It’s never too soon or too late to begin planning for your financial future. Whether you’re just starting out in your career or you’re nearing retirement, it’s important to have a financial plan in place.
In this article, we’ll go over the key components of a solid financial plan. By understanding and incorporating these components into your own financial planning, you can set yourself up for success.
Financial goals
To set your financial planning in motion, determine what you want to achieve. Do you want to save up a certain amount of money by the time you reach a certain age? Do you want to purchase a home or a new car? Do you want to retire comfortably?
The rest of your financial planning will be based on your financial goals. Once you determine what you want to achieve financially, you can start putting together a plan to make it happen.
Net worth statement
A net worth statement is essentially an overview of your current financial situation. It lists all of your assets (e.g., property, savings, and investments) and all of your liabilities (e.g., debts, loans, and credit card balances).
By subtracting your liabilities from your assets, you can calculate your net worth. This is a number you need to keep an eye on while you work toward your financial objectives.
Budget and cash flow projection
Creating a budget is a key part of financial planning. It involves evaluating your income and all of your regular expenses, which include fixed costs (e.g., rent and loan repayments) and variable costs (e.g., groceries and credit card fees).
Meanwhile, a cash flow projection is a tool that can help you predict how much money you will have coming in and going out over a period of time. It’s vital for planning your finances and ensuring that you have enough money to pay for all of your expenses.
Emergency funds
When something unexpected happens, it’s important to have a financial cushion to help you through. Having an emergency fund is key in these situations.
The amount of money you should have saved in your emergency fund varies depending on financial experts, but the range is typically between three to six months’ worth of living expenses. You’ll also want to save this money in a highly liquid checking or savings account that allows for easy and quick withdrawal.
Retirement plan
No financial plan is complete without a retirement plan. After all, retirement is one of the biggest financial goals that people have.
A good rule of thumb is to save enough money so you have 70–80% of your income from before retirement. That way, you can keep the same standard of living after you retire. However, this assumes that you’ve paid off all of your debts and have no other financial obligations.
You should also keep in mind that Medicare will not cover all of your healthcare expenses and that you will likely need to pay for some type of long-term care insurance. You might also spend more on travel and leisure activities in retirement.
Financial planning isn’t always easy, but it’s worth it. By taking the time to understand and implement the key components of a good financial plan, you can make sure that you’re on the right track to financial success.
