When looking at financial planning, at the very basic level, you should first understand the need for, and the value of, setting a personal spending plan. A spending plan acts like the pre-planned route of a road map that shows your money what to do each month. At its simplest level, a spending plan lays out how much income you have coming in compared to what’s actually going out each month. Understanding financial planning, the basics will set you in good ground foundationally.
You don’t need to be a financial planning expert to have a firm grasp on what this concept means and how it will impact you. What this will do however, is show you how the absolute basic fundamentals can help guide you toward a deeper understanding of how they work together to lay the groundwork of a solid financial foundation for you and your family – and for when you do eventually seek financial advice from an expert.
The first thing to do is create a detailed, written spending plan (or budget) which allows you to make smarter decisions with your finances on a daily basis. This will help you to recognise when you’re faced with spending money on something, that by keeping a budget will effectively ensure you stop and think about the purchase you are considering making.
When you set out to create your budget, always begin with a clear and honest picture of how much money you actually have available to you each month. You can do this by first identifying what your spending habits are, and how much, if any, is left over once everything else is accounted for. Ideally, you’ll have a surplus which you can use to put toward retirement, build an emergency fund, pay off debts such as credit cards, or apply to other financial goals you may have such as savings plans.
Once you’ve created your spending plan, you’ll find you have a much better understanding of where your money actually goes, and what areas could do with trimming back. You’ll also feel a sense of control over what you own and will soon find yourself questioning ‘wants’ over ‘needs’ when it comes to spending in the future. For many people, it’s a simple exercise that requires cutting back on the little things that eat up the surplus. For others, it may mean taking a closer look at unnecessary spending and make even further cuts to create a wider and more comfortable space between what’s coming in, and what’s going out.
Why is reducing your expenses important?
There are three key reasons why it’s important to grasp and implement the basics of our personal finances. First, it can free up more money in the budget so you’re less inclined to rely on ‘the plastic’ or loans to cover spending gaps. Second, if you have debt, adding extra money back into your budget can help you pay it off much faster. And third, having extra money can help you boost your emergency fund or further grow your retirement savings.
Even what could be classed as a modest credit card balance, can take over a decade to completely pay off when you’re faced with high interest payments. Especially if you pay the minimum amount due because of interest and finance charges.
Most unfortunate is the fact that many people today believe they don’t have enough money left over each month to save. Believing that, and taking it one step further by doing nothing about it, can be costly. If you delay saving in your early years and wait until later in life, it means missing out on the power of compound interest.
That’s why retirement savings need to become a priority in our lives instead of an afterthought.
When you are in your twenties, you are building a solid foundation for your financial future. And without sounding too cliché, the choices you make at that age will affect you for the rest of your financial life. You may be young, but if this age group represents you, or as a parent, your children, then you need to start thinking about, planning for, and saving now, for retirement. The sooner you start, the sooner you will be able to retire.
Would you set out on a trip without a destination in mind?
The principal here is the same for your financial journey, meaning it is important to have a solid financial plan for that journey, so you know exactly where you want to go financially. Then you can identify the individual steps you will need to take to get there.
Of course, it goes without saying that it takes time and hard work, but if you have a workable budget in place and you consciously and consistently follow it each month, you can be confident that you are handling your finances responsibly.
And who doesn’t want that?