Your Complete Guide to Making a Financial Plan

Financial security is one of the most common life goals around the world. It’s the reason why people save, scrimp and budget their money. But sometimes, they fall behind on their efforts. Whether it’s due to a drastic setback or a series of small stumbles, you might find that you’re not where you want to be in terms of handling money. While this can be frustrating, it doesn’t have to be the end of the world. You can learn to create a financial plan from the bottom up and work toward a more financially sound future.

Start by Setting Goals

Most people work better when they have something to work toward. Give yourself both short-term and long-term savings goals to serve as motivators. Use a financial plan template to get started if you’re unsure where to begin. Do you want to retire on time? Take a big trip in two years? Pay off your student debts before you get married? Your individual initiatives will be personal to you, but make sure they follow the S.M.A.R.T guidelines. This means they should be specific, measureable, actionable, realistic and timely.

Create a Budget

Next, you need to understand exactly where your money is going every month. You don’t need to use elaborate software to get organized, but try to use a simple financial-planning worksheet to track your income and expenses. Most financial experts recommend following a 50/30/20 budgeting rule. Put simply, this means that 50 percent of your income should go directly toward recurring, time-sensitive needs, including your mortgage, car payment, transportation and similar bills that you pay on a regular basis. From there, you should allocate 30 percent as “fun money” to be used for dining out, subscriptions, entertainment and the like. The remaining 20 percent you’ll apply toward saving for the future and paying down debts.

Participate in Your 401(k)

Does your employer offer a matching 401(k) program? If so, make sure you’re taking advantage of it. A main objective of financial planning is to create patterns that allow you to enjoy life away from a full-time career when the time comes. Yes, such a program will affect how much money you have to take home at the end of every month. Yet, the principle of “If you don’t see it, you won’t miss it” usually applies. It’s wise to plan ahead for your retirement and set aside some money now, even if you’re decades away from your golden years.

Create an Emergency Fund

Even if you’re barely scraping by, it’s important to set aside a little money each month in an emergency fund. Aim to eventually save one month’s worth of living expenses so that in the event that an emergency occurs and you no longer have a steady stream of income, you won’t go bankrupt. Over time, increase your fund to six month’s worth of living expenses if possible. If you need to use your emergency fund, work on building it back up once you have an income stream again. At the same time, work to build up your good credit or reverse any bad credit you have. This can help you receive better interest rates on loans, skip certain security deposits and provide financial freedom.

Pay Down Your Riskiest Debt

The reality is that some debts are riskier and more harmful than others. The most toxic types are those with the highest interest rates, including credit cards, payday loans and similar debts. Seek to pay these down as quickly as possible so they don’t keep working against you. Over time, as you pay down your debts and work toward a more lucrative and comfortable future, you’ll find that saving becomes second nature. Seek out free financial planning advice from your local library or community center if you need more guidance. When you make it a practice to keep a close eye on your income and find way to cut wherever possible, you might be surprised at how quickly even the most dire financial circumstance can be reversed.