Getting your finances in order may feel overwhelming, especially if you’re living paycheck to paycheck with little savings. Juggling bills, saving for the future, and tackling debt can quickly become overwhelming.
With a few basic financial planning steps, you can begin building a solid foundation for your financial future.
What Is Financial Planning?
Financial planning for beginners is a process that involves evaluating your current financial status, setting realistic personal and financial goals, and creating strategies to achieve those goals.
This strategic approach includes budgeting, savings, investments, and retirement planning. Good financial planning enables you to manage your money more effectively and prepare for short and long-term financial needs. It’s a way to help you achieve your goals and take control of your financial future.
The most important thing is just to get started. Breaking your financial planning down into manageable steps will ensure it doesn’t become overwhelming.
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Assess Your Current Financial Situation
The first step is to clearly understand your current financial situation. Gather all your financial documents — bank statements, pay stubs, credit card bills, loan statements, etc. This will allow you to take inventory of your assets (what you own) and liabilities (what you owe).
It’s a good idea to check your credit report to understand your credit standing during this phase of the process. Don’t worry if the numbers could be better — the goal is to have an honest, realistic assessment of your starting point.
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Set Financial Goals
Once you know where you’re at, it’s time to think about where you want to go. What are your short-term and long-term financial goals? Do you want to pay off credit card debt in the next two years? Save for a down payment on a house in five years? Build up your retirement savings? Write these goals down and try to quantify them with target amounts and timelines. This will give you something concrete to work towards.
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Create a Budget
A budget is the foundation of any sound financial plan. Start by tracking your monthly income from your income streams such as your job, investments, or other sources. Then categorize your expenses — rent/mortgage, utilities, groceries, transportation, etc. Don’t stress about getting your budget perfect right away. A budget is something you can continue to refine over time.
During this budgeting phase, it’s helpful to keep a small diary with you and log every purchase you make. This will not only give you real numbers to work with but can help you find extra money in your budget because smaller purchases that are easily forgotten can add up to a significant sum of cash.
Once everything is mapped out, see where you can cut back on discretionary spending. Maybe you can reduce your cable or streaming services, eat out less, or find ways to save on your monthly bills. Even small changes can add up quickly.
The goal is to have your expenses be less than your income so you have money left over to put into savings each month. Aim to save whatever you can, but between 5-15% of your paycheck is a good place to start if possible. Whatever you manage to save each pay period will make a difference in the long run, even if it’s just a small amount initially.
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Build an Emergency Fund
Life happens — unexpected expenses like a medical emergency or a new set of tires can derail even the best financial plans. That’s why it’s crucial to have an emergency fund with 3-6 months’ worth of living expenses set aside in a savings account. An emergency fund acts as a buffer so you don’t have to rely on credit cards or loans when the unexpected happens.
Aim to build this up gradually over time. An easy way to save is to set up automatic transfers from your checking account to a separate savings account. Even $25 or $50 a month will add up faster than you think. Treat these transfers like any other bill you have to pay.
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Manage and Reduce Debt
Debt, especially high-interest-rate credit cards, can be a significant obstacle to financial stability, especially if you have a less-than-perfect credit history.
Make a plan to aggressively pay down your most costly debts first. Strategies like the debt snowball (paying off debts from smallest to largest) or the debt avalanche (targeting debts with the highest interest rates first) can be effective.
As you chip away at what you owe, you’ll start to see your net worth grow.
If you’re struggling to make minimum payments, consider contacting your creditors to negotiate a payment plan or see if debt consolidation options are right for you. This can help you simplify your payments and potentially lower your interest rates.
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Plan for the Future
Saving for the future is just as important as tackling your current expenses. Even with a limited income, you can start building wealth for the future. The earlier you can start investing, the more time your money has to grow.
The best place to begin is by contributing to retirement accounts like a 401(k) or IRA. 401(k) plans are pre-tax deductions (unlike Roth IRAs, which are after-tax), so investing in your 401(k) will lower your tax liability in some circumstances. Investing offers advantages that can really supercharge your savings. Check to see if your employer offers matching contributions. Start with whatever amount you can afford — even small contributions add up over time.
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Protect Yourself with Insurance
Insurance might not be the most exciting part of personal finance, but it’s crucial for protecting yourself and your family. While there are state and federal laws on insurance that you are required to obtain, it’s a good idea to start with health, life, and homeowner’s or renter’s insurance.
Depending on your specific situation, you may also want to consider other policies such as disability, long-term care, or hospital insurance. Your current insurance plan, including your deductible, copayments, and coinsurance options, will help you to decide which supplemental insurance is best for you. Shop around and review your coverage periodically to ensure you have the right protections in place.
If you need help figuring out where to start, consider speaking with your Human Resources department, a financial advisor, or an insurance agent who can help you assess your needs and find the right coverage for your situation. Even minor financial hiccups can have a big impact on your financial stability, so it’s essential to have a plan in place to protect yourself and your family.
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Review and Adjust Your Plan
Financial planning isn’t a one-and-done deal — it’s an ongoing process that requires regular maintenance. Every quarter or so, take the time to review your plan and make any necessary adjustments.
Check in on your goals and see how you’re progressing. Update your budget to account for any changes in income or expenses. Rebalance your investment portfolio if needed. It’s helpful to seek professional guidance from a financial advisor if you need help.
Financial planning is an essential part of achieving long-term financial stability. It’s okay to start small and take things one step at a time. The most important thing is to get started and stay committed to your financial goals.