Financial Planning: Are you doing enough?

Confused about your finances? Wondering how you can save money for big things like a down payment on a house? You’re not alone. Plenty of people are simply uninformed about a whole host of financial issues.

But don’t worry. This guide will cover all the basics of getting control over the present and future of your money.

What is financial planning?

Financial planning is the process of wisely managing your finances so you can achieve your goals and dreams. It also involves negotiating the financial barriers that inevitably arise at every stage of life.

First, you’ll need to establish some goals. Do you want to travel the world? Do you want to own a house? Do you want to have enough saved so you can retire at 65?

If you think financial planning is only for the rich, you’re wrong. Anyone at any income bracket can begin to improve their financial health and start working toward their goals. Here are the basic steps to creating the financial future you want:

  • Identify your goals. Goals consist of anything that you want to do in the future that requires a significant amount of funding. Do you want to pass on a home to your children? You’ll need to save for that down payment on a house. Do you want to retire early? You’ll have to start a retirement plan as soon as possible.
  • Collect your financial data. What is the value of your cash, investments and other assets versus your debts? This is your net worth. You may want to also take stock of your monthly budget. How much money is going in and out after each paycheck? All of this plays into your financial plan.
  • Develop your step-by-step goals. Financial goals typically have short-term and long-term components. Reducing credit card debt in the short-term, for example, can lead to more funds added to your retirement plan and an increase in your net worth. Making and following a budget is typically the easiest first step to reaching your goals.
  • Get the ball rolling. After setting realistic goals, check on your budget and short-term goals each month. Keep track of your credit score, for example, and figure out how you can raise it or keep it high over time.
  • Be willing to adjust. Financial plans aren’t set in stone. They often have to adapt to emergency situations or new life developments, like the birth of a baby. Re-examine your goals and needs every six months or so.
  • Consider getting help. If it’s within your budget, consider getting a financial advisor. They can typically help with big issues like estate planning, tax strategy or choosing proper life insurance. They also help with typical financial problems like budgeting, investing and retirement planning.

Types of Savings

About 56 percent of U.S. residents don’t have a rainy day fund that would cover three months of expenses, the minimum recommended amount for your emergency fund. Ideally, you should have six months of expenses saved in that fund.

Begin by setting a monthly savings goal. This gets you in the habit of saving regularly and makes the task less daunting. One way to do this is by automatically transferring funds to your savings account after each paycheck.

There are three types of savings accounts: Regular savings accounts, money market accounts and certificates of deposit.

A regular savings account earns interest and offers quick access to funds when needed. Some online banks have high-yield savings accounts offering nearly 2 percent annual percentage yield (APY). That means that your $1,000 in savings would earn you about $20 per year, which is much higher than the 0.01 percent APY of traditional banks. The more you save, the higher your yield every year. Withdrawals and transfers are limited to six times per month by federal law, although some in-person requests aren’t subject to that limit.

A money market account typically earns more interest than a regular savings account in exchange for higher balance requirements. Some also offer check-writing privileges and ATM access. They typically require a balance of about $1,000 to avoid monthly fees. The six-per-month limit on withdrawals still applies here, however.

A certificate of deposit (CD) usually has the highest interest rate among savings accounts and the most limited access to funds. You must agree not to withdraw money for a certain amount of time, which is called a term. If you take your money out before that, you’ll pay an early withdrawal fee. CD terms typically range from about six months to five years. The longer the term, the higher the interest rate.

How to Start Financial Planning

  1. Take stock of your salary (if you’re employed), monthly budget and net worth. Write down how much money is coming in and out every month and year.
  2. Acknowledge your financial mistakes. Do you have a bad credit score or a lot of debt? You can do something about it. Never feel helpless when it comes to finances, as there’s always a solution.
  3. After you’ve assessed the damage, think about what you need to do to fix the problem. Do you need to make your credit card payments on time or start a retirement fund? Make a plan and do it. Create a new budget that cuts some unnecessary expenses if possible. Start redirecting a portion of your paycheck to be deposited into a savings account automatically.
  4. Set your long-term financial goals. Your short-term goals should be aimed at fixing your immediate financial problems, but also at achieving those bucket list goals.

Pros and Cons of Financial Planning

There aren’t many cons to financial planning, especially if you have long-term goals like buying a home or saving for retirement, but these are some of the circumstances that may effect this decision:

  • If you are a more impulsive person who likes to live one day at a time, you may find financial planning difficult.
  • If you prefer to always spend your cash and live paycheck to paycheck, financial planning is not the right choice for you.
  • It’s sometimes not feasible to create a financial plan if your income is limited.

The main pro to financial planning is that it’s the only way to set yourself up to succeed at your financial goals. Unless you’re financially well off, you’re unlikely to be able to buy a house, save for retirement or raise children without some kind of plan for your finances.

Financial planning also gives you peace of mind. If you have six months of expenses saved for a rainy day, you’re less likely to be stressed by a sudden job loss or medical emergency.

Money is also a huge stressor in relationships, but by being open and honest about your finances, you can avoid a lot of those headaches.

Even if you are already comfortable or wealthy, a good financial plan helps you maintain and grow that wealth to pass on to your children or your community.

Related Article: Assessing Expected Cash Flow

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