Financial Planning for Novices: How to Begin
Inclement weather has the surprising advantage of giving us time to spend quality time indoors and deal with our finances. Even the most innocent questions from a nervous friend, if she is doing the right thing or not or where to check her credit score eventually, turned into the issue of what to do next.
Everyone going through the “growing-up blues” needs the assurance that the things she was doing and bringing her anxiety made her a better person every step of the way.
The key is finding out how to begin effective financial planning. Here are some helpful steps to follow:
Do not be anxious
Although you might not end up choosing the most beneficial funds for your retirement plan or you end up paying for a credit score instead of getting it for free or you paid a slightly higher interest rate on your loan than you wanted, you will still be way ahead by a long stretch compared to having done no planning at all.
Granted, everyone wants to have the best choices for optimizing benefits and savings; however, fretting over how to chase the “highest and best” and ending up being paralyzed is counterproductive. The better goal to aim for is TIME. It is a commodity you cannot renegotiate or purchase back.
Do with what you already have
Determine where you are exactly before making a plan for your future by calculating the figures that that tell you what you have and what you need to have.
Do a financial inventory first – net worth, account balances, credit score, liabilities and assets. Consolidate all your finances using Personal Capital’s free tracking application in order to obtain a complete perspective of your financial status at any time.
Direct your course
Look at your finances as a road map, telling you where to put location markers along the way as you travel and to direct your destination. Only by marking your origin and staking out your destination will you be able to determine the most efficient route from one point to the other – and that is how finances work as well. Set your goals, your time frame and the cost for every step of the journey and order them according to their urgency.
Get educated on how you can effectively set and achieve goals through online aids that help you how to remain organized and to monitor your progress.
Marking your direction
Your present financial assessment marks your starting point and your goals as your destination, while your budget is your direction on the map. And before you can even begin to take the trip on that map, you must draw your direction – that is, make a budget.
Create a budget that best suits your situation -- a percentage budget, a zero sum budget or a cash- only budget – making sure that you stay above your make-or-break level, meaning your minimum cost of living, including savings.
By diligently minimizing your spending to essential expenses and/or maximizing your income in order to reach and go above the essential level, you will begin making headway. Read on the article “How to make a budget without a budget”.
Having done your inventory and determined your minimum financial level, you can have a better idea of your leftover money in order list your prioritized objectives. Where do you start? Should you pay off your loan? Or save into a retirement account? Open a savings account for a down payment for a home? Increase your emergency fund? With so many needs and not enough money, what is one to do?
At this point, the “growing-up blues” set in. Relax and be not anxious – no matter what happens, as long as you make reasonable choices, the road will lead you home.
Categorizing Financial Goals
There are four major categories of financial goals:
- Emergency savings
- Loan payment
- Short/Medium-term savings
- Long-term/Retirement savings
Most experts recommend funding all of these goal categories, aside from covering your monthly costs, and assigning bigger income portions to your highly-favored goals. However, rarely do things work your way and your limited income may require you to choose one or two financial goal categories above the rest.
Oftentimes, the two most crucial are emergency savings and loan payment. Providing yourself a safety net at a minimum of $1,000 is the first on your list (although the target amount should be enough to cover your living expenses for about 6 months). With your 1k emergency fund, proceed by distributing your money accordingly for emergency savings contributions and loan payment. You may also want to insert a tiny amount for your retirement savings into the picture -- this could be as small as $50 monthly – which is good enough for a low-interest debt.
Also, remember to contribute to short and medium-term fund savings. For young professionals, you have enough time before you reach 59½ to set aside some money for your lifelong dreams, whether a dream house, raising a family, travel, etc. That refers to money apart from your retirement nest egg or emergencies funds.
However, if your budget will not allow you to contribute to all savings categories, your best solution is to seek ways to increase your income. Saving money and reducing your daily expenses can only do so much. Your ability to earn more has practically no limit whatsoever; and having the flexibility and freedom that greater earnings provide will further enhance your financial and life aspirations. Financial experts will attest to this fact.
Financial Planning for Novices Review
- Assess your financial situation
- Set your goals
- Make a budget and surpass your minimum cost of living
- Prioritize your objectives and set aside surplus money from your living cost
- Enhance your income generation for funding higher targets
- Relax and enjoy your accomplishments
Breaking it down to the barest components, novices can do effective financial planning using a few essential, practical steps, namely: earn more money, reduce expenses and set aside extra money consistent with your highest goals.
Following these vital tips is your best weapon against the onset of “growing-up blues”.
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