Financial planning basics are not the long, drawn-out, intimidating, or complicated process that many make it out to be. Even if you’re one of those “what does finance mean?” folks, no fear. Financial planning is a straightforward practice that takes little time and reaps large money rewards. Whether you are a working professional or fresh out of college: it’s time to get serious with your finances.
Having a solid plan to manage your finances allows you to save money, afford the things you want, and achieve your long-term financial goals. Everyone’s financial planning looks different. If you’re wondering how to or why you need to create a plan for your finances, then read on.
1. Financial planning basics rule #1: Spend less than you make
Rent, groceries, travel, chilling, beer & shopping all require planning out your money and finances. It is a no-brainer that you need to spend less money than you earn. Unfortunately, financial planning is not easy when you have a lifestyle to keep up with.
When your finances drown on all fronts, it is easy to overspend. Here’s the first step. Track all your expenditures over a period to map out how you really spend money. Budgeting apps can help make this task much easier for you.
Planning finances for a relief fund during emergencies provides peace of mind to know that there is money set aside for life’s unexpected moments.
2. Financial planning basics rule #2: Make a monthly budget for your finances
Identify your income sources and plan out your fixed expenses. Once you have a budget worked out, you have an easy path to your financial planning goals. Instead of hoping to save money, you can start saving right now.
When starting with financial planning basics, remember that every penny counts! You can begin putting funds towards your goals like saving for a vacation, an emergency fund, or a big spend. Challenge yourself and find creative ways to stick to your budget no matter what!
Don’t be afraid to adjust your budget throughout the month. In fact, embrace this practice.
3. Pay off credit cards each month to effectively manage finances
It is prudent to pay off credit card bills each month to avoid costly interest payments. Many people ignore the first payment and let the balance carry over to the next month.
You may end up paying more money in interest than on the original purchase itself. If you are unable to pay off all credit bills each month, try to make an effort to pay a little more than the minimum amount. Any payment is better than the minimum amount or no payment at all.
ASIC’s Money Smart says, “if you make only minimum repayments to a $4,400 credit card debt, then it will take you 31 years to pay it off and cost you around $14,900 in interest.” That’s $10,500 more than the original debt!
4. Build an emergency money fund
An emergency fund is an important part of financial planning basics. It is a separate savings account that is put aside for unexpected expenses. It acts as a safety net for last-minute expenses like when your car breaks down, or you lose your job, etc.
Since you do not know what the future holds, being prepared is the best option. With no emergency funds, you risk financial trouble as you tend to take debt (credit card) or drain on personal funds in the absence of an emergency fund. What does finance mean without an emergency fund anyway?
Open a separate high-interest savings account and set up automated payments after receiving your salary every month.
5. Get yourself insured!
Insurance is your indispensable layer of protection that should be your priority. It’s like a shield protecting you financially from unfortunate life events like a critical illness or accident. With no insurance, any mishap could send your life into a tailspin. Additionally, there are life, income, and mortgage/renter’s insurance, which differentiate between a small bump or a big one.
Review your insurance every three to five years, during this time your personal assets, income, liabilities would have gone through changes.
6. Be consistent with your finances
Strategic financial planning means consistency. You may get off track here and there; try to stick to it in the long run. Small money habits can make a huge difference in your finances.
Takeaways:
Financial planning is not only for the wealthy, and it doesn’t have to cost a penny. No matter how much money you have, you can start with DIY financial planning that will set you up for future success.
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