Whether it’s getting an education, running a marathon, or losing weight, most people perform best with a clear goal and timetable.
The same applies to financial success. In today’s fast-paced world, where financial goals and aspirations evolve, a well-thought-out financial plan is essential to achieving financial success.
According to the 2023 Schwab’s Modern Wealth Survey, only about one-third (35 percent) of Americans have plotted their goals and documented a financial plan. Among those who do, 7 in 10 say a financial plan makes them feel more in control of their finances, and 9 in 10 say they feel confident that they will reach their financial goals.
Whether you’re just starting your career, enjoying your retirement, or somewhere in between, understanding the most important part of a financial plan is crucial.
This article will delve into the significance of analyzing your lifestyle and creating a comprehensive budget as the foundation of a successful financial plan.
The Initial Process: Evaluating Your Lifestyle
When developing a financial plan, the initial process involves a comprehensive lifestyle evaluation.
This entails closely examining your current spending and saving patterns, identifying your expenses, evaluating your income sources, and examining how you manage your savings and investments.
Understanding these aspects of your financial life gives you valuable insights into your money habits and financial behavior.
Budgeting: The Key to Financial Success
At the heart of the initial process lies budgeting, a fundamental practice that transcends all age groups and life stages.
This is really where the rubber meets the road, financial planning-wise. You cannot build wealth if you don’t have a handle on your expenses and an idea what you can save.
A budget serves as a blueprint for your financial journey, allowing you to control your spending, save for the future, and work towards accomplishing your goals.
1. Tracking Your Spending Over Time
Reviewing your expenses over the course of a year helps identify areas where you may be overspending and opportunities to adjust.
If you haven’t already, start tracking and categorizing your monthly expenses. As you make your list, separate your expenses into two distinct categories: must-have items such as rent and groceries, and nice-to-haves such as subscriptions and dining out. Adjust your spending as needed.
Staying true to your budget requires discipline and occasional re-evaluation, but it serves as an indispensable tool for maintaining financial stability.
2. Managing Debts
You’ve probably heard this before, “not all debt is bad debt.” Take mortgages, for instance. A mortgage can help build equity—and boost your credit score in the process.
However, if you’re riddled with short-term debts or personal loans, addressing and paying off these obligations is vital.
High-interest debts such as credit card balances, title loans and payday loans can impede your ability to save and invest, hindering your progress toward long-term financial objectives.
Struggling with revolving debt? A debt management plan or consolidation loan may help you wrap several expenses into a single monthly bill at a lower interest rate.
If you’re confused about where to start, a financial advisor can help you prioritize debt payments and determine how much of your budget should be dedicated to your debts each month.
3. Building an Emergency Fund
The bedrock of any financial plan is stashing money away for weathering unexpected financial storms.
Life is full of uncertainties. When an unexpected event occurs—you get laid off from your job, for example, or get hit with a sudden big medical bill—a rainy day fund can help you avoid maxing your credit cards to make ends meet.
The recommended size of the fund may vary depending on your circumstances, but it generally ranges from 3-6 months’ worth of living expenses.
4. Saving for Your Goals
Whether it’s buying a house, funding your children’s education, or planning for retirement, a budget helps you allocate funds toward specific goals. The more specific your goals are, the easier it is to measure your progress toward them.
Goals can be short-term (those you hope to achieve in the next 5 years—such as buying a new car or paying off debt), medium-term (those you hope to achieve in the next 5 to 10 years—such as starting your own business or making a down payment on a home) or long-term (those that are 10 or more years away— such as a college fund for your kids and retirement).
For every goal, specify a dollar figure and a target date.
Regularly reviewing and adjusting your savings contributions ensures you stay on track to achieve these aspirations.
Embracing Technology for Financial Success
Modern technology has provided us with a wealth of tools to assist in tracking and managing finances.
Budgeting apps and financial software can help automate the process, making it easier to monitor your progress and pinpoint areas where you can improve your financial habits.
Age and Financial Planning
Regardless of age, having a budget and a financial plan is essential.
Young adults can benefit from starting early, as it allows for long-term growth through compounding interest and strategic investments.
For those approaching retirement, reassessing financial goals and adjusting the budget to accommodate new lifestyle choices is key to enjoying a comfortable retirement.
In conclusion, the most important part of a financial plan is understanding your lifestyle and creating a well-structured budget. A budget allows you to manage your money and empowers you to pursue your goals without guilt or regret.
Regularly reviewing and adapting your financial plan ensures that it remains relevant and effective throughout life’s various stages. Regardless of your age or financial status, assessing your lifestyle and implementing a budget can pave the way for a more secure and prosperous future.
Do It Yourself or Get Professional Help?
While you can certainly create a financial plan yourself, it requires good data, effort, and a fair amount of creativity. And if it’s your first time, you’ll likely hit a few roadblocks along the way.
A certified financial planner can help ensure your plan covers all the essentials.
Remember, at Savvy Women Wealth Management, we’re just a phone call away if you need guidance or support in creating a financial plan.
Savvy Women Wealth Management is an SEC Registered Investment Advisor
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.