Financial Planning for Beginners – What You Need to Know

financial planning

We all strive to get to the point where we do not have to worry about our next paycheck. Financial independence is defined as earning at least 150% above the poverty line annually. Other sources define it as saving at least 25 times your annual spending. The main idea is that you do not have to work constantly to sustain your desired lifestyle.

Most people aged between 18 and 29 still depend on their parents to pay some of their bills. The age even extends beyond 30 years for some. Any individual striving to attain financial independence needs to create a financial plan.

A financial plan is a guide to meeting your financial goals by helping you manage your income, expenses, and investments. A financial plan raises your awareness of your spending habits and helps you manage your money. You will not have to worry about your retirement if you have a financial plan.

Before we look at what you need to include in your financial plan, we need to highlight financial advice. Our financial knowledge differs depending on several factors, among them our upbringing. As a result, we are all at a different level and some may be unaware of the crucial rules when it comes to finances.

You may need a financial advisor while on your road to managing your finances. A financial advisor will help you with tax management and investment for a fee. For example, if you are living in Lexington, You can look for the best financial advisor in Lexington and get assistance with your finances. The advice will cover the core areas like where to invest, how much, and your retirement plan.

What do you need in your financial plan? We shall look at the major sections you need covered which include:

1. Managing Your Income

The first step in financial planning is understanding your income and managing it. Take note of all your sources of income, your expenses, liabilities, and assets. Doing this will help you to understand how you spend your money, and you can then create priorities.

Come up with a strategy to manage your income. You can manage your income using a budget. Your budget should distribute your income to cater to your expenses, hobbies, and saving. You can employ the 50/30/20 rule for your budget.

You also need to create financial goals. You need to assess where you are financially and want to be in some years in the future. After creating your financial goals, you need to employ a realistic strategy to attain your desired lifestyle.

2. Regulating Your Expenses

Every coin counts. Therefore, you should count every coin. There are typically four types of expenses. You have the recurring ones that are variable expenses such as water bills and fixed ones such as your rent and subscriptions. You may also have intermittent expenses like repairs and non-essential expenses such as gifts and snacks.

Work toward reducing your expenses. Find ways of reducing costs such as buying supplies in bulk, reducing your energy consumption, and avoiding non-essential expenses. You can also focus on eliminating recurring bills such as rent. Work towards buying a home. 

3. Saving and Investment

Remember to always put aside something for a rainy day. Avoid spending all your income. Saving will help you avoid falling into debt, manage emergencies, and give you flexibility in life. 

First, you need to embrace the culture of saving and respecting your saved amount. Quantify your savings into short-term and long-term savings. You can even open a savings account to help motivate you to save. You will have a significantly smaller paycheck; however, you will still have funds for future use.

It is advisable to invest with your long-term savings. You should be aware of inflation and understand that with time, your money loses value. Having thousands of dollars sitting in your account is wasted potential. You should invest this money.

Find out from your financial advisor what type of investment suits you. If it is in stock investment find out what companies to consider, how much to invest, and how long. The best part about investing is that you can potently make millions from a good investment. However, remember that there is always a risk of making a bad investment.

4. Retirement Planningretirement planning

You should not spend all your life working; therefore, you need to plan your retirement. Most people consider 60 to 65 years to be the acceptable retirement age, however, you can also retire earlier. What determines your retirement age is how much money you have stored for the future.

You need to prepare for your retirement early on in your career. A great way to save for your retirement is getting an employer-sponsored retirement saving plan such as a 401k. The plan is beneficial because it lowers your taxable income because the contribution is made directly by your employer.

5. Debt Management

Focus on managing your debts. First, you need to understand that not all debt is bad, there exist good debts. Good debts are generated from owing for things that may increase your income or wealth in the long run. Good debt includes mortgages and business loans.

You should however avoid bad debt and falling into debt traps. Quantify your bad debt into high-interest debts and low-interest debts. Make sure you do away with the high-interest debts first, this is because they will cost you more if left unpaid.

Work towards avoiding falling into debt. Avoid credit card debts and the lure of paying the required minimum balance, clear the full debt. You should also be aware of how much debt you take on. Remember your debt repayments are reflected on your credit score. A low credit score will make it hard to get a loan in the future.

Conclusion

You need to pay attention to your finances. Your financial decisions today will impact your future lifestyle. Invest in a personal financial advisor if you do not have enough knowledge when it comes to dealing with finances.

Make sure you are always saving for your future. Remember your job may not always be secure. In case your employer lets you go you will depend on your savings to keep afloat.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.