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Money Management 101- How to Create the Best Financial Plan

A big part of your adult life consists of achieving financial and material goals, but if you try to do so without specific money management, it’s likely you won’t be able to get what you want. Financial plans are essential because they help you trace a map of what steps you should take in order to get a new house, save money, pay your loans, etc. Check out this article so you know how to create a financial plan that lets you live comfortably now and for your future. 

What is a Financial Plan?

A financial plan should contain your current economic situation and your short, medium and long-term monetary goals. This financial plan also must include well-planned strategies that should help you achieve these goals. Some people like to go to professional financial planners for this, but you can easily make a financial plan on your own with a little organization of the numbers. 

A financial plan compiles your cash flow by month and yearly, your current savings and how much you expect to save (if it’s one of your goals). It also includes your current debt and the expected date to be debt free of the investments you have active and how much income you receive from them. Finally, it includes medical, life and all types of insurances; and any other relevant aspects of your financial life. 

Set Clear Financial Goals

As mentioned, the first thing to do in order to create a financial plan is to state your financial goals for the short, medium and long term. Be as specific as you can when setting your goals, don’t just leave it at “be richer”, try to state numbers and a timeframe. Some of the most common financial goals people pursue are finally becoming debt free, doing effective money management to save and take a trip, buying a new house or even getting a retirement plan. 

Know Your Assets and Calculate Them 

How do you know where you stand before you can start planning your financial goals? Learn how to calculate your assets. Your assets are, simply put, things of present or future value owned by yu or your household. Your assets include cash, checking accounts, properties, personal properties and investments.  To calculate your net worth, you simply sum up all of your assets and then subtract all of your liabilities, which are debts, loans and mortgages. 

Related: Money Management Mistakes You May Have Made

Plan for Taxes 

Another important thing to keep in mind when building your financial plan are taxes. When you receive a paycheck, you always have to deduct the pertinent taxes so you know what your real income is and you can plan accordingly. Also, you should calculate the added tax to everything you buy and every service you pay for, especially when it comes to high-cost items. 

Create an Emergency Fund 

Planning isn’t really planning if you don’t take into account that unexpected things can happen at any given moment. That’s why it’s important that you build an emergency fund and don’t touch it unless something considered to be a real emergency happens. Remember that emergency funds are not to be used for planned purchases, but they also shouldn’t be a huge amount of money. To calculate the ideal amount for an emergency fund, think of having to support your household for 3 whole months; that should be a good amount. 

Budget From the Beginning

If you want to know how much time it will take you to accomplish your goals, you’ll need to discover what your real budget is. To do this, separate your income from your steady payments and expenses, leaving space to save for whatever your goal is. 

Never Forget About Inflation 

One of the things people never take into account when talking about money management is inflation. This is something that happens year after year like a mathematical equation, and you must take it into account so you don’t end up misplacing money or numbers.

Related: 10 Things to Stop Buying, and Doing, to Save Money

Tools to Create Financial Plans: Financial Calculators 

Sometimes numbers can get a bit overwhelming and you can’t see the light at the end of the tunnel. In order to fully prepare for a plan that succeeds, here are some of the most used financial calculators that’ll help you calculate all sorts of things. 

A retirement calculator allows you make a retirement plan by entering basic information such as your age, savings, expected retirement age, current income and marital status; and it calculates an estimate of how much you’ll be able to retire with. This tool is ideal to build a retirement plan. 

A 401K plan is offered by most employers, and it lets you contribute to a fund that will be matched by your employer. If you’re a little lost on how your 401K plan might benefit you, a calculator will help you determine how much you’ll actually save. 

Credit cards, or more precisely your credit score, can be your enemy when you’re trying to get your finances in shape and get rid of debts. To make things right, a credit card repayment calculator will do the numbers for you and tell you how much it’d take to become debt free. Remember to keep close track of your credit score to avoid getting blacklisted. 

If you have a current mortgage you’d like to get rid of, or if you have a new mortgage in your financial plans, consulting a mortgage calculator will help you ease the process and make the numbers clearer. 

Believe it or not, healthcare is something you also need to think about when building a financial plan. This calculator can predict how much your healthcare rates will change over the years.

An important thing to notice about money is that it won’t be worth the save over time; that’s what we call inflation. To predict this phenomenon and avoid any unpleasant surprises, you can use an inflation calculator that tracks records back to the 1800’s and can tell you how much is your money worth from X year to today. 

Related: Money Management Tips – How to Budget Like A Pro

When to Review Your Financial Plan 

Financial plans are prepared when you have something very specific in mind or simply to get your things in order. Even if you don’t have a specific plan, it’s still important that you revisit your financial plan once a year or when big life events happen, such as: 

  • Job Change

Getting a new job that pays more or having to leave your job and getting a new one that pays less, definitely calls for a revision of your financial plan. 

  • Selling or Buying a House

Getting a new home or getting rid of your old one involves either paying up a big amount of money or receiving it, which can help you alter your financial plan. 

  • Family Dynamics Change 

Families change endlessly with time, having a new baby, getting married, getting a divorce and even having your parents come live with you can alter your finances to the point where you’ll need to update your plan. 

  • Unexpected Debt 

This is one of the less desirable changes in your finances, but getting a big, unexpected debt can mean you’ll have to rearrange your finances to create a new plan. 

  • New Financial Goals 

You can also change your financial goals, because you already achieved what you were looking for or maybe because you no longer want what you planned for. 

Creating a solid financial plan is all about being consistent and keeping close track of your numbers. Follow our useful tips and you’ll keep your finances healthy and steady. 

Related: 10 Things to Stop Buying, and Doing, to Save Money

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