Financial planning isn’t difficult, at least on paper. The tough part is starring into the openness of your life, the choices, the options, and deciding what you want badly enough to sacrifice for, then following through each and every day. Without a big why, and understanding the importance of personal finance one will struggle, so why not make it easier by creating steps?
If you’re sick of not having money, living paycheck to paycheck, or simply want more time from your life, financial planning will get you there, and it’s literally as easy at one, two, three… (and four and five).
1. Taking a Current Snapshot
You must, must, must know where you are in order to know where you’re going. If you don’t know where you are, you can’t direct yourself towards the future. From a financial perspective that means creating a balance sheet that allows you to see your income, expenses, assets, and liabilities. A personal balance sheet is easy to make since it’s simply adding up what you own and subtracting what you owe on it. Learn how to create a personal balance sheet.
2. Creating Goals
Financial goals are easy to make. Saving for college, a house down payment, or creating a stream of passive income through investments are all things you can set as your goals. The best goals are ones that are SMART, meaning they’re specific, measurable, attainable, relevant, and timely. That means if you’d like to save for a down payment on a house you should state that you’d like to save $20,000 within 2 years. This is much more SMART than a vague goal of “saving for a down payment.”
3. Designing a Plan
The financial plan that you create will become the “how” to your goals. For example, if you did decide to give yourself a goal of saving $20,000 for a home down payment within the next 2 years you could say that you’re going to make $10,000 a year for the next 2 years working at an additional part time job. That would mean you’d have to make $833 a month (post tax) to reach your goal in two years.
This is going to be the most difficult part of your financial plan. Measured over weeks, months, and even years you’ll have to execute everyday to follow your plan. In order to follow execution successfully you may want to consider giving yourself shorter goals and rewards to start with then extending the time horizon once you accomplish them. In order to execute give yourself daily motivation, reminders, and even support from others to continue down the path to your financial goals.
5. Checking Progress
As you progress with your financial goals you’ll want to monitor your progress. This can be done through graphing, charting, or simply keeping a diary. Checking your progress will help to re-motivate you and let you know that you’re on the right track. With finance it’s also easy because numbers are black and white so you won’t be able to lie to yourself about your results.
Whether your goal is to simply build up an emergency fund, pay off your credit cards, or make a million dollars in the next five years you’ll need a road map for your financial plan. Following these five steps will give you a basic outline on your journey.
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