but you won`t believe how many people struggle with this essential rule. Begin by analyzing whether you are paid what you are worth.
For example, evaluate your position and skills and compare with average salaries and marketplace offers. If you find out that you`re underpaid, demand fair compensation. Even a few hundred dollars can have a profound impact in the long-term.
Even if a salary is high, one will not achieve financial success if one spends more and brings in. Of course, spending money is really easy but it can hurt financial stability, both in short- and long-term. Moreover, even a single cost-cutting decision can make a big difference. There is no need for big sacrifices, just eliminate some spending that has low value.
Second, pay off debt. A credit card debt can be a major obstacle to achieving personal financial goals. Those shiny little plastic pieces are easy and fun to use but it`s just as easy to forget that the spending is real and the debt might be mounting.
In some cases, paying the debt off is not done as planned. A failure to pay in time results in more spending because the interest needs to be paid as well.
So, pay off debt to start using the cash management strategy and plan your financial future. You will feel much more confident and calm once you do that. In contrast, having a debt to pay off will make good financial future more and more distant.
Step 5: Borrow smart
At some point, you may need to borrow money, so we will cover this area as well. It is absolutely critical that you borrow smart if you want to keep your financial stability intact. Homes, vehicles, and education are the common targets of those who loan, so let`s consider them in the planning.
Before you make any decision to borrow, ask yourself a couple of very important questions.
Be rational and objective when answering these questions. If you decide that the item is necessary, consider the following factors: interest rate, additional fees, and down payments.
Avoid loans with high interest rates because you will pay more for them. Look for loans with the lowest interest rates. Also, get a loan with a fixed interest rate because it ensures that the rate stays the same throughout the loan term.
Before borrowing, make sure that it fits into your monthly budget. You don`t want monthly payments to exceed your income.
There are many tools that can help you to make this decision as well. For example, the borrowing calculator from Money Saving Expert is a popular tool that provides useful guidance. Other tools include:
Step 6: Review your insurance coverage
Many people add insurance coverages to every loan they take in addition to their existing life and disability insurance. Sometimes, these coverages require too much money, which could be saved for other purposes.
If you think you are paying too much for your insurance or can drop some of the coverages, consider it. For example, if you are driving an old car on its last legs, dropping collision coverage makes sense until you purchase a new one.
At the same time, remember that you need to have enough insurance to protect you and your family members in case of a disaster.
Step 7: Retirement Planning
It is recommended to start saving for retirement in your 20s and 30s, so this area needs to be covered as well. This process is essentially determining financial goals and preparing to reach them. First and foremost, one needs to lay out the retirement goals and establish income needs to meet them. Then, one will be confident about the future.
The key to building personal assets is to make the most of the savings and investment opportunities such as stocks, bonds, IRAs, and other investment options. Also, you will need to take advantage of 401(k)s or 403(b)s.
The table below show how long the savings will last for different amounts and retirement durations (the results are produced using the average rate of return of 9.6 percent and the tax rate of 20 percent):
Step 8: Execute!
Put your plan into action. Don`t anticipate easy execution because sticking to it will be one of the hardest things you ever attempt in your life. Stay focused and determined to succeed in spite of circumstances.
Of course, making some changes to the plan is totally normal. However, avoid changing it the way that suits your mood because you will fail. Remember that the final outcome of this plan is debt-free life and good financial health.
One of the upsides of implementing the plan is the independence of having all the responsibility. You make all decisions and monitor the results. However, in some cases, consulting financial advisors might be a good idea if you do not have sufficient expertise.
The achievement of financial goals and plans will ensure a good future for you and your family. It is a difficult journey which begins as soon as you make a commitment to deliver on your promises to yourself. To succeed, make only reasonable and realistic promises.
About our guest blogger: Tom Jager is professional blogger. He works at Proessaywriting. He has degree in Law and English literature. Tom has written numerous articles/online journals. You can reach him at G+ or Facebook.