Start your financial planning - Six simple steps
Recently at an event I attended, I heard a scary statistic - "20% percent of women are comfortable with their financial knowledge. The number is low because they lack planning or fail to take action" (Source: 2015 Insurance Barometer Study). The good news is "Women are eager for information about financial planning and investing - 92% of women want to learn more about financial planning" (Source: Money fit women study).
Continuing the "Her Finances" series, let’s discuss a tool that will help us take control of our finances and achieve our financial goals- Financial planning. In this post, I will focus on what a financial plan is, how to create your financial plan, the continuous process of financial planning and share some resources for additional research.
Starting point
I encourage you to say the following about your financial journey:
I am financially independent.
I can achieve my big financial goals.
I will think big and not limit myself.
I will pursue financial education and empowerment.
What is Financial Planning?
There are many definitions of financial planning. Here are some that I liked:
Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life; (Source: What is Financial Planning?)
It is the long-term method of wisely managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life (Source: Financial Planning Defined)
An outline of a person or family’s financial goals and the steps that are necessary to reach them. (Source: Financial plan - Investment & Finance Definition)
Why do you need a financial plan?
Creating and managing your financial plan has many benefits. A financial plan will help you:
Achieve your financial goals faster.
Gain confidence in your financial status and the goals you can achieve.
Prepare for life and financial responsibilities.
Track progress towards your financial goals.
My financial planning journey
Until about three years ago my financial planning was focused primarily on growing my emergency fund and my savings. I set goals that I wanted to achieve and worked towards them. My commitment made me very successful in achieving my saving goals.
With my move to the US in 2015, I began to re-evaluate my financial goals, get exposure to other options and widen my perspective on financial planning. I updated my financial plan and started educating myself on different ways to achieve my financial goals. A few new areas I discovered were saving for retirement and investing in stocks. I am looking forward to exploring more areas as I learn more.
Six simple steps to start your financial planning
Step 1: Know your current financial situation
Start by being very transparent about your current financial situation. Before you begin setting your goals, you need to take stock of where you are today. Knowing your financial status will help you establish your starting point and set you up for success. Include your income, debt, current savings as well as other financial commitments.
Step 2: Define your financial goals
What are your financial goals? To be successful, you need to know what you are working towards. In my research on financial planning, I found the following essential categories: Savings, Debt, Emergency Fund, Investments, and Retirements.
Savings: Set your saving goals. In my experience, you are more successful if you are saving towards something like a certification, vacation or a new house.
Debt: Getting out of debt should be a major goal. The most common debts that you want to pay off as part of your plan are student loans, credit cards, and other loans.
Emergency fund: Are you financially prepared for emergencies? Years back I got advice to start building my emergency fund to cover three months of my fixed expenses like rent, food, health insurance, etc. Ever since I started working, I have been strict with building my emergency fund and not touching it.
Retirements: You might be very young and think that retirement is very far away. Personally, I plan to retire by 50 and work on my passions projects. At 32 now, 50 is not too far away. The fundamental question to ask yourself: How much do I have saved for retirement now? e.g., through work pension plans and how much do I still need in my retirement fund?
Investments: Especially for mid-term and long-term financial goals, investing in property or the stock market might be an option. Investing is an area I am currently exploring and would discuss in a more extended blog post.
Step 3: Create a financial plan
Like with everything we want to take control of, we need a plan. A financial plan helps you achieve your financial goals more efficiently. Set target dates and milestones to achieve your goals.
For example, if your goal is saving up $12,000 for a down payment on a house. You want to be clear on how much you can save monthly and how long it will take you to save up to your goal.
You want to be able to have a clear answer to the question: What can I do today to achieve my financial goals?
Step 4: Start implementing your plan
Now that you have a plan; it is time to take the first step and start working towards your plan. Practice being disciplined and staying committed to your plan.
Step 5: Track your progress
At all times, you want to be able to answer the question - How close are you to achieving your financial goals? Knowing where you are will either confirm that your plan is working or highlight areas you might need to change. Regularly measure the progress you are making towards achieving your financial goals. Seeing progress will encourage you to continue your journey.
Step 6: Review and adapt your plan
I recommend at least a monthly review of your plan. As we go through life, changes to your financial plan will be required. You create your plan based on some assumptions if they change you want to ensure your plan matches your learning. Plans are living documents, feel free to update.
Call to Action: Start creating your financial plan
Take courses and educate yourself.
Use available local resources provided by your financial institutions.
Consult with a financial advisor.
Final Thoughts
Take control - Be more active with your finances.
Start your Financial education - learn about new concepts and tools.
Learn from others - speak to people around you.
Work with your partner - For those of you in marriages, align your goals with your partner.
Great Resources