Seven steps in my personal financial planning

If you want to achieve financial freedom, you must make a plan. If you don't have a personal financial plan, you'll never know if you're off track.

Why do you need a personal financial plan

Plans make you more motivated and can improve your financial situation. In addition, planning can make your life more planned and meaningful, and everyone can benefit from it.

According to a survey by CNBC, 75% of Americans improvise in their financial plans. No crisis is the biggest crisis. Are you one of them?

To make a personal financial plan is to invest in yourself and in the future. And there is no need to consult an expensive chartered registered financial planner.

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If you follow these seven steps carefully, you will soon be able to create your own personal financial plan.

7 steps to develop a personal financial plan:

1. Write down your goals.

two。 Calculate your net worth

3. Establish an emergency fund

4. Determine a realistic budget

5. Eliminate bad debts

6. Take advantage of tax incentives

7. Start investing.

1. Write down your goals

Personal financial planning is very much like solving a jigsaw puzzle. These puzzles represent spending, shopping, debt, investments, and other aspects of your financial situation. Every jigsaw puzzle represents your goal.

To solve this problem, you need to put the parts together precisely.

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This is the correct mentality of personal finance. I have written about S.M.A.R.T in an article on wealth creation. The goal is more broadly explained, so let's break it down briefly here:

Personal finance plan S.M.A.R.T. target

S stands for specific goals.

The more specific your goals are, the more likely you are to achieve them. Don't just say, "I want to be richer" or "I want to pay off my mortgage". For example, "I need to increase the repayment of the loan by $x a year so that I can pay off my debt within five years."

M stands for measurable goals.

A measurable goal is a clear definition of success. Whether you want to cut spending by 1000 yuan a month or invest an extra 5000 yuan next year, make sure you can measure your progress in terms of numbers.

A stands for a consistent goal.

When your personal financial plan includes your partner or family member, you are more likely to stick to your goals. Getting the support of your family will make you more responsible. Both of these factors contribute to your personal financial pursuit.

R stands for realistic goals.

If your goals are unrealistic, you are preparing for failure. The difference between a realistic goal and an unrealistic goal may be a small adjustment. For example, if you can't pay off your mortgage in the next 10 years, set it in 15 years. Be true to reality.

T represents the time frame of the goal.

By setting goals with a time frame, you can feel a sense of urgency. Deadlines inspire people to use their time efficiently.

2. Calculate your net worth

Personal financial planning is to create a road map to success. So in order to get where you want to go, you have to know where you start from.

Start by listing all your assets-including money in your bank account, money in your portfolio, real estate, personal property and cars. Each asset is important when calculating your net worth.

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Then make a list of your debts-including your mortgages, credit card debts and loans.

Subtract your debt from your assets and you have your net worth. If this is a positive number, then you have surpassed many Americans. Don't worry if it's negative, it's normal. It just means you have a lot of work to do and you can't take your personal financial plan lightly.

3. Establish an emergency fund

After calculating your net worth, set aside some money for unexpected expenses. You may not want to let all your financial plans go down the drain with a medical fee or a car repair fee.

According to a survey by Bankrate, nearly 1/4 of Americans do not have any emergency savings. It's dangerous without an emergency fund. When there are unplanned expenses such as car failure, house maintenance or hospitalization, the emergency fund will not be burdened with debt.

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Generally speaking, an ideal emergency fund is about 3-6 months' living expenses. Financial experts recommend depositing 20% of your monthly salary in a savings account.

Ideally, you could set aside a small portion of your salary as a separate emergency fund. In this way, you don't have to use a savings account or get into debt because of unexpected expenses.

4. Determine a realistic budget

A realistic budget is crucial. The actual rule of the budget is the rule of 50-20-30. Senator Elizabeth Warren introduces it in her book "your full value: a lifelong Financial Plan":

Necessary expenditure

50% of your income should be spent on loans, rent, food, insurance, health care and other necessary expenses.

Savings

20% of your income should be spent on savings. Saving is the key to financial management.

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The remaining 30% of the income can be spent on other non-essential items. Including movies, clothing, electronics and other non-essential items.

5. Manage and eliminate debts

Not all debt is bad, some debt is beneficial, such as mortgages. If you can pay off your mortgage on time, you can improve your credit score. High-interest-rate debt, such as credit card debt, needs to be avoided.

When you have a high-interest debt, you'd better pay it off as soon as possible. To manage your high-interest-rate debt, try rule 28plus 36. 28% of pre-tax income should be spent on housing, and other debts should not exceed 36% of income.

Mortgage lenders often use this rule to assess someone's ability to repay a loan. If you can abide by the rule 28 and 36, you are more likely to get mortgages and other credit lines.

6. Make use of tax incentives

The tax law is not only very complicated, but it is always changing.

For example, the tax cuts and Employment Act of 2017 (Tax Cuts and Jobs Act) changed the number of tax breaks, reduced tax rates, and expanded tax credits for 2018 and beyond. The bill changed the tax situation of many Americans.

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You can review your withholding tax, estimated tax and any tax credits that you may be eligible for this year.

In addition, if you live in the United States, using tax avoidance accounts such as IRAs and 401 (k) can help you avoid Uncle Sam's taxes for a longer period of time.

If you want to know more about your tax situation, you can consult the accountant.

7. Accumulate wealth through personal financial planning

The purpose of personal finance is to accumulate wealth and even realize financial freedom. Another aspect of personal finance is to avoid losses. You work hard, cut expenses and save money. You certainly don't want to lose money.

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A low-risk but stable investment strategy is to invest in high-quality dividend stocks.

Companies usually pay dividends to shareholders on a quarterly basis. Therefore, investors who establish a portfolio of dividend stocks can obtain stable returns.

Our chief earnings strategist, Mark Littenfeld (Marc Lichtenfeld), always provides excellent insights into the area of dividend investment.

Final thoughts on personal Financial Planning

You don't need a financial planner to plan your finances. Investment can achieve your personal financial goals.