Ensuring one's financial well-being is secure is essential to living a comfortable life. Yet, according to 2021 statistics, about a third of America's population does not have a financial plan, including savings. That means that only 30% have any kind of financial plan. The remaining 70% are likely to hold on to limiting beliefs and myths. Some may believe that investing is particularly difficult. Many people think that they need a terrific sum to begin investing. Or that even if they venture into any investment scheme, they will lose all their money.
But making a financial plan is possible—even without a degree in economics. There are a few things to keep in mind when preparing a financial plan. The first question any individual should consider when planning to save or invest is what goals they intend to fund. For example, it might be for retirement or an emergency. Perhaps, they want to buy a car or a house. For some, their children may be the primary reason for saving or investing. For others, it could serve as a cushion for an unexpected period of unemployment. Whatever it might be, the individual must clearly outline their reasons for saving and investing. After that, they should define honestly and pragmatically the time duration for achieving each goal.
Before devising the appropriate means of achieving their set goals, they must take accurate stock of their financial situation by creating what experts call a net worth statement. For example, on a piece of paper divided equally into two parts, the individual would list their assets and liabilities. Assets are what they own, while what they owe others might form their liabilities. For instance, items like cash, savings, and insurance may be included on the asset list. Bank loans or mortgage balances would feature on the liability side.
The next step in creating a financial plan is to deduct liabilities from assets and determine one's net worth. If the assets are relatively more than the liabilities, they have a positive net worth. But if the liabilities outweigh the assets, they have a negative net worth. While having a negative net worth is never permanent, being more financially savvy and prudent may change one's financial status.
Moving on, the individual must have precise knowledge of how much they earn and how much they spend. They can set aside a percentage for savings and investment within that disposable income and expenditure. For some, paying themselves first as soon as they get their salary is preferred. They make some arrangements with their banks so that the minute they receive their paycheck, a designated sum is removed and transferred to another account.
If it seems impossible to save some of one's income, then the individual needs to study their spending habits and determine which expenses to cut back on. A careful perusal of one's monthly expenses might reveal to the individual how tiny sums of money may become significant if accumulated over a long period.
After saving some money, most individuals get confused about whether to continue saving or invest the money. The answer depends on one's perception of finance. Would they prefer to save a dollar that might only yield a minimal interest return or multiply the same dollar and earn a significantly higher return on dividends? This depends on how much risk they are capable of taking.
At this point, they may begin to educate themselves on the various savings and investment products from stocks and bonds to mutual funds and real estate. If they cannot decide by themselves, they may consult an investment professional who would assist them with whatever clarity they require regarding financial planning.
