Your financial wellbeing is ultimately your responsibility. By creating a personalised financial plan, you can take control of your money, save towards your goals, and achieve your long-term aspirations like retirement and putting your children through university.
There’s no one-size-fits-all approach – everyone’s financial plan will look a little different. Perhaps you’re wondering “what exactly is a financial plan?” or even “what makes a good one?”. If so, you’ve come to the right place!
Financial planning is crucial, and I believe it’s especially important for women to take charge of their finances.
We all dream of financial security and the freedom it brings. Taking that first step towards financial independence is a big decision – it marks a fresh financial beginning and a commitment to a better way of life.
In this guide, I’m sharing the steps I use in my own financial planning to help you chart your course to the future. So, grab a cuppa, get comfy, and get ready to take action towards building a solid financial plan of your own!
What is A Financial Plan?
It’s just a methodical way to achieve your financial objectives. It describes your present financial status and system, including retirement, savings, investing, and estate planning.
To aid in your long-term success, you can additionally decide to incorporate benchmarks that you’ll hit on your financial path in addition to these essential components.
So, to put it simply, what is a financial plan? It’s just a systematic, long-term approach to financial management.
Financial freedom isn’t built overnight, but with the right tools, you can establish a solid foundation. Here’s what you’ll need to gather or develop as you progress on your journey:
Financial Management Essentials
- Monthly Spending Plan: Track your income and expenses to ensure you’re living within your means.
- Debt Reduction Strategy: Craft a plan to pay off any existing debts, prioritizing high-interest ones first.
- Budgeting and Bill Management: Know your bills, their due dates, and factor them into your spending plan.
Building Your Nest Egg
- Emergency Fund: Aim to save 3-6 months’ worth of living expenses to cover unexpected costs.
- Retirement Savings Plan: Start saving for your golden years early, taking advantage of any employer contributions.
- Diversified Investment Portfolio: Invest for long-term growth by spreading your money across different asset classes.
Securing Your Future
- Multiple Income Streams: Explore creating additional income sources to boost your financial security.
- Goal-Oriented Savings: Set specific savings goals for short, medium, and long-term aspirations.
- Adequate Insurance Coverage: Protect yourself from financial setbacks with appropriate insurance (home, health, disability, life, etc.)
With a clear understanding of what you need, let’s delve into the specifics of crafting your financial plan. Here, we’ll unpack the ten steps to get you started on a solid foundation. Remember, this is your personal roadmap, so feel free to adapt these steps to your unique circumstances.
Step 1: Define Your Financial Goals
The journey to financial freedom begins by setting and achieving clear goals. After all, you can’t hit a target you can’t see! Take time to identify your financial aspirations, be they short-term, medium-term, or long-term. Prioritise them realistically, keeping in mind your current financial situation.
It’s fantastic to have big, ambitious goals! However, to avoid feeling overwhelmed, break them down into smaller, more manageable milestones. This will make tracking progress easier and keep you motivated.
Your financial goals could be anything from paying off debt (credit cards, car loans, student loans) to landing a higher-paying job. The key is to prioritise realistically based on your current financial situation.
Step 2: Financial Snapshot
Before diving into specific goals, take a moment to assess your financial health. Knowing your current financial standing will help you set realistic and achievable goals. Reflect on your relationship with money and what aspects you’d like to improve.
Here are some areas to consider:
- Income: How much money do you bring in each month?
- Expenses: Where is your money going each month? Categorise your spending to identify areas where you can potentially cut back.
- Debt: How much total debt do I have, and what are the interest rates on each loan?
- Savings & Investments: How much money do I currently have saved? Do I have any existing investments?
By answering these questions, you’ll gain a clear picture of your current financial situation. This will serve as the foundation for setting SMART goals (Specific, Measurable, Achievable, Relevant, and Time-bound) that propel you towards your financial aspirations.
Step 3: Create a Spending Plan
Budgeting is a crucial element of building a successful financial strategy. Without a clear understanding of your income and expenses, it’s impossible to make informed financial decisions or save for your future.
A budget should be a tool that empowers you, not restricts you. Choose a method that aligns with your spending habits and financial goals. Popular options include the cash envelope system, the 50/30/20 rule, or zero-based budgeting.
Here’s my personal approach:
- Gather your data: I start by reviewing my bank statements to compile a list of all my regular expenses.
- Categorise your spending: I then categorise these costs into clear buckets:
- Essentials: Housing, utilities, groceries, transport, etc.
- Lifestyle: Entertainment, shopping, leisure (your “wants”).
- Savings & Debt Repayment: This is crucial for reaching your financial goals.
- Track your income: Don’t forget to factor in all your income streams. This includes your regular salary, but also any additional income from interest, side hustles, or property rentals.
- Calculate the Net: Once you’ve categorised your expenses and income, it’s time to calculate your net position. Simply subtract your total monthly expenses from your total monthly income.
- Surplus: If you have a positive balance (income exceeds expenses), that’s fantastic! This surplus can be allocated towards your savings goals or debt repayment.
- Shortfall: If your expenses are higher than your income, you’ll need to identify areas to cut back.
- Ask yourself: “Where can I make adjustments to reduce my spending?”
Step 4. Build an Emergency Fund (Your Financial Safety Net)
One of your key financial goals should be building a robust emergency fund. This acts as your safety net during unexpected events, preventing you from falling back into debt.
