It’s a common myth that people should pursue financial planning when they reach a certain age or earn specific income amount.
Financial planning is crucial for all types of people as they all have financial dreams and needs. Financial planning can help them meet goals and create a useful and practical strategy for achieving them. An effective financial plan gives one the right roadmap for objectives.
Most people who are successful at achieving financial goals are those who create a financial plan and stick to it. Following the right steps is the crux here.
Top 10 steps to create a practical financial plan in 2018
- Figure Out What is Important to Your Financial Goals
Before creating a plan, understand your goals. Of course, all want to save enough money for retirement, to buy a home or to buy a car. But one needs to balance between short-term goals and long-term goals. Perhaps you want to plan a trip abroad or plan an expensive dinner for an anniversary.
Be specific about your goals and then can ensure your plan includes all the goals. Ensure they are SMART goals (Specific, Measurable, Achievable, Relevant, and Timely) too.
- Create a Realistic Budget
In order to achieve goals and objectives, you need a realistic budget that accounts for all expenses. After getting through monthly expenses, do not overlook insurance, taxes, investments and the like.
Your budget should include the basics of your income and utilize it on a weekly basis. Come up with a practical framework with a budget that is aligned to fixed income from different sources.
- Embrace the 50-20-30 Rule
Financial planning can be efficiently done with the 50/20/30 rule which allocates 50 percent of income to essential expenses like housing and groceries, 20 percent allocated to savings like retirement planning and emergency fund and about 30 percent allocated to shopping, entertainment, and other lifestyle choices. This pattern helps in creating outflow buckets for specific needs with a tweak in the percentage of expenses depending on priorities.
- Invest in a Lucrative Life Cover
One should have a life cover, which is at least 10 times of annual income. It all depends on one’s age, financial dependencies, existing wealth, etc. One should buy life insurance through a term insurance plan that guarantees low premium, and a perfect high-cover protection plan where the premium is allocated only for risk coverage and covers the mortality risk.
- Design Your Portfolio According to Needs
Your investment portfolio should be dependent on the basic mix of stocks, investment plans, and other conservative plans. By putting the investments in one basket, the risks are greater than ever. Always diversify the portfolio in different funds and keep reinvesting until the money is required for your needs.
- Prepare for Financial Emergencies
Check out our income for each month, after taxes and even get the contributions for retirement out of the way. Subtract monthly savings from that amount and that amount will provide you with a reasonable estimate of monthly spending on an average. One should have an emergency fund that spans 3-6 months of expenses. If your position is secure, you should at least have a backup of 3 months expenses. Preparing for financial emergencies especially in case of an unforeseen expense or a loss of job needs to be taken into account. Financial emergencies can also crop up during tax time when you have to save money to pay taxes, if not planned earlier.
- Plug Holes in Insurance Coverage
Every person needs a variety of insurance coverage include health, life, long-term care, auto, gadget, and home. Health, home, and auto insurance are a must. You also need to have a good disability insurance if you are part of a workforce and also secure your home with life insurance if you need your home to be taken care of in case of your death. Buy long-term-care insurance if you have about $1 million in savings and heading towards retirement.
- Decide on House Expenses You Can Afford
Banks want borrowers to limit monthly mortgage payments, especially property taxes and insurance, to 28% of monthly income before taxes. The house size and installments should be limited enough so that your income could manage it easily. Investing in a house beyond capacity is a strict no-no for maintaining a low risk of failure in any way.
- Estimate College Costs
It costs a bomb to study in a state university, and even more for studying in a private college. With the number of children in the house, it is evident that there would be high costs involved to send each of them to college for four years. Multiply the fees by 4 to arrive a tentative cost involved per child for sending them to college.
- Check Financial Aid Eligibility
One should be sure of the college aid that estimates your “expected family contribution” based on college costs on an annual basis. Colleges should provide enough financial aid to cover the difference in contribution and annual costs.
There are various factors in saving money for tax purposes, retirement funds, college education of your children and much more. Every financial plan should be aligned with one’s income as well as financial goals and objectives. Creating an effective financial plan for all expenses can save you from a lot of trouble too, especially when you have to save enough for paying taxes too.
