Financial planning will help you determine your financial goals and create a plan to achieve those goals. But most importantly, a great plan will teach you the right spending habits that will help you build and maintain wealth. Planning will ensure that you live within your means and while building a cosy retirement for yourself. A financial plan simply helps you prepare for the future.
One of the great benefits of financial planning is that you can starting making your money work for you.
Your financial plan is unique to you and your financial situation. This plan will guide you to where you want to be and how you want to get there.
A simple and easy to understand plan will take you further than a complicated plan.
Use these 6 steps to create your financial plan;
- Set financial goals
- Setup a perfect spending plan
- Start your emergency fund
- Get rid of debt
- Start investing
- Continue building wealth
1. Set your financial goals
Figuring out what you want is the first thing you need to get out of the way.
Think about what inspires you. Where do you want to be in five years from now? You can even push the envelope and figure out where you want to be in 10 or 15 years.
Do you want to buy a house? Get married? Maybe you want kids. Are you thinking about retirement?
When you come up with your goals, try to find goals that inspire you.
Use the SMART-goal strategy for your goals.
When you create your SMART-goals make sure they’re Specific, Measurable, Attainable, Realistic and Timely – SMART.
For example, if you’re planning to buy a house. Your goal could look something like this;
“By 2025 I will pay an R200 000 (20%) deposit on my first house.“
- Specific: 20% deposit on my first house.
- Measurable: You can track your process monthly or yearly.
- Attainable: R200 000 / 5 years = R40 000 per years / 12 months = R3 333 per month. Yes it is attainable.
- Realistic: You need to stop making debt and push more towards savings.
- Timely: You’ll achieve your goals within 5 years.
Setting your goals is simple.
Now, all you have to do is reach your goals.
2. Setup a perfect spending plan
You can’t achieve your financial goals without a proper budget in place.
Because budgets are so boring, we like to think about it as a spending plan.
Knowing where your money goes will help you plan your financial situation.
You know that you have to save a minimum of R3 333 per month so that you can buy a house in 5 years. What are you doing right now to save R3 333. You might have to cut costs somewhere or at least be more vigilant about your spending habits.
Taking the time to set up a spending plan will help you develop the right spending habits.
“Personal finance is 80% behaviour and only 20% head knowledge” – Dave Ramsey
Now that you’re saving R3 333, you’ll have to be more careful about how you spend your money.
3. Start your emergency fund
Having an emergency fund is the foundation for your financial plan.
The purpose of an emergency fund is to help you with those unexpected bills so that you don’t pile up on your credit cards bills.
You can start small. Put R500 away at first. Then keep adding R500 each month until you’ve saved one month’s basic living expenses.
You can keep adding to this savings account until you’ve saved a months’ salary.
4. Get rid of debt
A crucial part of financial planning is to get rid of ALL your debt. Debt is the one thing from holding you back when you’re trying to achieve your goals.
A great method for getting rid of debt is the snowball method.
Here’s how it works…
Your debt and minimum repayments:
- R8 000 medical bills – R500 minimum repayments
- R20 000 credit card debt – R1 000 minimum repayments
- R70 000 car loan – R2 000 minimum repayments
- R100 000 student loan – R4 000 minimum repayments
When using the debt snowball method you would pay the minimum repayment on all your debt.
But you would be pushing any extra money towards the smallest debt account. In this example, it’s the medical aid bill.
Because you’re doing some freelance work and you’ve cut down on expenses you’re able to pay an extra R500 towards your medical aid debt account.
So now you’re paying R1 000 towards your medical aid debt. Which means you’ll pay off your media aid debt within 8 months.
Once that account has been paid off, use that R1 000 you’ve been using and transfer it to your credit card debt.
Now you’re paying R2 000 towards your credit card debt (R1 000 minimum repayment plus the extra R1 000). You’ll be paying off your credit card debt within 10 months.
Do the same thing with your car loan and pay it off within 18 months.
By the time you’re paying off your student loan you’re paying double what you would have.
Your student loan will be paid off within 13 months.
Because you’ve worked hard and sacrificed a bit you were able to pay off R198 000 in only 49 months or 4 years.
The single most important thing to remember when using the snowball method is that it’s not the math that makes this method successful it’s your behaviour.
Once you change your spending behaviour, nothing will stop you.
5. Start investing
Most people think they need to be rich before they can start investing. But that’s the farthest thing from the truth.
You can start investing even if you only have an extra R500.
Investing can be as simple as putting some money into your retirement fund or even the stock market.
Investing your money simply means that you’re putting it away so that it can grow over time. The great thing about investing is that you can put away R500 today, and in 30 years time you’ve made 10 times that amount.
It doesn’t have to be huge amounts of money. But knowing that you’re putting some money away for your future-self, creates financial relief.
6. Continue building your wealth
These steps are the building blocks for your future wealth.
As your career improves and you learn the right spending habits, continue to build your financial wealth.
Keep pushing more money towards your retirement fund.
Keep topping up that emergency fund every time you use it.
Keep investing your money.
And always, keep reaching your financial goals.
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