Five Steps in the Personal Financial Planning Process
Without planning out your financial life, you may reach your retirement years and still be living paycheck to paycheck. While you can take several different approaches to financial planning, some core steps tend to be the same with every method. By taking five essential steps, you can move from financial insecurity to being in control of your situation.
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Set Financial Goals
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The first thing you have to do in the financial planning process is set your financial goals. Without some kind of goals to shoot for, you will not have much of a purpose for engaging in the financial planning process. Sit down and physically write out some goals that you wish to accomplish. For example, you may wish to buy a particular house or live off of your investments. This will provide you with direction for the rest of the process.
Start Saving
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Another step in the process involves starting a savings account. Once you begin a savings account, you can start saving for your goals. For example, if you have a goal of buying a house, you can save up enough money for the down payment on that home. This can be done by setting up a regular contribution to a savings account from your checking account. By setting it up to be automatic, you will not have to worry about making a conscious decision to save.
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Set Up Emergency Fund
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Another essential part of the financial planning process involves setting up an emergency fund. Without some kind of emergency fund, you will end up getting into your savings for everything. For example, when your car breaks down, you will have to use up your savings for this expense. With an emergency fund, you can simply pay for the item. You may want to get a high interest savings account or a money market account for your emergency fund.
Handle Your Debt
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As part of your financial plan, you may also need to take some steps to get your debt situation under control. If you have a large amount of credit card and other types of debt, it may seem like you cannot afford to do anything else but pay down your debt. While you have this debt, it will hang over you and cost you a potentially large amount of money in interest. Paying down your debt should be a priority as it will give you more money each month to use toward savings or investment.
Retirement Investing
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You also need to devote some time to retirement planning. You may want to open up a tax-advantaged retirement account such as the 401k or individual retirement account. Then start setting aside a regular amount of money out of your paycheck. Once you get some money in the accounts, you can invest it in securities like stocks or mutual funds. The returns that you earn from these accounts are tax-deferred and you will not have to pay taxes until you retire.
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