The great self-improvement author Alan Lakein once said, œPlanning is bringing the future into the present so that you can do something about it now. Considering the same quote with finance, financial planning would be bringing future financial problems to the present so that you can do something about it now to make your future more secure. Financial planning is the process of making smart, calculated decisions about money that help you achieve the goals you set for yourself.
Now, there are several types of financial planning ranging from children’s future planning to tax planning to even retirement financial planning. This article is going to focus on financial planning tips on a more personal level.
How to develop a financial plan
- Set your goals for the short-term and for the long run: For goal setting, follow the SMART approach-
T-time bound: This is the most important parameter of all; you should be able to set yourself deadlines to accomplish individual goals, because without these you will be stuck, making no real progress.
Habits are the building blocks of life, so find out what habits you need to develop to attain your goals. It could be something simple like, “I’m going to carry a little diary with me in which I will note down everything that I purchase.” This sounds mundane but overtime you will hold yourself more accountable for the money you spend, and you will subconsciously develop tendencies to spend wisely.
- Note down your assets and liabilities: Assets are anything that create an inward cash flow. Rising stocks, booming real estate, etc. are all assets. Liabilities are anything that suck cash out of you. Risky investments with poor return-potential are liabilities. It’s crucial that you become well aware of your assets and liabilities and look to turn your liabilities into assets. You might inflict some short-term losses in doing so, but the key to financial independence is racking up assets. Always work on paper, making decisions mentally are not quite as effective as systematically working on paper.
- Assess your current financial situation: The difference between your assets and liabilities is what’s called net worth. Think about how much far from your goals is your net worth. Try to understand where you are standing and where you want to go.
- Make mini plans to achieve each of your goals: For example, “To retire before I turn 50, I need to have earned x amount of dollars in y amount of years.” After making plans, think of the most efficient ways you can implement your plans. Planning is just a fantasy; execution is what makes that a reality.
- Monitor your plans regularly: This is the most critical step of all. You have to review your activity every month or every six months and find out if what you are doing is taking you towards your goals. Develop a flexible mindset to keep changing your approach until you find yourself heading towards victory. Failing to get feedback from your actions will turn out to be disastrous. You will have spent a lot of your most precious resource: time. Do not believe in failure. There are only victories or lessons. There’s no such thing as failure. Always look to learn from your mistakes and keep moving forward.