13 Financial Planning Tips Everyone Should Know
Do you feel confident in your financial future?
According to research done by Charles Schwab in 2018, Millennials tend to have high expectations for the futures of their financial lives. However, the research also showed that very few Millennials actually have concrete financial planning to back up their bright hopes. In fact, a full 43% of Millennials surveyed claimed to have relied on money borrowed from their parents the year before.
Millennials aren’t the only ones having a difficult time financially, and they’re not the only ones at risk of being in denial about their finances. Even if you’re just scraping by, it can be easy to convince yourself that things are better off than they really are. If you aren’t careful, you could find yourself in financial trouble later on in life.
Fortunately, there’s a simple solution, and it comes down to managing finances with a plan.
There’s more to financial management than doing taxes and saving money. But many people are unsure where to begin with formulating a strong financial plan.
Financial planning is best done with the help of an expert, but here you’ll find 13 tips to help you get started strong.
1. Decide What You Want for Your Life
Everyone has an idea of what they’d like their life to be like, but not everyone has written theirs down in the form of a goal. Your finances play the single greatest role in determining your quality of life, particularly during retirement. But unless you’ve identified what kind of life you want to experience, you won’t know how to arrange your finances to make it happen.
Because of this, one of the best things you can do for your finances is write down in detail what your ideal life would be like. What would you be doing for work? How much would you be earning, and what kind of retirement would you like to afford?
2. Know Where Your Money Is Going
You would probably be amazed by how many people don’t know what their exact monthly expenses are. But if you’re like most people, chances are you aren’t sure how much you spend in a month, either.
It’s an easy mistake to make, but it’s one of the worst things for your financial future. If you don’t know exactly how much you’re spending, you could be spending too much and going into debt without realizing it. You could be wasting money on things you don’t really want or need, like unused subscriptions.
Spend a month logging every single expense you have, from utilities to groceries. This will give you a clear picture of your financial situation.
3. Know Exactly What You’re Earning
Like knowing your monthly expenses, you need to know precisely how much you’re earning every month, too. This is even more critical if you have multiple income sources or occasionally receive unexpected income. You’ll want to compare everything you’re earning to the amount you’re typically spending.
You should also determine what your net income is.
Net income is the amount that’s left after you’ve saved 15% of your total income in multiple types of accounts for things like investing and retirement. It’s a good idea to have taxable, tax-deferred, and tax-free accounts, and to have 15% of your monthly income go there automatically. The amount leftover—your net income—is what you’re allowed to budget for expenses.
4. Watch Your Credit Score
Do you know what your credit score is? When was the last time you checked?
For people with less-than-perfect spending habits, checking their credit scores can be an uncomfortable experience. But your credit rating is what allows you to take out loans and make big, important purchases when necessary. You can’t afford not to watch your credit report and work to improve it.
There are many strategies you can use to improve your credit. You can pay down debt, factor utility payments into your credit score (you can use the Experian app for this), or use credit cards strategically to boost your credit. You should also make all your payments on time no matter what, and avoid taking on more debt 30% of your available credit in debt.
5. Start Spending Less Money
There’s no way around it: to get ahead financially, you must start spending less than you earn. If you’ve been squeezing by from paycheck to paycheck so far, spending everything you earn each month, you’re going to need to find a way to spend less.
No one likes to think about cutting expenses, but it doesn’t have to be as frustrating or uncomfortable as it sounds. In fact, you shouldn’t have to stop spending on the things you enjoy. You’ll just stop spending money on things you don’t really care about.
Look for ways that you’re spending money on things you don’t particularly like or need. Maybe you have a streaming service subscription, gym membership, or other recurring payment for something you don’t use. These are perfect opportunities to spend less without compromising your quality of life.
6. Pay Off Credit Cards
Financial experts agree that credit card debt is one of the worst kinds of debt you can have, if not the worst. The interest rates for credit cards are much higher than for other types of loans, and there’s less you can do with them. People don’t use credit cards to pay for their home or car—they use them for small, often unnecessary purchases that add up quickly.
