Every New Year, people commit to bettering themselves over the course of the year. For many, that means working on their finances.
Sound like you? Maybe you're taking control of your money for the first time, or perhaps you have some experience but need a refresher on the basics of financial planning.
In either case, read this quick guide to building a financial plan for 2021 to set yourself up for financial success.
1. Set Goals
First, set short-term and long-term goals so you have targets to aim for with your money habits. For example, a short-term goal might be to pay off an online loan, whereas a long-term goal could be buying a house.
Your goals shouldn't be vague — they need hard numbers and dates to be effective.
Once you set your goals, break them down into digestible steps. This often entails creating monthly savings goals.
Let's look at the house example again.
Say you want to buy a house in 5 years, and your budget for a home is $150,000. You need to save money for a 20% down payment, which is equivalent to $30,000.
You'll then divide that $30,000 over 60 months (five years), which equals $500 per month. Thus, save $500 a month to hit your goal.
2. Track Income and Expenses
Once you have your goals in place, you need to know where you stand currently.
In other words, your income and expenses.
For income, just look at your pay stub. If you're self-employed, you may need to look at several months of bank statements and average your income.
Factor in other sources of regular income, as well. For example, an income stream you have from a business would count. On the other hand, a stock sale would not, unless you rely on selling stocks as a regular income source.
For expenses, track all your spending for a month. If you're short on time, two weeks should suffice.
Today, it's much easier to track spending. Just sign up for an app like Mint or Personal Capital, link your accounts, and let the app track the numbers for you.
3. Create a Budget
Now, you can create your budget with your income and expense information.
One of the best budgeting methods for new budgeters is the 50/30/20 budget. Under this method, you spend 50% of your post-tax earnings on needs. Then, 20% goes towards saving — that can be paying down high-interest debt, building up a savings account, or investing for retirement. The last 30% in the middle goes towards wants.
There are numerous budgeting templates available, though, so explore other budgeting methods to see what's best for you.
In any case, fitting your spending and income into your next budget might require some expense cutting.
4. Stick to the Plan
You're almost guaranteed to be off your budget the first few months, especially if you've never budgeted before.
That's okay. It often takes a while to reign in your spending habits to the point where they closely match your budget.
The important thing is that you stick to the plan. Check your spending and income regularly — such as once a week — and weigh it against your budget.
If you undershoot, that's great. You can put that money towards something useful, like investing, or even "store" it for a splurge in next week's budget.
If you overshoot, look closely at what you overspent on so you can be aware of it next time.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: Building a Financial Plan to Start 2021 Right
