Tips for Starting a Personal Financial Plan
It’s important for every working adult to have a personal financial plan. The components of the plan will vary greatly from person to person because of differing circumstances and stages of life. But it’s definitely not something that you should delay until you’re facing retirement. By that time, your options will be limited. Here are seven tips for starting your financial planning: 1. Gather the data. The first step in personal financial planning is to gather all the relevant data. This includes your income, account balances, debts, assets, and credit score. 2. Assess your spending. In order to do this, you’ll need to track your spending for a month. Keep a detailed record of where every dollar goes. This is a time-consuming but necessary exercise. If you are hoping to reduce your expenses in the future, you first need to know where your dollars are being spent. 3. Consider debt. Debt is a part of financial planning for most people. There are a variety of kinds, including student debt, mortgage debt, and automobile debt. How you deal with debt relates both to the financial data (discussed above) and to your own attitude toward debt. Some people are OK with carrying debt, if the reason and duration are clear, and others prefer to get out from underneath debt as soon as possible. 4. Consider savings. For most working adults, savings should be part of your financial planning. You save for a house, for a vacation, for a car, and always for retirement. Financial advisors emphasize that savings should be automatic (coming directly out of your paycheck) and regular rather than discretionary and occasional. 5. Set your goals. This is a key element in financial planning. You must specify your life goals and related financial goals with as much clarity as possible. Do you intend to buy a house in five years? Do you intend to have children and to help with their university expenses? Would you like to retire at age 55? Do you intend to live luxuriously, or would you prefer to live modestly and maximize your retirement savings? 6. Develop a budget. Use the information from all the preceding points to develop a budget that takes into account your income, spending, and goals. This is a difficult exercise because it involves making choices. Do you want a bigger house or an earlier retirement? If you are one-half of a couple, is it more important for one person to be a stay-at-home parent or for both to work outside the home to maximize income? The budget should be as detailed as possible. 7. Visit a financial advisor. It is wise to seek out an expert at some stage in your initial financial planning. The expert can review your calculations and ensure that you’ve taken all relevant factors into account. Also, the advisor can give valuable advice about the handling of your debts and savings. The latter includes a consideration of investment options. There are many financial products available, and a financial advisor can explain the advantages and disadvantages of each and make recommendations. Few people enjoy engaging in financial planning, but it’s unwise to avoid this exercise. These tips should provide the basic information that you need to begin preparing a personal financial plan that will help you to achieve your goals.