If you’re currently using credit for everyday expenses, that’s a habit you probably ought to break. Then make a plan for paying off your credit cards and stick with it.
7. Have a Savings Plan
Everyone knows you should save money, but do you have a savings plan in place?
You’ve probably heard the advice that you should “pay yourself first.” What it means is that, when you get your paycheck, you should put money into your savings and retirement accounts before spending on anything else. And yes, that includes before paying your bills.
The reason this advice gets circulated is that financial advisors know how unlikely it is for anyone to have money left over after they’ve been spending all month. If you wait until the end of the month to see what’s left over for saving, chances are you won’t have much to set back. Saving first forces you to be more careful with your finances throughout the month so that your money goes further.
8. Automate Your Investing
Having a savings account that you’re putting money into is good, but it isn’t enough. You should also be regularly investing money, particularly to prepare for retirement.
Investing options can become complicated, and it’s a topic that goes beyond the scope of this article. But the important thing is to have money go from your salary into your investment accounts automatically, just like it should go into your savings account automatically. This ensures you’re preparing for the future without making it something you have to pay attention to every week.
9. Be Proactive About Retirement
In the report mentioned at the beginning of this article, it’s stated that many Millennials feel confident that they’ll retire at 60. However, most of them fail to explain how they intend to do it. Relatively few of them are taking a proactive approach to prepare for their retirement.
That’s one mistake you don’t want to make. Your retirement years can be the best period of your life with the right planning, but only if you take action as early as possible.
Your employer may offer a 401(k) or options for deferred compensation that can help you prepare for retirement effectively. Your Human Resources department should be able to tell you what options are available to you.
10. Use Multiple Bank Accounts
It may not have occurred to you that having more than one bank account can make organizing your money easier. With just a single bank account, financial planning and budgeting can be more difficult, because there’s only one place to put your money. That doesn’t exactly make it easy to keep track of different amounts.
To simplify your personal accounting, use no more than five categories for your budget, and then set up a separate checking account for each category. This makes it easy to see how much money you have left in your budget for each category without breaking out the calculator.
11. Use Online Budgeting Tools
At one time, the only financial planning tools you had to work with were a checkbook ledger and graph paper for budgeting. In the decades since then, as the world has gone digital, financial planning has become more automated and user-friendly. Today, there are hundreds of software programs and online tools that can help make personal finance easier—many of them for free.
Websites and mobile apps like Mint from Intuit can track multiple budgeting categories for you, and even sync with your bank and credit card accounts. This makes it easy to track expenses and savings goals automatically, without spending all your time buried in ledgers and spreadsheets.
Doing a quick search for apps to help with personal financial management should give you dozens of results that can meet your needs.
12. Focus on Earning More
Sometimes when people start learning about personal finance, they get excited about all the money they can save to start building wealth. They set up multiple investment accounts and begin cutting costs relentlessly. But sooner or later they hit a brick wall when they realize that they’re severely limited in how much they’re able to save.
Basically, your savings will always be limited by your income. Even if you stopped spending money altogether, you would still only be able to invest as much as you’re earning.
But while there’s a limit on how much you can save, there’s no limit on how much you can potentially earn. By focusing on increasing your income, you can set yourself up for long-term financial success much more effectively than by trying to cut costs and save.
13. Claim Allowable Tax Deductions and Credits
This is a fairly obvious piece of advice, but it gets overlooked all too often: always claim allowable tax credits and deductions. There’s no point in paying unnecessary taxes, so take advantage of all the opportunities available to pay less legally.
Always keep the receipts from purchases you make, especially if they’re for your business. Keep careful track of donations you make throughout the year. And work with a qualified tax professional every year to make sure you get all the deductions and credits you qualify for.
Begin Your Financial Planning Today
Finance and accounting are complex topics, but the good news is, you don’t necessarily need a lot of information to manage your personal finances well. If you try to apply these financial planning tips, you’ll be on your way to enjoying a comfortable and secure financial future. Not only that, but you’ll likely be well ahead of your peers, too.
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