Financial
planning is a big concept that includes things like budgeting,
retirement planning, saving, insurance and getting out of debt. You don't,
however, need to be a financial planning expert to have a firm grasp on what
each of these concepts means and how they impact you. Use this guide to gain a
deeper understanding of how they work together to lay the groundwork of a solid
financial foundation for you and your family.
Budgeting
At the very basic level of personal
finance, you should understand the need for, and value of, a budget.
A budget or spending plan is a road map for telling your money what to do each
month. At its simplest, a budget lists how much income you have coming in,
compared to what's going out each month.
Creating a
detailed and written
budget allows you to make smarter decisions with your finances
on a daily basis. When you're faced with spending money on something, a budget
requires you to stop and think about the purchase. You realize that by spending
money in one area, you won't have to spend--or save--elsewhere.
When you create a
budget, you begin to see a clear picture of how much money you
have, what you spend it on, and how much, if any is left over. Ideally, you'll
have a surplus left over which you can use to save for retirement, build up
your emergency fund, pay down debt or apply to other financial goals.
The simplest way
to create a budget is on paper, but you can also use a budgeting spreadsheet,
software or budgeting app to
get the job done. If it's your first time budgeting, consider testing out
different approaches each month to find the one that best fits your needs and
style.
Cutting
Expenses
After you've
successfully created a basic budget, you'll have a much better understanding of
where your money goes and where you can possibly trim expenses. For many
people, this is as simple as cutting back on some of the little things that can
add up. For others, it may mean taking a closer look at spending to make deeper
cuts in order to create a wider gap between monthly inflows and outflows.
For example, some
of the smaller variable
expenses you may consider eliminating include unnecessary
subscription services or recurring memberships you don't use. Bigger cuts could
result from refinancing your mortgage or wiping out an entire spending
category, such as dining out.
Why is reducing
expenses important? Three reasons. First, it can free up more money in your
budget so you're less inclined to rely on credit cards or loans to cover
spending gaps. Second, if you have debt, adding extra money back into your
budget can help you pay it off faster. And third, having extra money can help
you boost your emergency
fund or grow retirement savings.
Getting Out
of Debt
Even after
creating a sound budget and cutting unnecessary expenses, you may still find
yourself with lingering debt to get rid of. Using credit and taking on some
debt itself isn’t necessarily a bad thing, but when you can't keep up with the
payments or borrow more than you can afford to pay back, you could be in
trouble.
Getting out debt
becomes even more difficult when you're facing a high interest
rate on credit cards or loans.One of the most important steps
in getting out of debt is to pay more than the minimum
amount due each month.
Even a modest
credit card balance can take over a decade to pay off if you simply pay the
minimum amount due because of interest and finance charges. That could end up
costing you thousands of dollars that could be better used towards savings.
Giving the snowball
method a try, or looking into a credit card balance transfer,
could help you get out of debt sooner.
Saving for
Retirement
With fewer
companies offering full pension
plans and the uncertainty of Social
Security, it's become more important than ever to save and plan for
your own retirement. Unfortunately, many people feel that they simply don’t
have enough money left
over each month to save. That, however, can be costly if you delay saving until
later in life because it means missing out on the power of compound interest.
Retirement savings needs to become a priority instead of an afterthought. The Internal Revenue Service has made saving for retirement even more attractive with special tax-advantaged accounts such as employer 401(k) plans, individual retirement accounts and special retirement accounts for the self-employed. These accounts allow for tax deductions, credits and even tax-free earnings on some retirement savings. If you're not saving for retirement yet, revisit your budget to see if you have room to include it.
Retirement savings needs to become a priority instead of an afterthought. The Internal Revenue Service has made saving for retirement even more attractive with special tax-advantaged accounts such as employer 401(k) plans, individual retirement accounts and special retirement accounts for the self-employed. These accounts allow for tax deductions, credits and even tax-free earnings on some retirement savings. If you're not saving for retirement yet, revisit your budget to see if you have room to include it.
Insurance
You've created a budget, cut expenses,
eliminated your credit card
debt and have started saving for retirement, so you're all
set, right? While you've definitely come a long way, there is one more
important aspect of your finances that you need to consider: insurance.
You've worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. Life insurance, disability insurance and homeowners' insurance can help with those scenarios.
You've worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. Life insurance, disability insurance and homeowners' insurance can help with those scenarios.
One question you
may have is, what kind of
life insurance do I need? Term life offers
you for a set period of time; permanent insurance covers you for life, with
some policies offering the benefit of cash value accumulation. Permanent life insurance,
however, can be more expensive than term life. When choosing between the two,
it's important to consider which one is the best fit for your needs and
goals.
0 Comments