Budgeting every month is important, but it’s far from enough.
Many people feel they have it handled after creating their budget. They create spending categories and try to stick to the limits they’ve laid out. Of course, as long as you’re spending less than you make every month, you’ll be fine… Right?
Wrong.
Budgeting only accounts for where your money goes each month. What it doesn’t show you is where your money could be going to help you reach your financial goals.
And that’s a massive problem.
If you’re strictly budgeting each month you may be able to see where you overspent at the grocery store last month. But does your budget tell you how much you should be putting towards retirement? Does it show you what you should be saving for insurance needs? Does it even account for taxes taking away from your investment returns?
Chances are it does not.
That is why we put together this complete guide to financial planning. From creating an emergency fund to debt management to investing and retirement planning – we cover it all.
A financial plan shows you the full picture of your financial life and creates a strategy to help you reach your goals faster. But you have to actually build one.
Don’t just budget every month and hope for the best. Take control of your finances with holistic financial planning you can follow every day.
Here’s what you’ll learn:
- Why Budgeting Isn’t Enough
- The Components of a Financial Plan
- Steps to Creating a Financial Plan
- Mistakes That Hinder Financial Growth
Why Budgeting Isn’t Enough
Budgeting is important, but it isn’t the only thing you should be doing.
You should already know we’re not fans of budgets here at Bare Wealth, but that doesn’t mean we don’t see value in them. Budgets help give you a plan for your month and allow you to watch where your money goes.
The problem is that most people stop there.
Wall Street Journal says only 23% of Americans have financial plans. If you do your own budget each month but have no idea what you’re doing financially outside of that monthly budget, you’re part of the overwhelming majority.
Those without a financial plan are:
- More likely to live paycheck to paycheck
- More likely to have high-interest debt
- More likely to have little to no emergency savings
Budgets are a great short-term money management tool but do not replace a financial plan.
Components of a Financial Plan
You should be working on your financial plan every day, but that doesn’t mean it needs to be complicated. A solid financial plan is made up of several parts.
Emergency Fund
This is the foundation of your financial plan. If you don’t have money saved for emergencies, you’ll be thrown off track at the first sign of bad luck. Whether it be medical expenses, car repairs, or unexpected unemployment. Anything can happen to completely derail your finances overnight.
You should always strive to have 3-6 months of expenses saved up in an emergency fund. While this may sound simple, Bankrate reports that 59% of Americans wouldn’t be able to cover an unexpected $1,000 expense by saving. Yikes!
Debt Management
All debt is not created equal. Part of your financial plan should outline what debt is hurting your financial goals and what debt you should focus on paying off first.
For example, if you have credit card debt with 20%+ interest rates you should be working to pay that off as quickly as possible. The sooner you can get rid of high-interest debt, the more money you’ll have to kick toward your other financial goals.
Retirement Planning
Think retirement is too far away to start planning for? Think again.
By simply starting your retirement planning five years earlier, you could end up with tens of thousands more when it’s time to retire. Your financial plan should include specific retirement contributions as well as account for employer matches, tax benefits, and your risk tolerance.
Insurance Coverage and Risk Management
Ah… the most underrated piece of financial planning. You should have a plan for what you’re doing to protect your wealth.
From health to life to disability to home and car insurance. You need to have the proper coverage in place so that you’re not paying for unnecessary insurance but are also covered if the worst were to happen.
Tax Planning
The average American household pays thousands of dollars each year in taxes. But what if you were saving that money and using it to reach your financial goals?
Good tax planning is part of every financial plan. Figuring out ways to save on taxes when you can and paying them when you have to is what helps you keep more of your hard-earned money.
How To Build A Financial Plan
Now that you know what your financial plan should include, let’s talk about how you can actually build one.
Here’s what you need to do:
- Determine Your Current Financial Situation
Sit down and really dig into where you currently stand financially. Your income and expenses, debt, assets, and liabilities. You should know exactly where you stand before you start planning for the future.
- Outline Your Financial Goals
Trying to “save more money” is not a goal anyone can follow. Instead of having vague goals that don’t result in any real change, you want to have specific goals with a deadline.
“I want to save $X by Y date.”
- Create An Investment Strategy
Now it’s time to figure out how you plan to meet those goals. That will include your investment strategy and how you plan to grow your money as you move toward your goals.
If you aren’t comfortable doing this on your own or don’t have the time, now is a great time to consider finding a financial advisor to help you.
- Review and Update Monthly
Your financial plan isn’t set in stone until you’re retired. As your life changes and things come up, you’ll need to revisit your financial plan and make adjustments.
For example, if you have a new child you’ll want to make sure you’re updated on life and disability insurance. Once you buy a house, you’ll want to make sure you have the right home insurance.
A financial plan takes time, but anyone can build one.
As long as you know your current situation, have goals to strive for, and have a plan to meet those goals you’re well on your way. From there you simply review and make adjustments as you go.
Mistakes That Destroy Financial Growth
While we don’t want to leave you with a negative outlook on financial planning. There are a few common mistakes that people make that can really set you back.
Not Accounting for Inflation. Did you know that the cost of living increases every year? Part of your financial plan should account for your dollar not going as far as it did when you started saving.
Failing to Review Insurance Plans. We mentioned the importance of insurance above, but just like your financial plan your insurance needs can change. Make sure you revisit your insurance policies every year to make sure you’re not missing anything.
Using a Budget as Your Financial Plan. Remember how we told you budgeting was helpful but doesn’t replace having a financial plan? Using your budget as your financial plan is like using socks as gloves. Sure, they both cover your hands, but that doesn’t mean they’ll keep you warm in the winter.
Not Seeking Professional Advice. Don’t be afraid to ask for help. If you don’t have the time or want to make sure you have all your ducks in a row before you start building your financial plan then hire a professional.
Procrastination. We’ve saved the worst for last. Start building your financial plan today. The longer you wait to build your financial plan the more opportunities for compound growth you lose.
Conclusion
Monthly budgeting is crucial but only gives you a piece of the financial picture. If you want to see real wealth growth you need a plan that touches on every aspect of your financial life.
Do you have a financial plan?
Start building one today and adjust as you go.