Creating a Financial Plan
Having a financial plan is a necessity when it comes to money management. Without a good plan you are bound to encounter difficulties on your way to attaining your financial goals. This article will help you create a sound and well-balanced plan for your money.
Setting Financial Goals
The first step in creating a personal financial plan is setting your financial goals. Knowing your goals is of great importance for successful money management.
First, identify what you want to achieve. You may want to buy a new car, go on a vacation, send your kids to college, ensure a comfortable retirement, save for the down payment of a house, etc.
Second, break down your goals into different groups:
- short term goals
- medium term goals
- long-term goals
Third, estimate how much money you will need in order to achieve each goal.
Evaluating the Term for Your Goals
Evaluating the time you have in order to get to your financial destination is an important step in creating your financial plan since this will help you determine whether you are in a rush or have enough time to follow your plan leisurely.
Time is also a very important factor for your financial plan since it plays a huge role in investing. Knowing how much time you have will definitely influence your financial decisions and help you make smarter choices. Additionally, when it comes to saving and investing the earlier you start the better.
Evaluating Your Current Financial Situation
Having estimated how far you need to go and how much time you have to achieve your goals, it is time to evaluate your starting point.
In terms of money your starting point may mean two things:
- Your monthly income as well as your spending habits - those two things will help you determine how much money you have at your disposal every month.
- Your net worth - this is estimated by subtracting all the debts you have from the total value of everything you own.
Perhaps you already have a savings account or some kind of a retirement plan. You certainly don't want to use your retirement savings before your actual retirement but you can assess how much from your savings account you can set aside for investing or for some purchase you plan.
Choosing the Right Financial Instruments
The last but certainly not the least important step of creating your financial plan is determining how you plan to achieve your goals. Choose the right financial instruments by conforming them to your particular goal.
For example, let's say your goal is a medium-term one and you have two years to acquire $20,000 in order to attain it. You will have to save at least $5,000 and then you can acquire the rest of the money by some type of a safe investment. Since you don't have much time, you cannot afford to lose your money by choosing a riskier investment option.
Generally, the safer the investment option, the less the returns you will get. Therefore if you are creating a financial plan for your long-term goals, probably such safe investment options will not help you much. For such goals (for example saving for retirement) a combination of stocks, bonds and cash would probably be a more appropriate choice.
Finally, you should know that there are no exact or fast rules for creating a financial plan. However, it is really important to start doing it now. Sitting and waiting will not get you to your financial goals.
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