If you were going on a road trip to somewhere you’d never been before, would you hop in the car and start driving in that general direction? Would you figure you’d make a plan when you got closer to your final destination? Would you just hope you would make it there eventually? Probably not. You’d probably plug the address of your destination into your phone and have it give you turn-by-turn directions on how to get where you want to go.
That’s what your financial plan does for you, it gives you turn-by-turn directions on how to get from where you are now to where you want to go. And the sooner you set up your plan, the less aimless driving around you’ll be doing in the hopes that it will lead you to your end goal.
That doesn’t mean that all is lost if you haven’t set up a financial plan for yourself yet. It just means the time is NOW!
Financial planning is important for anyone and everyone, but that doesn’t mean that the same plan makes sense for you as for someone else. Determining the right financial plan depends on your life stage, your current financial status, and your financial goals.
Life Stage
Life stage is a combination of your age and family status. An individual, couple, or family could fall into one of these categories:
- Individual
- Couple
- Young Family
- Grown Family
- Retirement
While family status is important when determining what your financial plan will look like, age is also an important factor. Your age will determine what your time horizon looks like for saving. Personal financial planning is a long game, so the sooner you set your plan in motion, the less drastic it will have to be to meet your financial goals.
Current Financial Status
Your current financial status is based primarily on quantitative financial information such as:
- Income
- Expenses
- Debt
- Savings
Understanding where you are now will help you determine how close you are to meeting your financial goals, which will, in turn, help you define your financial plan. If you think back to the idea of the road trip, this determines if you’re at your starting point or if you’ve already started driving toward your destination and need to get from your current mid-point to your final destination.
Financial Goals
How can you possibly make a plan without knowing what your end goal is? The answer is, you can’t! In order to make a solid financial plan, you need to determine what you want to accomplish. This could include:
- Setting up an emergency fund
- Paying off debt (mortgage, student loans, credit cards)
- Saving for retirement
- Saving for children’s education
- Saving for large purchases either recurring (car purchase every x number of years) or single occurrence (kitchen remodel)
- The list goes on…
It is important to keep in mind that you don’t have to have just one goal. You can certainly prioritize your goals, but when developing your financial plan, you need to keep ALL of your goals in mind to make sure that you cover everything. And the earlier you identify your goals, the better, because time is on your side if you think ahead in the financial game.
Making a Financial Plan
Once you know what you want to be able to accomplish, then you can start laying out a plan on how to get there. It is important to make a financial plan, and as early as possible, because without one, how can you know if you’re on track to meet your financial goals? So let’s get started on planning your financial turn-by-turn directions!
Look for upcoming posts on These Money Matters to learn more about making your personal financial plan.