While it’s easy to do, as many as a third of Americans from all walks of life haven’t created a financial plan for their future. Whether you are a millennial starting your first job or a boomer inching toward retirement, learning the basic principles of personal financial planning today will contribute to a brighter tomorrow.
5 Personal Financial Planning Tips
1) Establish Financial Goals
Regardless of their age or financial situation, everyone needs a plan to reach their financial goals. Although the nature of that plan differs from person to person, there are several key similarities to every individual’s personal financial planning strategy.
They need to decide how much they must save; how much time they have to reach that threshold; and how much they can put toward that goal each month.
The financial goal(s) an individual chooses to strive for will depend on their life situation. The goal could be anything from reducing debt to paying for a child’s college education.
Whichever goal you choose, make sure to keep it realistic.
2) Set a Budget
Once you have an objective for your financial planning, it’s time to take steps to put the plan in place.
A monthly budget will help you reach your goals by setting guidelines for how much you would like to save and spend over a 30-day period.
Financial experts suggest that your after-tax income should be divided into three separate groups.
- Fixed costs, including rent or mortgage, utilities and car payments, should be 50 percent.
- Lifestyle or discretionary spending should account for 30 percent of a budget.
- Financial priorities, including emergency saving, debt payments and retirement, should be 20 percent of your take-home pay.
Compare your new budget with your previous financial habits. Then, use this information to make spending reductions or cuts if necessary.
3) Create an Emergency Fund
An emergency fund is one of the principle building blocks of strong personal financial planning. A rainy day fund helps you weather a financial storm caused by the loss of a job, serious illness or other issues, which disrupts your income stream.
Three to six months of living expenses is recommended to protect against personal bankruptcy or the accumulation of debt.
4) Pay off Debt
While debt allows you to buy things you might not be able to at the moment, the reality is debt costs money. Interest payments can quickly add up each time you borrow more money. And, if you wait to pay off your debt, the interest payments continue to increase.
However, if you pay off debt today, you can save money over time.
Your amount of debt will also affect your credit score, which impacts your ability to borrow more in the future. Once a year, you can check your credit score for free at www.annualcreditreport.com.
5) Save for Retirement
Nearly everyone knows about the importance of saving for retirement, but fewer have developed a plan and followed through with it.
Today, there are employee benefit plans, such as 401(k)s and Roth IRAs, which help you save money for retirement. Most 401(k) programs offer an employer match of the pre-tax money you contribute to your retirement savings. This free retirement money is another way to increase the size of your nest egg.
Developing a personal financial plan that increases your nest egg is the best way to protect yourself from any surprises you may encounter on the path towards retirement and the years beyond.