08 Feb Eight Components of a Good Financial Plan
A financial plan can help you reevaluate your spending habits, keep a steady savings plan, and save for milestones. With a complete financial plan in hand, you can breathe easy knowing that you have accounted for every foreseeable life event.
A good financial plan is a process that you can use to manage your money, meet your needs, and accomplish the goals you’ve set for yourself.
Crucial steps to know!
The first step in creating your financial plan is to figure out what your five-year goals are. This will give you guidance when deciding how much money to spend in different categories because it helps decide what’s best for you instead of what’s best for everyone else. Next, make a budget which divides up all the expenses in your life into different categories based on need or want. You can then create a monthly budget which corresponds with this spending plan. Finally, you will want to keep track of what you’ve done with your money throughout the year, so that you can see if your spending plan is achieving the results you want.
Financial plans are easy to create as long as you remember to document everything and make changes accordingly. To help keep it all organized and maintainable, I recommend using a financial planning software program. This will help you keep track of all your expenses while also making sure that they are accounted for properly throughout the entire year.
Eight main components to erect a healthy financial plan.
1. Your net worth is the sum total of all you own minus your debt, or your assets minus your liabilities, as of a specific date. This figure represents your financial stability.
2. Your salary is the amount of money you earn per month from your job (before taxes and other deductions). This figure gives you an idea how much money you can realistically save into a retirement fund every month.
3. A budget is a detailed listing and analysis of all of your expected income, expenses and savings for an upcoming period of time (such as 1 year). The purpose for the budget is to make sure that the amount of money earned does not exceed the amount spent and filled into savings during this period.
4. Your earnings are your total monthly income. It is the money you earn after taxes and other deductions. This figure gives you the money you can save toward unforeseen expenses and disasters or to prepare for retirement.
5. Your expenses are any outflow of cash that takes place in a given period of time (monthly). It also includes any debt that is due in this period, as well as savings that needs to be made on a regular basis (such as retirement). After subtracting your monthly earnings from your monthly expenses, what is left over is the amount you have available for savings or other purposes.
6. Your debts are the amount of money you owe to creditors on a given period of time (monthly). These amounts include mortgages, car loans, and any other debts that need to be paid in this period.
7. Your liabilities are the amount of money that you owe others as of a specific date such as your home or car loan or credit cards.
8. Your savings is all the money you save, both from your earnings and other sources such as social security payments. It also includes any money from investments (such as stock or bonds) except for those taken out for retirement purposes.
The best part of creating a financial plan is knowing that it will be there when times get tough or at least just knowing that this process exists so that when things do get tough in your life, it will be there for support. Thakur-Chabert is here to help you to create a healthy financial plan. Our Accounting and Auditing Team based in Uxbridge, London will help you to prepare a productive financial plan.