How to Build a Solid Financial Plan

Whether you’re an individual looking to take control of your finances or a family wanting to set yourself up for long-term financial security, having a solid financial plan is essential. A financial plan is basically a roadmap that helps you achieve your financial goals. It may include strategies for managing your money, budgeting, saving, investing, managing debt, and even planning for retirement.

The great thing about making a financial plan is that it helps you to organise your finances and make informed decisions about money – and the best part is that anyone can make one! Here are the seven things that you will need to consider if you are looking to build your own financial plan.

1. What does your current financial situation look like?

Knowing where you currently stand financially is important, and should be the first thing that you think about when building your own financial plan. Here are some of the questions that you will want to be asking yourself:

• What is your income? This will include your regular salary, as well as any other income that you receive – for example, from a side business or passive income sources like investments or rental properties.

• What are your expenses? This should include both fixed and variable expenses, and may include things like rent, utilities, groceries, transport, entertainment, subscriptions, and any other debts that you are currently paying for.

• What are your assets? This will include things like savings accounts, investments, superannuation accounts, real estate, and any other valuable assets.

• What are your liabilities? This will include all your debts – for example, mortgages, student loans, credit card balances, car loans, and personal loans.

• What is your current net worth? You can work this out by subtracting your liabilities from your assets. This will give you a better idea of where you stand overall financially.

Answering these questions will provide you with a clearer picture of your current financial situation. Once you understand this, you will be better able to make informed financial situations to help you manage and improve it.

2. What are your financial goals?

It is also important to know what you are working towards financially. For example, are you wanting to pay off a particular debt, save for a big purchase like a house or a car, or achieve a certain net worth? Getting clear about your financial goals gives you something to work towards, and also allows you to be more focused when it comes to how you manage your money.

You might like to come up with three kinds of financial goals:

• Short-term goals (1-2 years) – for example, creating an emergency fund, paying off credit card debt, or saving for a holiday.

• Medium-term goals (3-5 years) – for example, saving for a house deposit or buying a new car.

• Long-term goals (5+ years) – for example, planning for retirement or saving for large investments.

You might like to use the SMART goal setting approach, which means setting goals that are Specific, Measurable, Achievable, Relevant, and Time-bound. This can help you to set financial goals backed by a clear plan for achieving them.

3. How will you budget and divide up your money?

Budgeting means dividing up your income between your different expenses and saving goals. This is essential for any financial plan, as it will ensure you are managing your money effectively.

There are many different types of budgeting methods you can use. For example, some people like to use physical envelopes to divide up their money for each category of expenses. Other people might like to use a spreadsheet. You could also use the 50/30/20 method, where you split your income into 50% for needs (such as rent, utilities, groceries, and other bills), 30% for wants (such as entertainment, dining out, hobbies), and 20% for savings and paying off your debts.

Whichever budgeting method you choose, you should ensure that your budget is realistic for your current income, expenses, and lifestyle. You should also be able to adapt it if your income or expenses change.

4. Do you have an emergency fund?

Having an emergency fund is another key element for any strong financial plan. There will be times in life when you find yourself with an unexpected expense, such as a medical emergency or unanticipated car repair. You may also find yourself out of work. Life can be unpredictable, so it is important that you have enough money saved to ensure you can cover any unexpected expenses that you may find yourself facing.

A good rule of thumb is to aim to save up three to six months’ worth of expenses. Ideally, this should be stored in a high-interest savings account. Whilst this may seem like a lot, start small and gradually build up your emergency fund over time.

Not only does having an emergency fund give you peace of mind, but it will also mean you do not have to rely on credit cards or loans the next time you find yourself with an unexpected expense to pay. This will keep you from getting into more debt.

5. What debts do you have to pay off?

Managing and eliminating your debts is another important part of any effective financial plan. Debts can be a major obstacle to achieving your financial goals, particularly when they come with high interest such as some credit cards.

Focus on paying off your highest interest debts first to minimise the amount you pay in interest over time. You may also want to focus on paying off your smallest debts first, while continuing to make minimum payments on your larger debts. Once one debt is paid off, move to the next one.

If you have multiple debts to pay off, you could also consider consolidating them. This means combining them into a single loan so you only have the one debt to pay off. This can simplify your payments and reduce interest, though be sure to consider that you don’t end up paying more in fees and interest in the long run.

6. How can you set yourself up for retirement?

Although retirement planning is something a lot of people put off, particularly when they are young and retirement seems to be a long way into the future, retirement planning is an essential part of any solid financial plan. The earlier you start saving for retirement, the better, as this will ensure you have as much money saved as possible by the time you stop work.

In Australia, employers are required to make mandatory contributions to your super fund. Your employer will pay a percentage of your earnings (currently 11.5%) into your super fund, who will then continue investing the money. The money in your super fund will then continue to grow until you retire.

You will also want to work out how much money you will need to have saved by the time you retire in order to retire comfortably. Many factors will influence this, such as your desired lifestyle, expected healthcare costs, and other expenses you expect to incur.

To ensure that you have enough money saved to retire comfortably, consider making additional voluntary contributions to your super fund. This will ensure that you have as much money saved as possible by the time you retire.

7. What will you invest in?

Making well-informed financial investments can be key to building wealth over time. Making investments can have many advantages, as they often offer higher returns than savings accounts, helping you grow your money faster.

There are a number of different investments you might make. For example, you might invest in stocks, exchange-traded funds (ETFs), bonds, mutual funds, or real estate. Consider consulting with a financial adviseor, as they will be able to help you build a diversified investment portfolio that aligns with your risk appetite and financial goals.

These seven things are key to building a strong financial plan. However, it is important to note that creating your financial plan is not a one-off task. Instead, you should continue monitoring and adjusting your financial plan over time to ensure it continues to reflect your changing goals and circumstances.

As you can see, having a solid financial plan is key to ensure financial stability and achieve your goals. Although building your own financial plan may seem overwhelming at first, breaking it down into these seven key areas can help you manage your finances more effectively and set yourself up for a great financial future.

_{This article contains general information about financial planning. It does not consider an individual’s personal circumstances and therefore before relying on any content, you should ensure that you have obtained individual personal advice from a licenced Financial Adviser.}