Depending on the state of your finances, financial freedom might seem a long way off. For many people, the idea of not worrying about the bills while their money works for them is a distant dream – but they don’t realise how close financial planning can get them to it. Financial planning isn’t all ledgers and spreadsheets (though you’re welcome to enjoy those); it’s about listing your financial goals and working out how to reach them. Here’s how to get started.
1. Decide your goals
Work out your financial goals over one, five, ten and twenty years. Do you want to buy a house? Retire? Buy a car? Knowing what you want will guide the whole plan.
2. Determine where your money goes
Understand your cash flow so you can see where your money has to go, where you enjoy spending it (but could cut back), and how much you’re spending and saving. List your income and expenses and track both for a few months, grouping expenses by how necessary they are so you can spot where to save.
3. Commit to saving
You don’t need to cut out all your fun, but aim to build at least a couple of months’ basic living expenses into a savings account. Trim meals out or switch to cheaper utility plans where you can. Don’t get caught needing money for an emergency only to find you have none.
4. Commit to paying off debt
You can save and pay off debt at the same time. You might cut back on entertainment or clothing for a while, but clearing high-interest debt helps your finances enormously in the long run – over the years you could pay more than double what you originally owed on some cards and loans if you don’t.
5. Be aware of your credit position
Your credit history affects your interest rates and your ability to be approved for loans. Check it periodically and, if there’s an error, contact the credit agency to have it corrected.
6. Talk to a financial planner
A planner can help you set goals, work out how much you can or should save, and weigh paying down debt against saving or investing. They can also test whether your goals are realistic, and ask the questions that help you clarify your goals and your plan.
Final thoughts
You can go through life without a financial plan, but you probably won’t be as financially healthy as you’d be with a systematic way of setting goals, achieving them and reviewing your progress. A plan beats crossing your fingers and hoping you’ll feel secure one day.