Financial planning covers a broad range of money matters including budgeting, investing, debt management, and retirement planning. Although it may seem intimidating, financial planning is a process that puts you in the driver’s seat and gives you complete control over the money matters in your life.
Using a financial plan to actively manage your money can help you set and achieve goals so that you can focus on what matters most.
The basics of any financial plan begin with setting a budget that serves as a roadmap for how to allocate your money each month to achieve your goals. A budget gives you a clear picture of how much money you have coming in compared to how much money you have going out each month.
Set Goals
Your financial plan outlines all of your short-term and long-term goals along with the finances required to meet those goals. Think of short-term goals as things that you would like to accomplish within six months to a year. Examples include saving for a vacation, a car, or putting away enough cash for an emergency fund. Long-term goals, on the other hand, take longer than a year to accomplish and may include things such as saving for a house, a car or planning for retirement.
Create a Budget
Start your budget by totaling all sources of income for the month. Next, write down all expenses you expect to incur over the month. Break down your expenses into two categories: fixed and variable. Fixed expenses are those that remain relatively consistent each month. Examples of fixed expenses include your rent, car payment, cell phone bill and utility bills. Variable expenses, on the other hand, vary from month to month and include things such as gas, groceries, eating out and entertainment. Total your expenses for the month and compare it to your income. Your goal is to have enough income to cover all of your expenses. Once you have an understanding of your spending each month, you can take steps to manage your finances to ensure you are on track to meet your goals.
Manage Expenses
If you have more income than expenses each month, you are off to a good start with your financial plan. If you find that you have more expenses than income, examine the variable expenses on your budget and identify areas where you can cut back or eliminate altogether.
Develop a Plan
Once you have a clear understanding of your goals, you can create a strategy to help you achieve those goals. Begin your plan by evaluating your budget to determine how much you have available each month to devote to your goals. Your strategy might include increasing your savings, investing in stocks and bonds or setting aside money in a retirement plan.
Evaluate Your Assets
Regardless of your goals or your strategy, you should monitor your assets regularly to ensure they are still appropriate for your plan and that they are performing optimally.
Performing a periodic review of your assets gives you a chance to make changes to your plan to keep things on track. Begin your evaluation by examining your debt. Pay off high-interest credit cards and loans so that you can relocate those funds to other items in your plan.
Next, look through your portfolio to identify excess fees that may be eating away at your returns. Management fees are usually a percentage of the total value of your portfolio and can add up to thousands of dollars of fees over time. Try to negotiate a lower fee or switch firms so that you can keep more of your money to devote to your financial plan. Also, look for ways to cut your transaction fees. If you regularly trade, find an investment firm with a low transaction fee so that you can trade freely without overspending on transaction fees.
Reconsider Allocation of Your Funds
No financial plan is static. As you experience life changes, you will want to reconsider your portfolio mix to ensure that your plan remains on track towards accomplishing your goals. The younger you are, the more risk you can tolerate in your portfolio. In the early years of life, your portfolio should include a greater proportion of stocks to bonds.
Taking on such risk in your younger years gives your portfolio more time to recover as the market fluctuates each year. As you progress towards retirement, however, you should reduce the number of stocks in your portfolio and reallocate your funds to safer investment vehicles such as savings bonds and CDs.
Finding the Right Financial Planner for You
When it comes to developing a financial plan, it sometimes helps to get professional advice. Many people mistakenly assume that financial planners are only for the wealthy. Regardless of your income, however, financial planners are invaluable in helping you make wise decisions regarding your finances. An advisor evaluates your goals and offers advice on how best to invest, save, and grow your money to help you achieve those goals.
To find a good financial planner, seek referrals from family and friends. You can also check with the National Association of Personal Financial Advisors (NAPFA) for more leads on planners in your area. Do your research and check credentials of anyone offering financial advice. Someone with a Certified Professional Planner (CFP) designation has undergone extensive training and has passed a rigorous exam administered by the Certified Financial Planner Board of Standards. Hiring someone with CFP credentials ensures you are dealing with someone with the expertise to give you sound advice.
Also, consider the financial planners pay structure in your decision. Advisors earn their income by one of two methods: commission or fees. A commission is a fee paid to an advisor for selling stocks or investment products. Advisors who rely on commission for their income may be biased in their advice. They may steer you into products based on their potential income rather than what is appropriate for your strategy. Fee-based planners charge a fixed amount for their services. They may charge an hourly rate, an annual amount or a fee based on the percentage of your portfolio. Make sure you are clear about and are comfortable with a financial planner’s pay structure before you hire them.
By Admin –
