Introduction to Basic Financial Planning
Without proper financial planning, it’s very difficult to reach your goal no matter what that goal might be. For example, let’s take a look at the great American game known as football. Teams work hard in an attempt to get to the playoffs by creating plays in an attempt to defeat the opposing team. They don’t just run out on the field without a proper training and planning. In fact, everyone works as a team in order to execute a well defined and practiced play. Why would you attempt to live your life without creating a proper plan of action? People plan out their education goals, career strategy, so why wouldn’t you have a financial plan too.
I’ve worked in the technology business for most of my working carrier. In the IT business, education and certifications means a great deal. A person doesn’t just run out and take a high level certification exam. You have to plan and follow a certification path in order to achieve their goal.
Eliminating debt and saving for the future also requires a plan of action. These articles will help you develop your plan of action and walk you through the steps necessary to eliminate debt and begin creating wealth. A well designed plan is worthless if it is not properly executed. I can help you define your financial plan, but it is up to you to properly execute your plan.
There are several tools designed to help you achieve your financial goals. The most important of these tools that we are going to build our financial plan around is the budget. They say knowledge is power, and a well defined budget give you the knowledge to understand where you’re hard earned money is going.
Financial Planning Outline
Here’s the outline that I used to eliminate debt and begin building wealth.
- Create a Budget
- Create an Emergency Fund
- Eliminate Debt
- Finish Emergency Fund
- Build Wealth
Now that we have our outline, let’s take a look at each one of these items.
Budget: You have to know and manage your income and expenses. The budget documents your income and expenses and gives you the opportunity to better understand and control your finances.
Basic Emergency Fund: Put back $500 which will only be used for emergencies. This way if your car breaks down, you will have the money for the repairs and you will not need to put anything on a credit.
Eliminate Debt: Pay off all your debt with the exception of a house payment. Debt snowball is the perfered method to eliminate debt.
Finish Emergency Fund: Once your debt is paid off, put back enough money to cover 6 months worth of your living expenses. This money is only to be used in the case of an actual emergency.
Build Wealth: In order to begin building wealth, I suggest investing 10% to 15% of your income in good mutual funds. Depending on where you are in life, you may want to invest more in order to make up for previous years.
Now that we have defined our financial plan, it is time to move to the next step and begin creating your budget.