What Is The First Step In Financial Planning?

It is natural for any individual to think about personal finances and how it will affect one’s future. If you’re not prepared, primarily when factors affect your health, your family’s needs, or the business you own, you could end up with unfavorable consequences.

Financial planning should be a part of your life, especially if you’re a young professional at the early stages of your career or business. Knowing how to keep your hard-earned money to use for the essential events in your life will save you some regrets in the future.

Where To Start With Financial Planning

Not everyone knows how to create a clear plan, especially when it comes to their finances. You could seek the assistance of financial planning services to help you walk through the entire process. A financial advisor will help your investment management, retirement, estate, and education planning. But before those, a financial advisor will help you determine the following:

  • Financial Status

Before creating a plan that works, you need to assess your current financial situation. It is where you need to look at areas that need improvement to properly work on the best course of action towards the financial freedom you seek. This way, you’ll know exactly how much money you currently have, how much money you usually spend, and the amount you can put aside for financial goals. The following components of your financial status are:

  • Monthly income (earned, profit, and other forms of income streams)
  • Monthly expenses (mortgage, lease, or rent; utilities; car payments, and other priority expenses)
  • Outstanding debts (credit card, student loan, business loan, and other forms of credit)
    Bank account balances in your savings/checking account, or both
  • Financial Goals

Determining your finances current state should prompt you to reflect on where you want to be financially at a specific period. Anyone who looks straight to the future should have financial goals. This time around is a stage of self-assessment to pinpoint where you want to direct your hard-earned money. Knowing what you want will help you make better choices in handling your finances.

Like the components of your financial status, you can make a list of your goals to help you create a clear mental picture. Here are some examples:

  • Would you like to own a house and lot?
  • Do you know how you’ll quickly pay off your debts?
  • Do you want to have your own business someday?
  • What do you want to do in your retirement?
  • What if you get into an accident?
  • Are you getting married?
  • Where do you want to travel?

There are many ways to reach your financial goals. However, setting realistic ones is the best way step-by-step. See to it that you’re setting short-term and long-term goals apart. It’ll help you determine which ones you can accomplish faster, and celebrate even small victories to keep you going.

  • Budget And Residual Income

Following your financial goals, you must now learn how to budget your regular income. For some, budgeting is tricky because of an accustomed way of mindless spending due to their current lifestyle. If you’re always adhering to your wants before your needs, your financial goals will likely fail. You need a systematic way of budgeting called a zero-based budget, which means subtracting expenses from your income that will equal zero.

Budgeting is one way, and residual income is another. Residual income is the money you continue to receive passively from investments, real estate, sale of various consumer items, interest, or dividend income. The more income streams you have, the faster you are to reaching your financial goals.

Conclusion

Financial planning can only begin once you’re able to work on the foundation. By determining where your financial status is, you can start to fulfill a lifelong dream or prepare for the significant stages of your life. To bridge them together is to keep a budget and set up income streams to help you reach your goals. When you have a solid foundation, financial planning becomes a one-way, straightforward path that you can maintain towards the life you want.

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