Smart Financial Planning – How to Make a Financial Plan
Smart Financial Planning – How to
Make a Financial Plan
Learning how to take control of your personal finances is a must have skill in life yet most people never receive any instruction in it.
The first thing you must do before you start is to figure out how you are spending your money. Keep a diary for a three month period of everything you spend, down to the last dime. If you spend 3.50 a day on coffee, note that down. Every time you pay a bill, note that. Once you have three months of spending activity documented, then sit down and sort your expenses.
Your expenses will generally fall into two categories: fixed and variable. Fixed expenses are those that stay the same or are unlikely to change such as your mortgage/rent, car payment, student loan payments, credit card payments, and payments for cable/satellite TV service. Variable expenses are those that fluctuate from month to month such entertainment, groceries, eating out, clothes shopping, or emergency expenses like car repair.
Total them up and then subtract them from your income. If the number is positive then you have a surplus, if the number is negative, then you have a deficit and are spending more than you are making.
If you have a surplus, then you should do a couple of things:
1: Set up an allocated savings plan
2: Pay down your debt
Setting up an allocated savings plan lets you plan your purchases, avoid going into debt from unexpected expenses, and save money to just have fun with on the spur of the moment.
Paying down your debt will free up more of your money in the future to put into your allocated savings plan. Once you are debt free, that allocated savings plan will help you to remain so.
If you have a deficit, then the first place you need to look is at your variable expenses and see where you can make cuts so that you aren’t over-spending. Even small changes can yield big differences, like foregoing the Starbucks coffee in the morning in favor of making your own at home and taking it to work in a thermos. Your goal is to get into the surplus position outlined above.
If your deficit is large and most of it is comprised of your fixed expenses, then you are likely carrying a heavy debt burden and could benefit from the services of a credit counseling/debt management agency. Such an agency can help you by working with your creditors to reduce the interest you pay and your over-all payments while at the same time creating a payment plan that will have you debt-free in a five to six year period.
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