Goal setting is good. But having a financial plan is even better. What’s the difference? Think of your financial life as a journey. Your goals are your destination. While your financial plan is your road map showing you ways to achieve your goals. So, while goal setting answers the question “What do you want in life?”, financial planning answers the question “How will you achieve what you want?”. In celebration of Financial Planning Month this October, let’s find out why everyone needs a financial plan.
What is financial planning?
More than just defining your goals, financial planning involves quantifying them as well as factoring inflation, and other risks such as sudden death or loss of employment. By anchoring one’s goals on such realities, financial planning helps you determine effective strategies in achieving your objectives. It also keeps you on track in meeting your financial obligations and helps you monitor your progress over time.
What every plan should have
While there’s no one-size-fits-all financial plan, a good financial plan must have these key components:
1. Identify your goals
List your goals from short term to long term. Short term goals are those you want to achieve in 5 years like buying a car or paying off debt. Medium term goals are those you want reach in 5-10 years like buying a house. Long term goals are 10 or more years away like your retirement. Quantify how much money you need to achieve each goal. Pegging your goals to a specific dollar amount helps you monitor your progress in reaching them.
2. Establish your baseline
Do a reality check by calculating your net worth. List all your assets (bank accounts, investments, real estate) and liabilities (credit card, mortgages, student loans). Then subtract the latter from the former to get your net worth.
3. Stick to a budget
Know where your money goes and where you can cut back to help you reach your goals. It helps to identify which items are your must-haves and which ones are nice-to-haves.
4. Manage your debt
Leverage your debt effectively. For instance, while having a mortgage can help build equity, high interest debts like your credit cards impacts your credit score negatively. On top of this, when you’re paying interest for your credit cards, it pulls your resources away from your goals. If you’re at a loss on how to pay off your debts, Financial Rescue can help. Call our customer representatives and we can help you find ways to free yourself from debt.
5. Create an investment plan
Maximize your savings through disciplined investing. But first get the help of a financial adviser to help determine your tolerance for risk. This will help define the type of investments that best suits you.
6. Get risk protection
While you’re working toward your goals, you need to protect yourself and your loved ones from life’s uncertainties – accidents, sudden death, unemployment. Make sure your financial plan includes insurance coverage. Find out what insurance options are available by calling Mercado Global Insurance Brokers. We can help you determine what type of coverage works best for your needs.
Financial planning puts you in the driver’s seat as you navigate your life via the financial routes you choose to reach your goals. By having measurable goals you can work toward you can track your progress and make adjustments along the way. What’s more it can inspire you to develop better money habits as you find ways to attaining the objectives you’ve set for yourself.