Informally, a Financial Plan is a document (or collection of documents) that prepares you financially for the future. This can be as simple as a household budget, or as complex as legal documents, wills, pensions and investments. There are companies that offer financial planning services, but you may not need this help. Often, basic financial plans can be easily created at home. When creating your financial plan, follow these 5 steps:
1. Think Long Term and Short Term
A good financial plan takes into account your long term and short term goals. A short term goal might be paying off a small debt. Such as a payday loan or store card, whilst a slightly longer goal might be paying off a larger loan or credit card. Goals don’t need to be all about paying things off, so you should think about everything that’s related to your financial state. Do you want to plan for a baby, move house or go on holiday? These are all things to consider.
2. Take Stock of Your Current Situation
Goals are great, but you need to know where you’re starting from. Write down a list of all your current assets including property, savings and investments. Then write another list of all your debts and liabilities. You can use this to gain insight into your current financial position, to see just how far you are from the goals that you’ve listed.
3. Come Up With a Financial Plan
Once you’ve listed your goals and discovered how far you are from them, it’s time to connect the two. You need plans for how you’re going to meet your goals, and there might be many different routes to consider. If you’re planning to go on holiday, write ideas such as ‘sell old belongings’ and ‘work 10 hours of overtime’. If your goal is a bigger one, plans might include asking for a salary increase. Or downsizing the house. Maybe even selling your car or moving your savings to a different and more rewarding location.
4. Pay off Debt
If you do have debt, it usually makes sense to pay this off before focusing too much on your savings. What you’re paying out on loan and credit card interest rates could be higher than what you could earn back by putting your money into a savings fund. Additionally, your debt could have an emotional impact that affects other areas of your life. Try to arrange your financial plan so any debts, from payday loans to long term price plans, are quickly paid off as a top priority.
5. Review Regularly
By looking over your financial plan, you might find motivation in the fact that you’re getting closer to your goals. Or, if your plan isn’t working, you’ll be able to recognise this and to make adjustments before things get out of control. Adjustments might even include lowering the amount that you put into savings. Especially If it’s an unrealistic figure. One that’s causing you to struggle elsewhere.
Don’t forget you can make personal financial plans. And joint ones with family members. Check if your goals for the future align and collaborate on the routes that you want to take to reach them.