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The following article is by MPFJ staff writer, Miss T, from Prairie Eco-Thrifter. If you want to learn how to live your dream life in a sustainable, healthy, and money savvy way, check out her site here.
“Prior planning prevents poor performance,” was a line my sales manager used to quote to me frequently when I first started work.
It occurred to me recently that this little saying applies to many areas of life, including personal finances. You need to plan to get where you want to be financially, otherwise, you probably won’t end up where you wanted to be. I can tell you that my financial position improved considerably once I actually started planning how I wanted to spend my hard-earned cash.
Visualize Where You Want to End Up
Before you can set out a plan, you need to know where you want to end up. What position do you want to be in later in life? Do you have a 5 year, 10 year, and 20 year plan? What position do you want to be in when you retire? For that matter, when do you want to retire?
Having a financial plan also helps you manage your money better and actually helps you make it stretch to achieve all the things you want in life. Financial planning helps you know where your money goes and how to keep money in your pocket or account for longer. You know what you want your money to do for you because you have taken the time to work it out in advance. Prior planning means that you avoid unnecessary and reckless spending on things you don’t really need. (Haven’t we all done that at some time?) You will know how much you can spend at any time and what your credit limits are. Never again run out of money before you get to the end of the month.
Steps to Financial Planning
These are some of the reasons why financial planning is a good idea. So let’s look at how you go about it.
The first step is to work out what you want, what is important to you and what you want your financial future to look like. Investigate your personal values – those beliefs that you have about what is right and good. Most people make their decisions based on what they value. Sit down with your partner and determine your mutual values and how your differences could impact your financial future. This step alone will help to avoid many of the arguments couples have over money in the future.
If you find it hard to work out your values and beliefs, consider some aspects of life like savings, education, family, vacations, health, success, debts, entertainment, insurances, food, clothes, culture, sports, hobbies and activities, friends, spending, money and any other things you think of. Rate each point on a scale of ‘important’, ‘not important’, ‘very important’ and ask your partner to do the same. Compare your lists and discuss the areas in which you differ; consider how your differences will impact your financial future.
The second step in planning your financial future is to draw up a budget. Make a list of all the household income and expenses, leaving nothing out. Remember to include occasional expenditure like gifts, hair cuts, vet bills, and magazine subscriptions. Subtract your total expenses from your total incomes; if you get a negative figure, you will need to find where you can cut spending. Try to make several smaller spending cuts rather than just one big hit; this lessens the pain somewhat.
Does your budget include amounts for some general savings, an emergency fund, and retirement saving? These are vital areas to make allowance for in the budget to get your financial plan set on solid footing and enable you to manage unforeseen disasters. You might need to make some tough decisions to set yourself up for a more favorable financial future.
If you have amassed a large credit card debt, like I had, allow extra funds for attacking this expensive debt to get it paid off. This should be your first financial goal; this high-interest debt will impact your financial security for as long as you have it. It will be easier to make the tough choices now than wait until later, when your situation could be more serious.
Once you have your budget in place, you will have a good idea where you stand financially, right now. If your income is insufficient for you current spending needs, consider a better paying job or a second part time job. If your situation is really serious, consider such things as down-sizing your home or buying a less-expensive car.
When you know where you are at the moment, think about where you want to be at different stages of your life. Set goals such as where you will live, what vehicles you’ll drive and holidays you want to have. What do you want your retirement to look like? Work out what these will cost you and factor them into your financial and savings plans.
Your financial plan will always be a work-in-progress. As your achieve goals or your circumstances change, tweak your plan to keep it relevant to your needs.
How about you all? How do you financially plan?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/76657755@N04/7027601297/sizes/l/in/photostream/