Hopefully, over the course of the last newsletters, you have done several things. One, you have assessed where you are financially. Two, you have made financial goals to get to where you want to be. The next step is creating a financial plan to get there.
As I have mentioned in the past, finances are hard to juggle. It is hard to balance month-to-month expenses with financial goals like paying off debt, building an emergency fund, planning for retirement, and saving for college tuition while actually getting to enjoy the fruits of your labor.
It’s good to create a financial plan to help you achieve the goals you created. Your plan can help you determine exactly where you are going. You have goals and aspirations, and your plan will keep you focused. You can make future financial decisions based on whether they help or deter you from your financial goals. So how do you create a financial plan?
Step one is figuring out where you are going.
The goals you created are the driving force behind your financial plan. Goals could be anything from getting out of debt, building an emergency fund, starting a college fund, or investing toward retirement. Your goals will probably be a mixture of short-term (within one year), mid-term (between two to five years), and long-term (five or more years) goals. Remember to be realist and specific. For example, if you want to get out of debt, consider the amount of debt, the interest rates, and how much you can dedicate toward paying debt off without incurring more. Then, from there, you can determine your get out of debt date goal.
Step two is building milestones.
Remember Rome was not built in a day, and your emergency fund will not appear overnight (unless you receive a sudden financial windfall). Creating milestones is done by creating small wins along your financial journey that become key milestones in your financial journey. Let’s return to the getting out of debt example.
Last issue, we talked about the Dave Ramsey method of using the snowball effect. You pay off the smallest amount (by paying more than the minimum payment) first regardless of the interest rates of your debt (just making the minimum payment on all other bills). The quick win gives you momentum, motivation, and a sense of empowerment. Then you move on to the next smallest and so on until all debt is paid off.
So let’s say you have three credit cards, and your goal is to be out of debt in four years. Your first milestone goal could be paying the credit card with the smallest amount within one year. Your next milestone could be paying off the second smallest credit card within two years and so on.
Step three is setting goals toward your plan.
For this example, let’s talk more about creating an emergency fund. You should determine how much you want to save and when you want to reach the goal by. This will help you determine how much you should set aside each month. You should factor in items like bonuses and income tax refunds. In some cases, people have two months with an “extra” pay period each year. If your monthly budget is based on two pay periods, why not direct that third pay period check toward your emergency fund?
If you find that the goal might not be achievable in your timeline, then change the date you want to achieve the goal by. Other options could be getting a part-time job or reducing your spending in other places so you can save more.
There is a saying that, “When you fail to plan, you plan to fail.” This saying is true in life, especially when it comes to finances. Create your financial plan, set your milestones, and celebrate your achievements. Your first step toward financial health starts today!