Balancing short-term needs, long-term goals, and unexpected life events can be all-consuming without the right financial plan to balance income and expenditure.
From everyday groceries to utility bills, emergencies, and debt payments, the elements that can stake a claim to a percentage of your income are endless and sometimes unforeseeable. Hence, the need for you to figure out a way to tackle bills while at the same time taking steps to set yourself up for a financially free future.
Many of us have fallen victim to a lack of personal financial planning one way or the other. Are you fond of impulse buying? Do you get strapped for cash weeks before your payday? Have you ever been in a situation where you thought how good it would be if you had insurance?
This is why creating a long-term strategy regarding money, and financial security is essential. While it may all seem like an immense process, we’ll be demystifying personal finance and guiding you on how to plan for a secure economic future.
Understanding personal financial planning
Personal financial planning entails everything that has to do with maximizing financial resources through money management practices like budgeting, saving, investing, debt payment, tax planning, and retirement planning to achieve one’s financial objectives.
Planning your finances with these basic financial facets safeguards you against unforeseen situations. In addition, it helps you strategize a plan to save for emergencies, pay off debt, and invest in long-term securities.
Before further discussion, let’s quickly examine some key areas of personal finance and how much they affect any plan we may have toward financial freedom.
Income is the first step on the road map to effective personal financial planning.
Before strategizing any plan to maximize your financial resources, you must first earn the finances. You can have multiple sources of money, but for this purpose, we’ll consider steady cash flow received from sources like:
- Business profit
- Hourly wages
A large majority of our income is usually allocated to expenses. These expenses can occur daily, weekly, monthly, or yearly. They can be paid with cash or credit. Still, they are all the same – money spent on consumable goods and services. Expenses can come in the form of:
- Utility bills
- Credit card payments
- Leisure & recreational spending
All these expenses have a diminishing effect on an individual’s income and reduce the amount of money available for investment and financial growth options.
Managing spending is just as crucial as the ability to generate income. It is perhaps of greater importance because it is one area of personal finance we do have control over.
Savings can be in the form of physical cash, money market securities, or a checking account. Savings are important for managing cash flow and short-term expenses, but having too much savings without generating returns can be counterproductive to any financial plan. This leads us to another critical area.
Investing involves obtaining assets projected to generate a return on investments over a period.
The keyword here is “projected,” as investing comes with risk, and not every asset is guaranteed to produce a positive rate of return.
Investing involves buying into securities such as stocks, bonds, mutual funds, or long-term money growers like real estate, art, and commodities. It is a complicated aspect of personal finance that most people find requires professional advice. Still, you can start by learning the basics of personal financial planning.
Unforeseen events are part of life we can’t completely write off, hence the need for financial protection to guard against this situation when and if they do happen.
Protection entails measures we put in place to mitigate adverse situations and their financial consequences, including insurance (Health & Life) and Estate planning.
It is typical to seek professional advice regarding protection because of the monetary analysis that needs to be performed to assess the best options for an individual’s insurance and estate plan.
Companies offering financial planning services like All Seasons Wealth look into a client’s financial situation and help them create a plan for effectively managing expenses, increasing savings, investing wisely, and ensuring they’re adequately protected with insurance.
Steps to personal financial planning
Personal financial planning mainly involves prioritizing economic goals in different areas of your financial life. With a sound objective in mind, you can now begin to take steps in strategizing how to meet your financial targets.
Let’s take a look at some steps to consider in planning personal finance
Setting up a budget
A budget is a financial tool that allows you to track your spending habits and plan how you save every time you earn an income. Budgeting is crucial to getting your financial planning in order.
A simple budget involves calculating your monthly expenses and subtracting them from your monthly income. If your total comes to a deficit, you are overstretching your income, and you should tackle this issue first.
It would help if you lived within or below your means to have money leftover each month to put into investments, pay off bills, and build an emergency fund. Then, once you balance your budget, you can move on to the next step.
Create an emergency fund
Financial experts recommend having three to six months’ worth of expenses saved up in case of emergencies that render you incapacitated or should you lose your primary source of income.
An emergency fund is money set aside for unforeseen situations and circumstances. For example, the Federal Reserve reports that 36% of Americans would not be able to handle a financial emergency that requires $400 in cash without borrowing or looking to alternative sources of money.
Emergency funds can be held in a high-yielding savings account or other securities. Just be sure it has high liquidity, and you can cash it in anytime there is an emergency.
Cut out debt
Debt can be more crumbling to your personal financial planning efforts than anything else, especially debt that yields high interest, like credit card debt or high-interest loans.
When your outstanding monthly balances go to paying off debt rather than investment, it can be a hindrance to your financial goals. For this reason, paying off high-interest debts first makes sense as they cost you more money.
After you successfully handle high-interest debt, you can take your time to pay off low-interest debt like personal loans and student loans.
Plan for retirement
A significant part of personal financial planning is retirement planning. Though Social Security guarantees certain benefits upon retirement in the United States, it has shown not to be a reliable safety net for retiring workers.
Creating a retirement plan requires you to decide how much you can afford to save depending on your age, risk tolerance, expected retirement age, and lifestyle. This would give you an idea of how much to put into your retirement plan.
Ensure your assets
Insurance is another crucial aspect of personal financial planning that is worth repeating. It protects you and your loved ones against unfortunate surprises.
Insuring yourself, your family, and your assets protects you from incurring high costs that can come up in case of emergencies. As part of a sustainable financial plan, you may want to consider insurance in areas such as;
- Health insurance
- Disability insurance
- Life insurance
- Auto insurance
- Business Insurance
- Homeowners Insurance
Suppose you are unsure what type of insurance is best suited for you. In that case, you should seek the advice of a certified financial planner or advisor to help you evaluate your situation and determine what policies would fit you best.
Diversify your investments
Building wealth cost-efficiently demands, you diversify your assets into multiple investment options such as stocks, bonds, commodities, real estate investments, mutual funds, exchange-traded funds, etc.
All these investment options are varying degrees of risk and reward, so it is important that you have a clear view of your goals and how much risk you can realistically take on.
Plan your taxes
Tax planning is also a crucial aspect of personal financial planning. Your ability to minimize your tax liability and maximize your tax breaks would determine how much you can save and invest for your future.
Using tax advantage accounts such as a 401K or an IRA can help you save more and make healthy investment decisions.
A financial safety net with a readily available emergency fund, growing investments, and sustainable insurance can help you start saving to accomplish your long-term personal financial goals. In addition, employing the services of expert financial planners at All Seasons Wealth in Tampa, Florida, can help you through all stages of the financial planning process.
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