Building a financial plan is key to financial health. No matter how much money you make or how responsible you are, it’s almost impossible to reach your financial goals without a plan. Once you have a strategy in place, you’ll have increased confidence knowing that the decisions you’re making align with your goals. However, creating a plan that fits your specific needs may feel overwhelming. While there is no one-size-fits-all approach, there are a few steps on how to build a financial plan that apply to everyone. Read on to learn more!
Speak with a financial advisor at Modern Family Asset Management for assistance on creating a plan that works for your specific needs. Contact Us.
Create a Budget
Budgeting is the heart of any financial plan. People are often hesitant to create a budget because they associate them with deprivation—but that doesn’t have to be the case. Budgets are about prioritization. Rather than completely cutting out areas of spending, take into account what matters most to you. Start with the traditional 50/30/20 budgeting rule, which says that fifty percent of your pay should go towards needs, thirty percent towards wants, and twenty percent towards savings and debt repayment.
The key to creating an effective budget is understanding where your money goes—especially the thirty percent you set aside towards wants—and making sure that your spending lines up with your priorities. Also keep in mind that what’s right for one person may not be right for another.
For example, one person may realize that they’re spending a lot on eating out, so they reprioritize by cooking more meals at home. Another person who is passionate about trying new restaurants may be perfectly happy with what they spend on eating out, so they reprioritize other areas of spending to allow for this.
Manage Debt Responsibly
Another key aspect of any good financial plan is managing debt responsibly. You may have heard that if you have debt, you should do everything you can to pay it off—but this isn’t always the case. Not all debt is created equal.
Low-interest debt, such as a mortgage, is less important to pay off than higher interest debt, such as credit card debt. That’s because the higher the interest rate, the more you end up paying in the long term.
Higher interest debt means that you’re likely paying far more than the original price of the purchase. Once you’re out of debt, make sure you understand how you got there in the first place. If your debt came from credit cards, make sure you have a plan to limit your credit card spending going forward.
Build an Emergency Fund
An emergency fund is elemental to long-term financial health. Your emergency fund will ideally cover six months’ worth of expenses and can drastically limit the amount of stress in your life. Keep in mind that no matter how well you plan or budget, unexpected events will occur. By making sure you’re prepared for these, you can better handle whatever life throws your way.
Once you create your fund, remember, it’s called an “emergency” fund for a reason. This money should only be used when absolutely necessary. If you do need to use the money, make sure that you replace it as soon as you’re able to.
Save for the Long-Term
A budget helps you handle your finances from day-to-day, managing debt provides you with more flexibility, and an emergency fund prepares you for the unexpected. But no financial plan is complete without long-term savings.
Long-term savings are for major ticket items in life, such as a down payment on a home, college for children, and of course, retirement. How much you need to save for each of these will vary from person to person, but the important part is to start saving, if you haven’t already.
A financial plan is a fantastic tool that sets you up to achieve your financial goals while minimizing stress. If you don’t yet have a financial plan, the sooner you begin creating one, the better. For assistance, contact a financial advisor at Modern Family Asset Management. Our team knows how to build a financial plan that works specifically for you. We look forward to serving you!