Financial planning can seem really daunting but it’s an extremely important part of everyone’s personal finances. To be honest, it’s kind of fun once you have a goal to work towards and can watch it come to life right before your eyes. Keep reading to see a step-by-step financial plan example so you can create your own!
1. Come to terms with the now.
It’s time to get real with yourself. What is your current situation? What is your comfort zone? Hint hint: it’s where you are right now.
What is your current income? Where is your money going? Really dig deep and ask yourself if you have any harmful spending habits. Once we’ve come to terms with where we are right now, we can begin to level up our finances.
2. Write down your financial goals.
Write down your wildest dreams! Would you like to purchase a home someday? What about travelling somewhere new every year? Have you thought about when you’d like to retire? Maybe you just want to pay off those dang student loans!
Whatever your dreams are, I can promise you that they’re not stupid. No matter how crazy or unrealistic they seem right now, just write them down. Writing down your goals is strongly associated with goal success!
3. Start an emergency fund.
If you already have an emergency fund, you’re ahead of the game! Congrats! An emergency fund is money that you keep tucked in a high interest savings account ready to use when life doesn’t quite go as planned.
How much? Well, the best answer I can give you is at least 3 months, if not 6 months of bare bones expenses. How much do you need to survive for a month if you suddenly lost all of your income? Take that number times 3, or 6, or really whatever you feel comfortable with.
Money and finance in general is an extremely emotional and personal topic. Knowing that you have yourself covered in an emergency situation is a crucial start to a successful financial future.
4. Pay off high interest debt.
Any debt where you are getting charged interest rates around 5% or above, get that stuff outta here!
There are two main debt payoff methods:
- The debt snowball: pay the minimum payments on all debts while focusing on your debt with the smallest total sum. Once that is paid off, go to the next smallest debt and work your way up.
- The debt avalanche: pay the minimum payments on all debts while focusing on your debt with the highest interest. Once that is paid off, go to the next debt highest interest rate. This method makes more mathematical sense but might not be as mentally motivating as the debt snowball method.
Once your high interest debt is paid off (credit cards, payday loans, etc.), you’re ready to start building some serious wealth.
5. Start investing.
Rich people are rich because they invest. The best time to start investing was yesterday, so our next best option is to start today.
Starting to invest as early as possible is key to what we call ‘compounding interest’. Investing allows your money to make money, which then continues to make even more money and BAM! 40 years later you’ve got a nice stash of cash ready for you to sip margaritas on the beach without a care in the world.
A million dollars might seem like a fairy tale but as a financial plan example, investing a mere $500 each month starting at the age of 25 could amount to a comfortable retirement of over 1.5 million dollars (assuming 7.0% rate of return)! All you need to do is start. The sooner the better.
To learn more about investing check out:
The Basics Of Investing In Canada
Saving vs. Investing: What Should You Do
6. Get yourself insured.
Have you ever thought about getting life or disability insurance? Well, maybe you should. Life and disability insurance is an important thing to do in your twenties because we’re generally healthy so we can get great coverage for a great price.
Just as an FYI, banks are actually not allowed to sell life insurance, although they might sell it as such. If you are going to be paying towards life and disability insurance, you should be filling out a survey to test your eligibility before you pay anyone a cent. Working with a un-biased broker might be beneficial in this case so they can help you find the best option for you.
Even if you’re finally getting around to purchasing dental or health coverage, even renter’s insurance, let’s make sure you’ve got yourself covered in the worse case scenario.
7. Calculate your retirement number.
Do you know how much you need to retire? Take your monthly expenses, times them by 12 to get your annual expenses, then times that by 25. Tadaa! That is a rough idea of how much money you will need to retire and safely withdraw 4% every year without running out of money.
In this financial plan example, Ron makes $60,000 a year and his expenses amount to $4,000/month. To calculate Ron’s approximate retirement number, we times $4,000 by 12 months (=$48,000), then times that by 25 (=1.2 million). Ron’s retirement number is 1.2 million!
You can also check out this retirement calculator, which takes into account inflation, salary increases and more to tell you how much you need to be putting away each month to hit your number.
8. Review and change your financial plan as needed.
The financial plan you create today is not going to be set in stone. Life changes and our financial plans will definitely change with us over time. It’s extremely important for us to have goals to work towards but make sure you’re creating an environment for yourself where you can fall and get back up again.
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