Through thick and thin, in good times and bad, the people who are successful at setting goals and achieving them, at least financially, are those who create a financial plan and follow it. The good news is that it’s not hard to create one and here are nine simple steps to help you do so.
Step 1: Discover Where Your Money Goes Now
The first and most important step to creating a financial plan is to develop a budget detailing where your money goes now. But before you can develop a budget, you must first know where money is coming in and where it is going out. Every time you spend money, save the receipt detailing what you bought and how much it cost. For a more tech-savvy approach, there are a number of personal finance apps and websites that can keep track of your spending for you, such as www.quickbooks.com or www.waveapps.com.
At the end of the week, spend half an hour going over your receipts and categorizing them. How much did you spend on food? On transportation? On housing, clothing, entertainment, healthcare, rent, mortgage, and utilities? At the end of a month, consolidate your notes. At the end of the next month, do the same, and at the end of three months, add everything up and devote some time to study the result.
For now, the job is only to figure out where your money is going. It’s also important to carry on this exercise for at least three months, if not four. You want to capture every expenditure you make, including those you don’t make every month; for example, car repairs.
Step 2: Set Financial Goals
Now ask yourself a simple question: “Where do I want to be 5, 10, or 20 years down the road?” But avoid generic answers like, “I want to be rich.” Answer with more specificity: “I want to own a house with the mortgage half paid off, and I want to have an investment portfolio of $500,000, plus a side fund of half that to help my kids get a college degree.”
Be realistic in laying out your goals, and be specific. You want to succeed, not fail, and you can do that only if you start out with attainable, specific goals.
Step 3: Prepare For The Unexpected With Insurance
Do you have a family? If not, purchase yourself some disability insurance to protect your earning power. If you do have a family, you’ll want some disability coverage and lots of life insurance to protect your loved ones. Adequate health insurance, auto coverage, and homeowners or renters insurance are also important. No matter your financial situation, insuring against the unexpected can help keep you on the right track should accidents create a financial burden.
Step 4: Keep an Eye on Your Credit
This is a big one, especially if you are looking to make large purchases in the future. You can’t get anywhere these days without good credit. At least once a year, check on your score with each of the three big credit agencies, TransUnion, Experian, and Equifax. You can also get a free copy of these reports once per year at AnnualCreditReport.com.
Make sure that there are no discrepancies between your records and the credit reports. If there are errors, you need to dispute them with the agency that is reporting them. Instructions on how to dispute errors are included at the agencies’ websites.
Step 5: Pay Yourself First
Here’s where guilty pleasures come back into the picture. The key to any savings plan is not income but expenses. Even if you earn a high wage, you can outspend your income, lots of people do. But if you control your expenses, on the other hand, it doesn’t matter how much you bring home, because it will be more than enough.
After looking at your list of expenditures, determine where you might be spending too much. Are you splurging on entertainment? What about your car payments, vacations, or food?
Look for ways to save here and there, but don’t be too harsh on yourself. Your goal is not to eliminate guilty pleasures, only to control them so that you can free up some part of your income, say 10%, for a savings plan.
You’ll want to put this money aside and add to it until you have at least three months’ worth of income in a money market or savings account. If an emergency comes along forcing you to dip into this money, don’t feel guilty, that’s what this cushion is for. Just make it your first priority to replace it as soon as possible. However, although it is hard, this step of the plan does require some self-control. After all, buying brand new furniture for your home or splurging on your favorite shoes won’t exactly constitute an emergency when it comes to your savings account.
Step 6: Pay Down Debt
Paying down your debt may seem like an insurmountable challenge but commitment to this process can reap many rewards. Imagine how you would feel to be able to say you are debt free. To start, make a list of your outstanding debts including the creditor name, account #, account balance, and perhaps a section for notes as well. It is helpful to organize your list in ascending amounts (smallest to largest).
Begin by paying off the smallest debt first either by making a full payment or contacting the creditor to work out a payment plan over a certain period. Only focus on one debt at a time so as not to get overwhelmed. This process will allow you some quick small wins which just may give you the push you need to keep going with your plan.
And don’t forget to communicate with your creditors and make them aware of your repayment plans. In many cases, communication could be the difference in keeping negative remarks off your credit report.
Step 7: Begin to Build a Portfolio
After saving enough for an emergency fund, you should begin to look toward investing extra cash. For new and seasoned investors alike, the easiest way to start building a portfolio is with stocks or mutual funds. For one thing, you can find mutual funds to match your particular risk tolerance. For another, they spread your investment risk.
Step 8: Keep Track of Your Plan
Manage your financial plan, in part with an annual checkup to ensure that it remains aligned with your personal situation. Have your goals changed? How about your income, debt, family needs, health? How have your investments performed? More important, have they performed as you expected?
Depending on circumstances, it may make sense to review your plan semi-annually, even quarterly. If you do, however, don’t confuse your long-term goals with short-term ups and downs in your personal situation; meaning, don’t be quick to change your plan.
Step 9: Plan Your Exit Strategies
Plan an exit strategy to match every financial goal in your plan. If, for example, you want to buy that 10,000 square foot house in ten years, you will probably need to free up some of your portfolio at that point to get the job done. Similarly, if you expect to need college money for two children, you will need an exit strategy for that money, too. Last but not least, you will need an exit strategy for yourself at retirement and an estate plan for your heirs.
Creating a financial plan takes some work, as you can see. And no amount of planning can guarantee the outcome you want. But planning is better than the alternative; namely, not planning. That’s what other folks do, and it’s often why they fail to reach their goals.