When striving to mobilize on your financial goals, it is imperative that one has a proper plan in place in order to stay on track. Without a plan, you are inevitably more prone to slip ups and less likely to realize your financial goals. This planning that I am going to outline may take days, even weeks, to organize but being prepared before taking action always prevails in the end.
My planning method involves four different fundamental areas: Budgeting, The 70-10-10-10 Rule, Emergency Funds, and Savings Goals. The reason why I have chosen these four as being the most important factors is because they cover all the necessary bases for sound personal finances. Take a look at them and see how they can be applicable to your life.
Step 1: Make a Budget, and Commit to Sticking to it
Budgeting your money is the single most important factor in your immediate financial success. I know some of you out there may think that you generally do not spend that much money but you still want to give yourself parameters for your monthly expenses. Budgeting doesn’t always have to be a painful process either, as I have found that I sometimes have an extra $50 left over for Dining Out and am able to take a friend out to dinner.
The best way to put your budget together is to track your spending, penny by penny, for a week. I would suggest that you go out and buy yourself a ledger where you can document your daily expenditures. Following that week, take a close look at how much money you dedicate to each spending category and at that point you’re going to decide whether you’re spending to much, have room to spend more, or you’re just fine. After coming up with budget figures for a week, multiply everything by four so that your budget is suitable for a month. Type up this budget and tack it to something that you look at every morning, like your mirror. Another good idea is to carry around a laminated card that has your monthly budget on it so that you are constantly able to keep yourself accountable.
One more important thing to remember when creating your budget is to KEEP YOUR BUDGET WITHIN YOUR INCOME!! You’d be shocked by how many people put together budgets for themselves that are outside of their means; don’t make the same mistake.
Step 2: Follow the 70-10-10-10 Rule
The 70-10-10-10 Rule is so very crucial to your asset allocation. The idea is essentially that you’re going to live on 70% of your income, actively invest 10%, passively invest 10%, and tithe the last 10%.
So often, people skimp on tithing but I personally believe that you have to give in order to receive. The more your give, the more your mind is thinking ‘I make enough money that I can donate to others,’ thus giving yourself the illusion that you have MORE than enough.
What I mean by actively investing 10% of your money is the idea of Buy and Sell. With this 10%, you are trying to make the profit. For instance, you can set aside this 10% for a long while until you have enough for a down payment on an investment property, or a property that you’d like to fix up and sell.
The passively invested 10% is money that you’re allowing someone else to manage; leaving you as the passive partner in the transaction. A perfect example of this would be opening an investment account that enables you to invest using the dollar cost averaging method. You can have 10% of your income deducted from your checking account every month to go towards this investment fund and it costs you no energy to do so.
The planning process for 70-10-10-10 would include your decisions as to where you want your investing money and tithing money directed. You’re going to have to do a bit of research before you get started but it will make this process much smoother once you’re ready to get started.
Step 3: Allocate Funds to Serve as Liquid Cash Reserves
It’s important that you have at least three months of living expenses set aside in a savings account. You should immediately start putting some numbers together to see how much money you require for a month’s worth of living and multiply it by three once you have that figure. You can slowly allocate funds for your emergency reserves by having a certain amount deducted from your checking account each month and transferred into savings. This should be built in to your monthly budget (the 70% of your income you are allowed to spend). When you reach your goal for your emergency cash fund, you can decide whether to continue contributing to it (which is a good idea) or you can direct that money towards another savings goal that you have.
The planning for your emergency fund would include scoping out a savings account where you can set your money aside. You want to look for an account that has a competitive interest rate and allows you to access your money easily (because you never know when emergencies will occur). You will also need to decide how much you want deducted each month for emergencies and build that in to your budget.
Step 4: Create Some Savings Goals for Yourself
If you make saving and investing a painful process that does not allow you to reap any short or mid-term rewards, what incentive do you have to continue? Take time to really think about something you want and create a savings plan to get it. Once again, you can set up a savings account just for this purpose and direct a certain amount of money each month to be deposited (many banks allow you to set up multiple savings accounts for your various savings needs – and using the online service, you can even label the savings accounts yourself. For example, if you’re saving up for a laptop, you can label the account ‘John Smith’s Laptop Fund’). Build this expense in to your budget.
These are just a few basic steps that can be taken in order to put together a plan for sound personal finances. They can be bent and molded to fit your personal situation or you can simply add them to the financial plan that you are currently following. Also, feel free to expand them as you see fit. Whatever you decide to do, make sure that your plan is as structured as possible before taking any actions.