Every day you make a lot of decisions. One study found that the average adult makes 122 informed choices every day. While some decisions, like your attire for the day or meal of choice, may seem insignificant, others can set you on a course for long-term financial success or failure. The best way to ensure you make informed decisions for your fiscal future is with a financial plan.
October is National Financial Planning Month, which gives us a fantastic opportunity to share the importance of financial planning. Keep reading to learn how you can define financial success, the value of financial planning and how to create your plan.
Defining Financial Success for You
Unlike a footrace in a track and field competition, not everyone gets the same starting point in their financial journey. Life circumstances affect your education, job and investment opportunities. These life factors are unavoidable, but they shouldn’t deter you from pursuing your financial goals. You may be wondering what kind of goals people set for themselves. A few common goals are:
- Paying off your home and auto loans
- Saving up for a trip
- Raising your credit score
- Starting a business
- Creating a college fund for your children
- Retiring by 65
No single financial goal is more or less valuable. Each one is important to achieving financial success.
Why Is a Financial Plan Valuable?
Once you’ve defined what financial success looks like for you, you need a roadmap of steps to achieve your goals. A financial plan is that roadmap, giving you short-term tasks to slowly achieve your long-term aspirations. Financial plans can vary in length and complexity.
One survey found that only 33% of Americans have a financial plan, meaning the remaining two-thirds don’t have any roadmap for financial success. You can make it as general or in-depth as you want. The important thing is to have something documented you can follow to make informed financial decisions.
Four Essential Parts to Creating Your Own Financial Plan
Your financial plan should go through these four stages: analysis, strategy, action and assessment. Let’s dig into each step and evaluate its importance to your overall plan.
#1 Analysis
Before creating your budget and action plan, you should take inventory of your current financial state. Your analysis should cover your:
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Monthly income – Your monthly income is vital to reaching financial success. It’s the engine that helps you eliminate debt, build wealth and accomplish your goals.
- Monthly expenses – Your expenses are fixed costs that don’t go toward paying off debt. These include rent, gas, groceries, utilities, insurance and other necessary expenses.
- Total debt – While you may pay off your debt in monthly installments, you need to analyze the total amount you owe to understand how long it will take you to pay it off.
Recording these data points will give you a baseline understanding of how financially flexible you are and what actions you need to take.
#2 Strategy: Why Is Budgeting Important to Financial Planning?
Financial strategy is where budgeting becomes critical. You may ask, “why is budgeting important for financial planning?” Your budget will act as the foundation of your strategy. After your analysis, you can look for areas to reduce your monthly expenses to give you more income to reach your goals.
Short-term steps can include creating an emergency savings fund and eliminating smaller debts one at a time. Creating an emergency savings fund allows you more flexibility when unexpected expenses arise, such as car maintenance or medical emergencies. If you have debts outside of a home mortgage, experts suggest eliminating them from smallest to largest after filling your emergency savings account.
Once you take care of your short-term goals, your long-term goals are more attainable. You can use the freed-up income to save cash to invest in your business idea or contribute to a retirement account. Regardless of your short and long-term goals, creating a plan and budget can give you the necessary steps to move forward.
#3 Action
A financial plan will only work if you put it into motion. Without follow-through, you won’t see any progress. Two ways you can keep yourself more accountable to your plan are:
- Writing out your goal dates on a piece of paper. Research shows that writing creates a stronger link between your mind and your goal than typing it or trying to store it mentally.
- Finding someone you can talk with about your financial plan. Accountability is cultivated in these discussions. Once you tell a close friend or family member your financial goal, you are more likely to stick to it.
#4 Assessment
After you’ve had a chance to work toward your financial goals, an assessment is essential to help you find what is and isn’t working for your current plan. Significant life changes like marriage, divorce, having a child, losing a loved one, changing jobs or moving can affect your financial state. Taking time to assess your plan every quarter or bi-annually allows you to see how you need to change your strategy so you can keep moving toward your goals.
Working with a Local Bank to Help You Reach Your Financial Goals
Creating a financial plan can be daunting. However, working with a local bank that wants to help you succeed is a great place to start. Local banks are dedicated to helping members of the community succeed financially and can make it easy to work toward your financial goals with excellent customer service.
Community Point Bank has helped members of our community achieve their financial goals for more than 87 years. With top-rated customer service and straightforward banking services, we make it easier to follow your financial plan. Visit our contact page to see when you can come in and start banking better.