Aim to save enough to cover 3-6 months’ worth of living expenses. This will provide a buffer for emergencies such as job loss, illness, or unexpected car repairs. Remember, the amount should be substantial enough to support you through tough times.
Top Tip: Start small and build up gradually. Even setting aside a small amount each month consistently will contribute significantly to your emergency fund over time.
Step 5: Tackle Your Debt
Debt can be a major roadblock on your path to financial freedom. High interest rates, hefty minimum payments, and the negative impact on your credit score can all hinder your progress.
That’s why incorporating a debt repayment strategy is crucial. Here’s how to get started:
- Prioritise High-Interest Debt: Focus on paying off debts with the highest interest rates first, as this will save you money in the long run. Common culprits include credit card debt and personal loans.
- Create a Debt Repayment Plan: Develop a plan that outlines how much you’ll allocate towards debt repayment each month. Consider using the snowball or avalanche method (depending on your situation) to accelerate your progress.
- Stick to Your Plan: Debt repayment takes discipline. Be patient and stay committed to your plan. Celebrate your milestones and track your progress to stay motivated.
- Seeing your debt shrink will be a huge motivator. One day, you’ll be able to proudly declare “I’m debt-free!”
Step 6: Track Your Spending
Maintaining a clear picture of your financial situation is vital for a successful financial plan. This means knowing exactly where every pound goes.
There are various ways to track your spending:
- Apps: Apps like You Need A Budget (YNAB) offer user-friendly interfaces and budgeting features for managing your finances on the go.
- Expense Tracking Sheets: If you prefer a more traditional method, consider using a pen-and-paper expense tracking sheet.
Regardless of your chosen method, ensure you regularly record your transactions. If you’re not a fan of paperwork, an app might be a better fit.
The key isn’t the fancy app – a simple budget planner or even a pen and paper will do the trick! What matters most is consistently tracking your spending. This data is gold – it will help you identify areas to cut back and ultimately strengthen your financial position.
Remember, your budget is a living document, not set in stone. Review it regularly and adjust it as needed to reflect your changing circumstances and spending habits.
Step 7: Explore Investments (Grow Your Wealth)
Investing is a powerful tool for building long-term wealth. However, before diving in, it’s crucial to have clear financial goals in mind.
Goal Setting: Consider what you’re hoping to achieve with your investments. Are you saving for retirement, a child’s education, or a down payment on a house?
Time Horizon: Think about your investment timeframe. Are you saving for a short-term goal (within 5 years) or a long-term one (10+ years)? This will influence the types of investments suitable for you.
Risk Tolerance: How comfortable are you with potential losses? Investors with a higher risk tolerance can potentially see higher returns, but also face greater risk of losing money.
Building a Balanced Portfolio: Once you’ve considered these factors, you can start building a diversified investment portfolio. This means spreading your money across different asset classes (e.g., stocks, bonds, property) to mitigate risk.
Step 8: Secure Your Wealth with Insurance
Having worked hard to build your financial security, the last thing you want is for an unexpected event to derail your progress. Insurance acts as a safety net, protecting your assets in case of life’s curveballs that could cause significant financial strain.
Consider different types of insurance to safeguard what matters most:
Property & Contents Insurance: Protects your home or rental property and its belongings from events like fire, theft, or weather damage.
Life Insurance: Provides financial security for your loved ones in the event of your passing.
Health Insurance: Covers medical expenses in case of illness or injury.
Disability Insurance: Replaces a portion of your income if you’re unable to work due to illness or disability.
Car Insurance: Mandatory by law, it protects you financially in case of an accident.
By having the right insurance in place, you can turn a potentially devastating event into a manageable setback. Peace of mind is priceless, and knowing your family and assets are protected allows you to focus on your financial goals with confidence.
Step 9: Chart Your Course to Retirement
Living comfortably in your golden years requires a well-defined retirement plan. Here’s what you need to consider:
Retirement Needs: Estimate how much money you’ll need to maintain your desired lifestyle after retirement. Remember to factor in inflation, which erodes the purchasing power of your money over time.
Savings & Investments: Start saving and investing early to accumulate a sufficient retirement corpus. Explore tax-efficient options like Individual Savings Accounts (ISAs) that offer tax benefits on contributions and potential growth.
Don’t let the seemingly distant prospect of retirement deter you from taking action. The earlier you start planning and saving, the more time your money has to grow through compound interest.
A well-crafted retirement plan empowers you to design your ideal future. So, start planning today and look forward to a financially secure and fulfilling retirement!
Step 10: Persistence is Key
Building financial freedom isn’t always smooth sailing. There will be tough days, weeks, or even months. But with discipline, a sound plan, and a commitment to living within your means, you’ll be surprised at the positive impact.
It’s okay to make mistakes with your money. We all do! Sometimes the urge to splurge might be tempting, or you might feel like ditching your entire plan because it feels restrictive.
Here’s the trick:
Review and Refine: View setbacks as learning opportunities. Review your budget and spending habits regularly, and adjust your plan as needed.
Celebrate Milestones: Recognise and celebrate your progress! Reaching financial goals, big or small, is a cause for celebration.
Forgive Yourself: Everyone makes mistakes. Don’t beat yourself up if you overspend occasionally. Just get back on track and keep moving forward.
Remember, consistency is key. The more you stick to your plan, the closer you’ll get to achieving your financial dreams.
