Introduction
Budgeting is part of our everyday life and knowing how to develop a proper budget plan can spare you lots of time and cause less stress in future. The importance of a good budget cannot be overemphasized. It helps you create wealth, make sensible decisions regarding your investments and saving, and achieve set financial objectives.
When you have a financial plan, then you are assured that financially you are well sorted to enable you live a comfortable life. This article will provide you with a step by step process to come up with a good and elaborate financial plan.
Step 1: Reviews Your Current Financial Condition
In order to have a financial plan, you have to know your financial situation at the present time. This entails a process of scrutinizing the income in and out, the assets and liabilities you have at your disposal.
Begin with recording all means of income such as pay check, any earnings on investments and the interest from the bank account. Second, list your expenditures as:
Fixed expenses – rent/mortgage, electricity, water, insurance, loan etc.
Variable expenses – food, entertainment, grooming etc.
Review your equity (anything of value that you own including stocks, Bonds or buildings), Your fixed assets (debts that you owe including college tuition fees, credit card balances or car loans). When determining your financial position it is recommended, you can use a spreadsheet that could be in excel, or Google sheets.
Step 2: Set Clear Financial Goals
The following step is to define the financial objectives that are realistic and reasonable to achieve. These goals should be Specific, Measurable, Achievable, Relevant and time-bounded (SMART). For instance, an individualistic short-term health aim could be to reduce one’s calorie intake as a means of losing weight while a general long-term goal could be to lead a healthy lifestyle by excelling in an exercise regime.
Most importantly, begin with the priority list. Focus on your goals both in the short and long-term and always check to see that they are inline with your values and what you want to achieve in life. Such might be acquiring a home, making provision for your child or children’s school fees, saving for retirement, or repaying a loan.
Step 3: Understand how patient you are and how quickly you want your money to work for you
Risk tolerance is simply how much risk one can afford to take with his/her investment. It will offer you valuable insights on which type of investments to make, if you are to meet your financial goals. Consider the following factors when determining your risk tolerance:
1. Your age: For instance, young persons are considerate with risk because they have lifetime to regain any lost investment.
2. Your income and assets: A person with regular income and high reserves is expected to take on more risks than a person with few reserve assets.
3. Your personal preferences: There are people with a low tolerance for risk, they need less risky investments strategies than those mentioned above.
You can then decide what kind of investment you want depending on your risk taking capabilities. There is also more conservative investment instruments which are bonds, first of all government bonds or certificates of deposit. If you want to be more of an active risk taker, fast assets such as stocks or property or at least raw materials could be recommended.
Step 4: Establish an Emergency Fund
An emergency fund is crucial in anyone’s financial plan because you never know when something is bound to happen, like losing your job, or having to go to the hospital. Ideally, one should aim to save up closely to 3-6 months of doing nothing: no job search, no expenses.
Ideally, to create an emergency fund, some of the cash must be placed into a high yield savings account. This will mean that the funds are easily accessed and insulated from fluctuations in the market price.
Step 5: Make up a Budget and Stick to It
Budgeting is an effective means of financial control since it makes you plan, allocate your money in the most efficient way possible. To create a budget, follow these steps:
1. Calculate your monthly earnings after deductions such as tax.
2. To obtain your monthly disposable income, you need to deduct your exemptions or your fixed expenses for rent, mortgage, insurance and loan payments.
3. Spend that extra cash towards your sundry expenses (food, leisure, bills and etc.) and your savings.
4. Check you expenditure and ensure you keep to your financial plan from time to time.
Being financially responsible represents refraining from incurring more debt than is required by the household and the family’s actual income. This will assist you in achieving the financial basics and contribute to achieving your financial objectives.
Step 6: Learning about insurance to protect your assets
A good example of personal financial management is insurance as it acts as a secondary form of security that shields you from disasters such as car accidents, diseases among other risks. Key types of insurance to consider include:
1. Health insurance: Safeguards you against hefty costs in various medical facilities and intrusive health complications.
2. Life insurance: It offers a payment of a lump sum cash benefit in the event of the policyholder’s death.
3. Homeowners or renters insurance: Please my property from any form of damage or loss.
4. Auto insurance: Provides for repair charges or medicare expenses in the event of an accident.
Using the insurance needs assessment form, decide what kind of insurance you need considering your financial position and personal changes.
Step 7: Bar and Control Your Money Plan
Setting up a financial plan is one thing, but the next in line is even more challenging. To ensure continued effectiveness of this hybrid system, the major recommendation is constant supervision and control with necessary revisions from time to time. The plan should be reviewed on a regular basis to determine whether it meets the required goals and situation. In other words, make changes to your financial plan, portfolio allocation, and savings plan when necessary.
Conclusion
Developing the realistic financial plan is not an easy process However, the goal of having a good financial plan is worth every effort. Following these seven basic principles can create the foundation for success and start to lead a financial life that will, in turn, allow you to meet your goals on life. Remember to adhere to the self control, to be consistent with your actions, and always evaluate and adapt the plan to guarantee that you will reach your financial goals. Many people struggle financially throughout their lives and never experience financial stability and calmness for years.
