If you don’t have a budget or if you’re still paying off your credit card bill, then making money and investing is not what you should be focused on.
That’s why in this article I’ll be sharing the 5 steps that I teach my clients, on how to create a financial plan.
1. TRACK YOUR FINANCIAL POSITION
Have you ever travelled anywhere where the currency is like 100,000 for a meal and you have no idea if its expensive or cheap? That’s the same feeling when you don’t know your current financial position.
Your financial position is basically how much money you’d have if you sold everything you own and pay off all your debts. It can be calculated with a simple formula (Assets – Liabilities), where your assets are everything that you own, and your liabilities are everything that you owe.
Assets can include your house, car, cash, or investments
Liabilities can include student debt, car loans, mortgages, or money you owe your friends/parents! 😀
2. SET FINANCIAL GOALS:
I was never the best at math and often times I’d be stuck for hours trying to figure out the answer. But I got better at math by looking at the answer key, and finding the steps to get to the answer.
Its the same thing to build your financial plan! By figuring out where you want to be in the future, you can figure out steps to get you there.
So start tracking your goals and WHEN you want to achieve them.
Check out my past article on 3 steps to Set Future Financial Goals
3. SAVINGS PLAN
The third step is to create a savings plan! Now a lot of people see budgeting as tedious process where you track every little expense on paper each time you buy something.
And I agree this is tedious and if you do this you might last a week.
Instead, I create a plan where I track how much I make and spend on average, and then figure out how much I can realistically save every week, month, or year. This is also known as your CASH BUDGET.
So if I know I have $200 of leisure spending every month, I’ll spend around that number, and save the rest.
If you’d like to learn more about how to use a CASH BUDGET you’re in luck because I’ve already written an article for it 😉
4. INVEST
Woohoo finally investing!!
I know you might want to jump right into investing right away, but if you don’t have any financial goals or a budget, how will you choose your investing strategy and what to invest in?
For an example, a person who wants to buy a house in one year, will have a VERY different investing strategy from someone who wants to buy a house in 10 years.
That’s why Investing is step 4, and not step 1. Your investing strategy will be determined based on your financial position, financial goals, and budget.
5. MAXIMIZE
The last step is to maximize your money. You’ve taken all the right steps if you set your goals and figured the steps to achieve them.
But imagine if you could buy your house in 5 years instead of 10! Wouldn’t that be awesome?
This is where we learn how to maximize the amount of money that you make (aka pay less taxes) and how to make more money through your side-businesses.
If you want some business ideas, check out Top 4 Low Risk Online Business Ideas.
CONCLUSION
These are the 5 steps to create a financial plan:
(1) Figure out your Financial Position
(2) Set Financial Goals
(3) Create a Savings Plan
(4) Invest
(5) Maximize
The first 3 are EASY so take them out first. Once you do that you’re ready to invest and start maximizing your earnings. Happy Planting!