A good financial plan does more than reduce debt—it reduces stress. You can live more comfortably now, while also saving for the future, with thoughtful planning. That doesn’t mean, however, that your planning has to necessarily be complex. Here are eight simple yet highly effective steps for solid financial planning at any age and on any budget.
Make a Household Budget
Did you know that the average American household has about $132,529 in debt? For many people, creating a budget isn’t all that challenging—it’s sticking to that budget that turns out to be the hardest. There are a lot of different budgeting styles out there, but there is one easy way to make sure you stick to the plan. Try the 50/30/20 budgeting plan: 50 percent of your income goes toward necessary living expenses, 30 percent toward “wants” and 20 percent into savings. This formula works for many people because of its flexibility; it helps you prioritize the things that are necessary and unnecessary.
Save Your Raises and Bonuses
Every other time you earn a raise or receive a bonus, put it into savings. For example, let’s say you get a well-earned 5 percent raise. Instead of spending that extra cash each pay period, put it in savings. This is a really simple way to boost your savings, as it really doesn’t require you to change behavior or sacrifice something you love.
Safeguard Your Legacy
What would happen to your family if you were to pass away unexpectedly? It may not seem like an important question to answer now, but it’s actually pretty smart to go ahead and lock down a good life insurance policy. Finding the right one for your specific situation isn’t hard—do you have children, debt, a strict budget or a mortgage you expect to pay off in less than 20 years? A 20-year term life insurance policy creates both a safety net after your passing and helps cover medical costs and funeral expenses.
Start Stashing Away an Emergency Fund
Over the course of your lifetime, you will rely on your savings account many times, but the one time you shouldn’t is when a major financial crisis hits. That's when you tap into your emergency fund. Ideally, you want to build your emergency fund up to three months’ worth of your expenses. That way if you should lose your job, get set back by a health condition or have to pay for an expensive home repair, you don’t have to deplete your savings to stay afloat.
Think of Your Future Now
Start saving for retirement as soon as you can. It may sound silly when you’re in your 20s, but you should have a good deal saved up by the time you retire. That means you have to start investing now. First, find out if your company matches any retirement contributions. With that in mind, start off by putting in no less than 15 percent of your annual income, then add to that percentage gradually.
Reassess Your Payment Plan
The U.S. Census Bureau reported that 157 million Americans are in credit card debt and
44 million have student loan debt. As you work toward paying down this debt, you may experience life changes that can impact your financial situation. Reassess your plan before and after major life changes, like getting a new job, moving in with a partner, buying a house or having a child. You may need to adjust some of the numbers, cut out some of your expenses or use some of your savings. Try not to judge yourself; simply recognize your situation has changed and adjust your plan so it is reasonable, realistic and reachable.
Monitor Your Credit
Keep an eye on your credit score. Try not to check it too much or put too much weight on the numbers. However, you can see where you might need to plug some leaks or adjust behavior by watching if your score raises or lowers over time. Shooting for 700 or higher is a great place to be if you are thinking of buying a car, purchasing a house or starting a business. The quickest ways to improve your credit score include paying down your balances, paying twice a month and opening a new line of credit.
Set Realistic Goals and Timelines
If you’re trying to save for a specific reason, like you want to take a once-in-a-lifetime vacation to Europe, then it’s important to stay realistic about what you can accomplish and when. If you want to see Europe next year, you may have to be more rigid in your plan than if you were planning this trip in five years. If the idea is to have an incredible vacation next year, set your sights a little closer to home. Or, if the goal is to see Europe, your timeline should realistically reflect what you can and are willing to set aside each month to accomplish your goals.
Financial planning may not seem easy, but that doesn’t mean it has to be hard. Take things one step at a time and ask for help when you need it. There are professionals out there who can make the planning process seem like a breeze.
About the Author:
After five years, Christopher Haymon is almost debt-free. Leaving college and entering the “real world,” he learned a valuable lesson about the perils of not budgeting or saving. Now that he’s on the right track, Christopher writes about finances in his spare time in an effort to help others.