If you are serious about your finances, it is essential that you have a financial plan. Just like any other plan in life, this can be a guiding force to big money-related decisions that you will have to make. A financial plan can be as big or small as you want it to be, but usually includes a basic budget, basic goals, and plans for saving and retirement.
The Budget
The foundation of most financial plans is the budget. You have to know where your income is coming from, how much, and where you are spending your money, and how much. Without this, any financial plan you put in place will be worthless.
To put together a budget, you can do a couple things. If you’re not tech savvy, you can create a spreadsheet, and look over your last few months of bank statements. Using these, you can categorize all your income and spending, and total it up. This will give you a good snapshot of your total income, your total expenses, and where you are spending your money.
If you are looking for something more automated, you could use an online program such as Mint, which will automatically connect to all your accounts and do the above exercise for you. You may have to categorize a few transactions Mint doesn’t recognize, but otherwise, it is effortless.
Once you have a budget, you can being to look at your goals.
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The Goals
The goals are anything that is important to you. They could be the purchase of something: a car, a house, even something small like a computer. They could be related to getting out of debt: paying off a student loan, paying off a credit card, etc. Or, they could be a savings target: save X amount every paycheck, or max out my IRA this year.
Once you have your specific goals in mind, you need to look at your budget and plan them in. For example, if you want to max out your IRA this year, and want to contribute the full $5,000, that breaks down to $416 per month. You then want to go to your budget, and identify where you can allocate that money. If it was already extra, great. But if you find yourself coming up short, you may have to consider cutting back on other spending to achieve your goal.
You can do this with each goal that you come up with. It is a good exercise to do, since you can quickly see how competing priorities and expenses will line up.
Saving in General and for Retirement
This is one area that many people seem to leave off a financial plan. You may consider your savings the excess from the income minus the expenses – but if you don’t account for it, what happens when you start aligning your budget with your goals?
It is essential that you include both emergency fund savings, and retirement savings in your budget because they really are essential expenses for most households. Without those funds, you could be in real trouble if something should happen.
The internet has created a ton of money saving tools, but it takes a savvy individual to know how to navigate them all. This isn’t meant to be a completely comprehensive list, but it does give you an overview of the different tools out there to help you save.
Online Money Management
Online money management has become a valuable tool over the past few years. With sites like Mint, Adaptu, and more, you can keep track of all your accounts, spending, and investments in one place for free. This beats shelling out $50+ for software you need to run on your home computer.
Beyond the tracking part, these sites make their money by referring you to money saving products. For example, if you have a high interest credit card, these sites will recommend you move to a lower interest one that you qualify for, and may even have rewards. By presenting these valuable deals, you can save even more money online.
Online Bill Pay
This may seem simple, but does your bank offer online bill pay? If it does, why aren’t you using it yet? Most banks and credit unions offer online bill pay for free through their websites, and it can save you hundreds of dollars a year in stamps and envelopes. It is extremely easy to setup, and you can even automate the system so you can save time as well.
Coupon Sites
If you are looking to purchase anything online, you need to see if there is a coupon available. There are literally hundreds of coupon sites, but it is essential you look them up.
For example, if you are going to shop on Amazon.com, you can Google Search Amazon coupon, and see a bunch of sites offering coupon codes for Amazon. When you check out, there is usually a space on most websites (including Amazon) for a coupon code or promo code. You can enter that code and save even more.
There are coupon codes for everything – from discounts and savings, to free shipping. These codes and discounts can save you tons of money, so don’t even think about shopping online without looking first.
If you’ve saved up enough in an emergency fund, and have been maxing out your 401k at work, you may be wondering if it is time to start investing. Investing can be a great way to see your money grow over time, as returns in the stock market typically outperform most other asset classes over time.
If this sounds like you, then here are some basic steps to follow to get started investing.
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Finding the Right Account
The first step in investing is deciding how you want to invest. There are two major account types, and many different sub-account types. In general, there are accounts that are cash accounts or brokerage accounts, and then there are retirement accounts.
If you want to be able to withdraw from your account at any time, then you probably want to consider a brokerage account. These accounts provide no tax efficiencies, but do allow you to withdraw at any time.
If you are investing for the very long term, a retirement account is probably a good option. Most people either invest in a traditional IRA or Roth IRA. With a traditional IRA, you can invest up to $5,000 per year, and you can deduct this amount from your taxes. With a Roth IRA, you contribute after-tax money, which means there is no current year deduction.
The big differences with these accounts lies in withdraw: with a traditional IRA, you pay taxes on your income when you withdraw, and with a Roth IRA, you don’t. However, you cannot withdraw from these accounts until you reach retirement age.
Finding the Right Brokerage
Once you’ve decided which account type is right for you, you need to decide the right company to invest with. There are many different brokerage companies out there, but you should look for one with low costs.
Make sure that you don’t have to pay annual fees, transfer fees, or other fees. Furthermore, you should look for a company that offers low commissions (under $10), or even free trades for opening an account.
Making Your First Investment
Once you’ve picked your company and account type, it is time to fund your account and make your first trade.
Whenever you invest, it is essential that you assess your own tolerance for risk. Remember, investments in the stock market can lose their value, so you need to be prepared for this. Based on how much risk you are willing to take will also set the tone for your investments.
If you are investing for the long haul, you should consider investing in index funds. This are funds that mimic a broad stock index, and so by investing in them, you get some diversity compared to investing in individual stocks.
You should look at your other investments, such as a 401k, and try to build an overall balanced portfolio that doesn’t invest too much in one asset class. There are many tools that can help with this, and your brokerage may provide them for you free of charge. If not, you could look at a site like Morningstar for guidance.
Once you’ve made your first investment, sit back, and watch it grow!
