Financial planning is about how you manage and take control of your financial situation. A common misconception is that only wealthy people should undertake financial planning, but in reality everyone should plan for their financial future if they want to achieve certain financial goals. Here are the four steps to help you get started with your personal financial plan:
1. Define your financial goals
A vital step towards successful personal financial planning is defining your financial goals. A financial goal should be set up as a SMART goal: Specific, Measurable, Achievable, Realistic and Timely. Your goals should also be defined as both short term and long term, and can be split into categories of education, work-related, lifestyle, asset and retirement goals.
2. List your current obligations
Your financial plan should list all your credit and tax obligations as well as your investments and assets. In particular, it should list the steps towards reaching your goals, whether it’s paying down your credit card debt or saving up for your first house. Prioritise paying down your ‘bad debt’ such as credit cards over ‘good debt’ such as a mortgage or education debt.
3. Identify the areas of weakness
Now that you’ve got your goals and obligations in place, it’s time to determine if your monthly outgoings exceed your monthly incomings – i.e. whether you’re spending more than you earn, as this will affect how quickly you achieve your goals. If you are spending too much, identify the areas you need help in – are you putting too much on your credit card? Are you taking on too many personal loans? Outline the bad habits you need to break to help you save money and get your life back on track.
4. Execute your plan
A financial plan is only successful if put into action. This is the hardest part of all as sticking to a financial plan requires a huge amount of determination. Your plan may change with your circumstances, but avoid changing it to suit your mood as that will likely defeat its purpose. A good way to keep yourself motivated is to set short term and long term deadlines and put those deadlines in your calendar. Also, consider the end result – whether it’s a holiday or a debt-free life, this will likely spur you on the path to better financial health.