Creating a personal financial plan can seem to be overwhelming. Magazines, blogs, books, tv shows, friends, and family will all give you varying advice about what to do. It’s no surprise that many people get lost in this tsunami of information.
So where do you really start?
The answer is that your finances begin with you! Your life goals and preferences create the map to your unique financial future.
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If we think of a financial plan as a map, then your financial goals would be your destinations. Your set of financial goals are unique to yourself and include saving for a home, vacation, retirement, paying off debt, and more.
Your financial goals are very powerful and are what really gives your finances direction. Having clear goals is one of the most powerful ways to overcome a feeling of being lost amongst all the financial information.
Your goals will also provide you with clarity. Now all of your financial choices should help get you where you want to be and will direct your other financial decisions. For example, you know what to choose an investment that is appropriate for you goal.
While not going into depth here, the next stage is to determine how much you need to regularly save to achieve your goal. This amount is then added to your budget and periodically reviewed.
Your preferences are also very important to creating a financial goal that will work for you. Preferences often include your level of risk tolerance, ethical investment needs, liquidity, and much more.
Making choices that are harmonious with your intangible needs will help reduce your financial stress and will help create a financial plan that works with your personality. If you make choices against your preferences then you will consistently feel uncomfortable and likely be more inclined to avoid your financial plan.
One of the most common, and debated preferences revolves around safety. Unfortunately, many banking professionals will disregard an individual’s requested safety needs. This is the wrong approach. Picking an inappropriate level of safety can actually lead to a rejection of a financial plan, degrade trust, and lead to other issues.
While your goals and preferences direct your finances and shape your choices, they are limited by your income, fixed expenses, and credit ratings. These can change over time, but in the short-run they are typically fixed.
This means that your financial situation limits your path to achieving your financial. If your cash flow doesn’t allow you to save an amount to achieve a goal then you’ll need to make and adjustment like reduce an expense, adjust your goal, or find a way to earn extra income.
Similarly, a high-credit score will give you access to a larger selection of lending products, while a low-credit score will restrict your choices.
It’s All About You!
Overall, your finances are about you and once we recognize that we can finally create a financial plan that works for you!