This is Stage 3: Develop a plan. Before reading this article, please take the time to read:
Developing a plan is the third stage of financial planning. This is where you try to meet the goals that you have set by including them in your present situation. That is why it is also important that you know your financial status, as it is where everything is going to be grounded on and provides a guide on all of your financial strategies.
Change your outlook about personal finance.
Stop thinking of money as a means to buy you things in the present. Think of it too as a means of buying you the kind of life in the future too.
Future net worth
Look at your net worth. Decide how much assets you want to build and how you are going to settle your debts. To better guide you, it is best think of it as selecting three lifestyles that you want to aspire.
- Rags to riches. You want to improve present standard of living. This where most of us fall under. Your strategy is more on acquiring assets that will eventually earn you passive income, getting out of debt quickly, and increasing current earnings to sustain a more comfortable life.
- Staying the course. You want to maintain current standard of living, and you may be more interested on how to protect your level of income and assets. You might also want to fill your days with activities that give meaning to your existence, such as playing a sport, donating to charity, collecting artworks, etc.
- Philanthropy. You are willing to sacrifice in order to give to people you love or to the less fortunate. Your financial planning no longer revolves around your needs. Instead, it is going to be concerned about how to best take care of the people who means a lot to you, such as donating to your favorite charity or leaving behind a sizable estate.
Make a budget
A budget is an estimate of your daily living that you can live by. It should look a lot like your cashflow analysis. The difference is that while cashflow is a historical record of past income and expenses, a budget is an estimate of your future.
Remember, planning is bringing the future to the present so you can do something about it. And budgeting achieves exactly that. It allows you to take control of your present life by approximating your living expenses and sticking to it, so that you will have enough to spare to make your goals a reality.
Start the habit of saving
Regardless of your income, start the habit of saving. Your budget must be designed around your ability to set aside spare cash every month. If it doesn’t, make sure to go back to it and determine ways for you to save.
Pay yourself first
Paying yourself first means that you need to change the way you think of saving. Most of us think that it is what you have left after all your spending, which is
Savings = Income – Expenses
But that’s the old formula. A smarter way to go about it is to determine your savings before all expenditures.
Expenses = Income – Savings
The big difference is that it changes your mindset about managing your money. Instead of waiting at the end of each month to know how much you have ended up saving, you turn the idea upside down by ensuring the exact amount that you will save and then controlling how much goes to your spending.
Decide on lifestyle changes
It is also important that you make a decision around how you are going to stick to your budget. This is a critical aspect of financial planning because this involves the idea of ‘sacrifice’, which is giving up some of the things that you are currently enjoying in favor of a bigger purpose later on. You might have to:
- Change present lifestyle by spending less in order to save more
- Change lifestyle at a later stage, such as after a job promotion or in retirement
- Spend less
- Sell assets that are no longer needed in order to increase cash available for investing
- Borrow money to invest
- Reduce inheritance for heirs
- Revise financial goals
- Buy more assets such as real estate, investment-linked insurance, or stocks
- Change investing level by getting more exposure to assets with higher risks but with higher potential for growth
Make money work for you
You work to earn money. It is time that you need to know the strategies of making it work for you. Learn many ways of earning such as investing in relatively safe assets such as term deposits and money market accounts. You can also learn to invest more aggressively and get higher potential for returns in equities and direct shares.
Increase your cashflow
You might be in a situation where, no matter how much you rein in your spending and live frugally, you still don’t have enough money to go around. Look for ways to increase the money coming in. Several ways to come to mind.
- pay debts with higher interest, or avoid paying interest on purchases
- look for products at discounted/bargain prices
- work harder to get a promotion
- change to high-paying job
- get a part-time job
- learn new marketable skills
- go into business
- acquire assets that can earn passive income
Next step: build a strong financial foundation
Developing a plan is really about ensuring that your goals are included in your daily reality. It also involves the next steps in personal finance. With your savings, you can buy adequate insurance cover to protect your income and reduce life risks, save for the rainy days, pay debt, and invest.