While the world may feel chaotic as the coronavirus pandemic continues to disrupt daily life, there’s no better time to get a hold on your finances. The future may seem uncertain, but having a strategy for managing your finances will help navigate whatever lies ahead.
If you’ve never created a financial plan, here are some commonly asked questions to get you started.
What Is a Financial Plan?
A financial plan outlines your financial goals and how you can plan to reach them. Possible goals can be paying off debt, saving for retirement, sticking to a monthly budget, or creating an investment plan.
These kinds of financial strategies are not just for wealthy people. Anyone who’s interested in taking charge of their finances and working toward long-term goals can make a financial plan by either working with a financial planner or creating one themselves.
What’s the Benefit of a Financial Plan?
The benefits of a financial plan are many, but the most important is that you establish control over your money and grow in confidence as you stick to a budget, save, and invest wisely. Financial plans can look decades ahead while allowing for flexibility for big life events such as the loss of a job or a child’s wedding.
How Do I Get Started Creating a Financial Plan?
Whether you work with a certified financial planner or build your own financial plan, your first step should be writing down your financial goals. You’ll want to consider both short- and long-term goals, such as a short-term plan for paying for a college tuition in the next five years or retiring decades from now. The more specific you are, the more you can define your financial strategy.
Start by writing down your financial goes for the next five, 10, and 20 years. Think about how much you’d like to save, what big (expensive) life events are coming up, and how much money you’ll need to fund the retirement you dream of. The more detailed your goals, the more motivated you’ll be to prioritize and follow through with them.
What Documents Do I Need to Create a Financial Plan?
To get an accurate overview of your financial situation, you’ll need to review documents detailing everything from your mortgage to your retirement savings account. As you evaluate these documents, you’ll gain a better understanding of your spending history, income, investments, and liabilities. This information will give you a strong foundation to work from as you build a realistic financial plan and work toward your goals.
What Kinds of Goals Should I Consider Including in My Financial Plan?
While every financial plan is personalized, it’s beneficial to consider goals that will strengthen your savings and help you reach your financial goals. Here are some examples.
Preparing for emergencies. Financial experts recommend building up a savings of three to six months of expenses in case of a catastrophe such as a sudden job loss. This savings should be a priority—as COVID-19 has shown, financial situations can take a turn for the worse unexpectedly. A savings buffer will help you pay bills if you are suddenly looking for a new job or facing cutbacks at work.
Dealing with debt. If you have significant debt, your financial plan should prioritize paying it off—starting with high-interest loans or balances such as unpaid credit card debt. Paying off these balances will free you from paying interest on money you’ve borrowed and free up more cash for you to save or invest. You can approach this goal from several angles, including taking out a debt consolidation loan or directing money from a second job toward loan payments.
Retirement savings. No matter what age you are, it’s wise to save for retirement. The younger you are, the more benefit you will receive from compounding interest that will quickly build your retirement account. One way to quickly grow your retirement savings is to enroll your employer’s matching savings program.
Big purchases. If you are considering an expensive purchase, such as a second home or a new car, you’ll want to not only save for this purchase but also build up your credit so that you’ll qualify for a good loan. You can do this by paying bills on time and paying off high-interest debts.
How Do I Stay Motivated to Stick to My Financial Plan?
Financial plans can be daunting, especially if you’ve never had one before. Instead of becoming overwhelmed, focus on small goals that serve as milestones on your journey toward financial health. You’ll find that small victories can snowball—paying off a high-interest credit card balance will free up more money to invest, save, or pay toward other debts.
Once you have a plan in place and are following it, you’ll gain a new sense of control and confidence as you build savings, pay off debt, and being to shore up your finances against unforeseen circumstances.