According to Schwab’s 2018 Modern Wealth Index, only one in four Americans has a written financial plan. Those without them think they do not have enough money to warrant creating one for themselves. Others cite having little or no time while the rest consider the process of creating one to be too complicated.
Fair enough, the process can be overwhelming. However, that does not mean you should not plan for your finances.
In this short guide, we’ll walk you through five practical steps on how to plan for your future finances on matters credit, mortgage and investment.
Start by setting financial goals
Have you ever set any form of goals in your life? Buying a new car before the end of the year or losing weight before summer begins? If this sounds familiar, then financial goals are no different.
To get started, write down your short-term goals like paying off your credit card debt, sticking to a budget or saving for an emergency fund. Thereafter, write down your long-term goals like buying a home, saving for your kids’ college education, creating multiple streams of income, etc.
While writing them down, be SMART about it. If you’re unsure about what this stands for, your goals should be Specific, Measurable, Attainable, Realistic, and Time-bound. Better still, try to make them inspiring so that you can remain motivated to pursue them even when things are not going right.
Track your money and channel it to your financial goals
Before that though, you need to have a budget where you can apply the famous 50/30/20 rule for personal budgeting. To give you a simple breakdown of what these figures represent, 50 percent of your income should be spent on essentials (rent, gas, transportation, and other recurrent expenditure), 30 percent on wants (eating out, travel, clothing, entertainment), and 20 percent on savings and debt repayment.
If you are disciplined with your budget, you should start noticing a positive cash flow in no time. You can then use this newfound money to finance your goals in step 1.
Tackle high-interest debt
When planning for your future finances, make sure you pay off all high-interest debt as quickly as possible. This is because interest rates on these accounts can be so high that you end up repaying two or three times what you borrowed. Common examples of these debts include credit card balances, title loans, payday loans, and rent-to-own payments.
In case you’re struggling with debts of these nature, we highly advise you to check out Crediful, a free online resource that helps individuals overcome personal debt fast. While you’re at it, learn how to restore a good credit score if it’s already gone to the dogs.
Invest your savings
If you follow your budget to the tee, you will have at least 20 percent of your income for investing. To get things underway, start with investments that have a low barrier to entry. An excellent place to start if you’re employed is the traditional 401(k), a tax-advantaged retirement account. Later, you can add a total money market index fund and Robo-advisor to your portfolio.
Grow your income
Finally, if you carefully follow through the above steps and are disciplined about it, you should be at a point where you can now look for a higher paying job. This will significantly increase the amount of money you set aside for your long term goals.
For example, a boost in income can help you repay your mortgage faster, facilitate easier creation of multiple streams of income, and enable you achieve your goals much quicker. However, if you see no prospects in getting a higher paying job, you can pick up part-time jobs or look for freelancing opportunities to grow your income.
For this step, the caveat is to avoid lifestyle inflation when your income grows.
Personal finance is a touchy subject for many people today. Unfortunately, most of us do not like to talk about it even though we know deep down that it affects every aspect of our lives. For some people, however, it is the lack of financial literacy that keeps consuming them. These are the people you’ll find living paycheck to paycheck while are drowning in high levels of debt.
The good news is that you can avoid this kind of vicious cycle this cycle by getting deliberate on how you plan for your future finances. Start by implementing the five steps we’ve described for you here to turn around your fortunes. Afterward, you can look for more advanced information and tips to help you streamline your credit, mortgage, and investments.