Your existing financial condition, your financial goals, and any strategies you have made to achieve those goals are all clearly outlined in a financial plan. A strong financial planning should include information about your cash flow, savings, debt, investments, insurance, and any other financial components of your life.
What is a financial planning?
Financial planning is a continuous process that can help you meet your short-term demands, minimize financial stress, and create a nest egg for your long-term objectives, such as retirement. Making a financial plan is crucial because it enables you to maximize your assets, ensures that you achieve your objectives, and gives you the assurance you need to handle any hiccups along the way.
Either you or a professional financial planner can create a financial plan. Using help with financial planning has also never been more affordable and accessible thanks to online businesses like robo-advisors.
Financial planning through 7 easy strategies
1. Set financial objectives
Your financial objectives serve as a guide for a sound financial plan. Savings will feel more deliberate if you approach financial planning from the perspective of what your money can achieve for you, whether that’s helping you buy a house or retire early.
Make your financial objectives motivating. How do you imagine your life to be like in five years? How about in ten and twenty years? Do you desire debt freedom? Having specific objectives can help you identify and complete the following steps with ease and serve as a lighthouse as you work to realize those objectives.
2. Manage your finances
Learn how much money you earn and how much you spend each month. A precise picture is necessary for creating a financial strategy since it might highlight potential spending cuts or savings targets. Knowing where your money is going may make it easier to make short-, medium-, and long-term plans.
An example of an immediate strategy is creating a budget. One advice is to adhere to the 50/30/20 budget guidelines: Spend 50% of your gross income on necessities (housing, utilities, transportation, and other recurrent expenses), 30% on wants and 20% on savings and debt repayment. Paying off credit card debt or other high-interest debt is a typical medium-term plan, and saving for retirement is a typical long-term objective.
3. Request a company match
If you have a 401(k) or other employer-sponsored retirement plan, and if so, whether your employer matches any of your contributions, a financial advisor will make sure to bring this up when you meet with them. Yes, 401(k) contributions lower your current take-home pay, but since the matching contribution is free money, it’s beneficial to make enough contributions to receive the whole amount.
4. Get your emergency plan
The cornerstone of any financial strategy is setting aside money for unexpected costs. But, first start small. For instance, $500 will cover minor repairs and emergencies, preventing credit card debt from being incurred by unanticipated expenses. Then you could aim for $1,000, then one month’s worth of essential living expenditures, and so forth.
Building credit is another way to shock-proof your spending plan. Having high credit makes it simple to get a car loan at a fair rate when you need options. It can also help you stretch your budget by obtaining lower insurance premiums and enabling you to skip utility deposits.
5. Address high-interest debt
Any financial strategy must include paying off “toxic” high-interest debt, such as credit card bills, payday loans, title loans, and rent-to-own payments. Some of these may have interest rates so high that you have to pay back twice or three times what you borrowed in the first place. If you’re having trouble with revolving debt, a debt consolidation loan or debt management plan may be able to lower your interest rate and help you consolidate many monthly bills.
6. Invest to increase your savings
It could seem as though only rich people or those with established careers and families should invest. It’s not. Both opening a brokerage account and making a 401(k) contribution are simple ways to invest. One of the investment instruments are programs for retirement funded by employers. Increase your contributions gradually toward the IRS limit of $20,500 per year in 2022 if you have a 401(k), 403(b), or comparable plan. By using a traditional or Roth IRA, you can increase your retirement savings by up to $6,000 per year in 2022 (or $7,000 if you are over 50).
7. Safeguard and improve your financial situation
You are creating a moat of protection for yourself from financial losses by taking each of these actions. Continue to broaden your financial moat as your profession develops by: increasing your retirement account contributions, increasing your emergency fund until you have three to six months’ worth of living expenses covered and protect your financial stability by using insurance.
Financial planning with robo-advisors
Access to human advisors is provided virtually by online financial planning services. A fundamental service would feature automated investment management (similar to what you’d get from a robo-advisor) along with the option to speak with a group of financial counselors when you have additional queries regarding your finances. The level of service provided by more thorough providers is essentially the same as that of conventional financial planners: You are paired with a committed human financial advisor who will look after your investments, put together a detailed financial plan for you, and conduct routine check-ins to see whether your financial plan is working as intended or needs to be modified.
Robo-advisors provide straightforward, inexpensive online investment management. Investing portfolios are created by computer algorithms based on your goals and responses to inquiries about your risk tolerance. The service then keeps an eye on your investment mix and adjusts it as needed to make sure you stay on target. It is significantly less expensive than hiring a human portfolio manager because everything is digital.
