HOW TO TAKE CONTROL OF YOUR FINANCES
Most people hesitate to engage in financial planning because they find it complex and confusing. It’s actually very simple. Financial planning is simply plotting a road map that will take you from where you are to where you wish to be 10, 15, or 20 years in the future. It’s like taking the entire family on a road trip, your parents, spouse, and, of course, your children.
Creating a detailed financial plan can eliminate financial anxiety and stress for a person due to its focus on their financial goals. Many people want to be financially independent and build wealth, but don’t know where to start. By following these six steps, you will be able to simplify your financial planning.
ESTABLISH YOUR FINANCIAL GOALS
Like traveling, deciding where to take your family is the first step. Suppose you want to send your children to university, own rental properties, or an early comfortable retirement. Prepare a list of those goals and a timeline with the amount needed. Taking distance, time, and resources into account, a general roadmap can then be planned out. A typical financial planner would start by determining where you are coming from. However, if your financial goals are based on your current situation, you may reduce your dreams. Because of this, it is better to start by figuring out where you want to be rather than beginning where you are.
DETERMINE YOUR CURRENT FINANCIAL STATUS
Second, you need to understand your financial situation. What financial resources or assets do you already have in place? Are you liable for any debts? What is the total amount? What’s the state of your cash flow? How much does it help you on your journey? Are you saving enough? Is your loan balance too high or too low? How much bad debt are you paying? Basically, this means examining a person’s savings, income, and debts, as well as their current living expenses.
CREATE A STRATEGIC ACTION PLAN
Then, determine which assets or investment options are appropriate to reach those goals. It has to match risk tolerance. The investor’s risk tolerance determines how well they can endure losing money on a particular investment. Over the course of a person’s life, his or her risk tolerance can change, and subsequently determines the type of investments that will be considered. Picking the right investment for your goal is like selecting a vehicle for your trip. Depending on whether you like it fast and furious or slow and steady. Regardless of your choice, do not forget to consider the safety features or the potential risks involved. Given your resources, it may not be realistic to reach the goals in the time that you have initially planned. If so, you may need to alter your financial goals, eliminating bad debt, or increasing your income. In contrast, if your goals are so important to you, it’s just a matter of driving a little faster and working a bit harder.
MITIGATE THE RISK
To ensure your family continues to reach your destination, you will need a plan B or a plan C to deal with contingencies like medical bills, loss of income because of disability or even death. Building your emergency fund is the first step to dealing with this issue. This fund is for urgent needs, such as sudden home repairs, living expenses due to job loss, unforeseen travel expenses, and car repairs. Nevertheless, if the emergency is more serious, such as disability caused by critical illness or an accident, or worse, early death, then life insurance becomes very useful. In certain cases, being without coverage can be expensive, so shopping for the right policy for your financial situation is a good idea. Consider the consequences when your car crashes without an airbag – it would be catastrophic for you and for those who depend on you. Take steps to prevent financial hardship for yourself and your dependents.
IMPLEMENTING THE FINANCIAL PLAN
And off you go! As all road trips go, they never happen exactly the way you planned. There may be road bumps, obstacles, distractions, maybe even disasters that take you off the path. Along the way you may need to slow down when there is a hazard ahead and take advantage of opportunities to speed up. When you ultimately arrived at the destination, you’ll want to be in the position that your money is now working for you instead of you working for your money. And that’s financial planning explained.
REEVALUATE AND REVISE YOUR PLAN
By implementing the plan, I mean executing it. While it sounds simple, many people find the implementation phase of financial planning to be the most challenging. A plan can be developed, but putting it into action takes discipline. Perhaps you are beginning to wonder what might happen if you fail. Taking no action can grow into procrastination.
CONCLUSION
Now that you know the six steps of financial planning, you can apply them to any area of personal finance, including insurance planning, investing, and retirement. Although you can do this yourself, getting professional advice and a first-hand look at your finances can be extremely helpful.
Remember to keep referring back to the steps as your life or finances change, whether you do it yourself or hire an advisor. It may also be a good idea to reevaluate your plan annually as professional financial planners do.
The future of your finances is still up to you. In the end, it comes down to this question: what will happen to your future if you do not take responsibility today? So, take action today!
