Making smart financial choices—which includes creating a plan for your money—can help set you up for long-term success. Having a solid financial plan will help you achieve your savings goals; afford the things you always desire and realize long-term goals like retirement. Unfortunately, this isn’t an easy task—you must figure out your current financial position and where you want to get to.
The easiest way for you to set course for your ultimate financial success is to visualize a series of steps. And that’s completely doable. Remember, some steps will take years to materialize—and that’s part of the plan. But you’ll also enjoy some immediate gratification: a whole lot less stress once you dive into taking smart steps to control all the financial stuff that’s gnawing at you.
Start with our guide to understand the eight smartest things you can take for your finances—the ticket to taking control of your life.
The Importance of Having a Plan
Achieving financial security is an ongoing juggling act, and having a solid financial management plan can help you stay out of trouble. A solid plan is equivalent to creating a master list of all your financial goals. Some of the money balls in the air are goals you want to achieve ASAP while others may have a maturity date that’s a decade off.
It’s always easier to craft a course of action when you’re already clear on what you want to achieve. Whether you write down your plan on paper or a spreadsheet, ensure you take some time to think it through. At its heart, a financial plan should deliver security and safety, so that you can focus on living, not worrying.
Below is a list of essentials that should make up your financial plan.
Step 1: Budget and Reduce Expenses
Not exactly an entertaining topic, but creating a budget is a smart financial step that does more than just getting your finances in order and tracking your cash flow. It makes every other financial goal attainable. A budget is a line-item accounting of all income—salary, an investment or side gig—and expenses. The idea behind a budget is to lay everything out so that you can see where your money is ending up and make some adjustments if you’re not on course to reach your goals.
Creating a budget may seem like a lot of work, but there are numerous apps and online resources that can help you. These tools do most of the heavy lifting and all you have to do is tweak it as your income or spending habits change. Remember, creating a budget is just as important as sticking to it.
You’ll also never get ahead of your finances if you’re spending more than you earn. In fact, this is a sign of trouble ahead. Cutting down your expenses can steer you in the right path. Regularly check-in with your budgeting goals to ensure you’re not spending more than you can repay. If you have shared expenses, ensure you can both access the budget and hold each other accountable.
Step 2: Build an Emergency Fund
You don’t need anyone to emphasize that setting some money aside for life’s financial curveballs—a health insurance deductible or pandemic layoff—is arguably the best line of defense against incurring unwanted debt. But how do you create an emergency fund?
Start by setting a goal for the amount of protection you want to build for yourself. You should look to have at least six months’ worth of living expenses deposited in a separate savings account. Depositing in a regular checking account may introduce the temptation to withdraw the money for non-emergencies. Don’t expect to earn any interest on your emergency fund account, just ensure it’s accessible and safe.
An emergency fund is also separate from other savings and it acts as a hedge against tapping a retirement or other long-term savings account. A sufficiently padded fund also prevents you from using credit cards or borrowing money to clear bills if you encounter an unplanned expense.
Step 3: Contribute to Employer Matched Retirement Funds
Many employers will also match your RRSP contributions up to a certain percentage, which will help you maximize your savings. A general rule of thumb is to contribute at least a percentage that’s equal to your employer’s match. So, if your employer matches up to 5% of your contribution every month, transfer 5% or more to your retirement account each pay period.
Step 4: Pay Down High-Interest Debt
Paying off high-interest debt like a credit card debt or student loan should be a priority if you’re looking to make a smart financial move in your 20s. Owing some money to lenders could potentially hurt your credit by increasing your credit utilisation rate—which may lead to a lower credit score. Lenders could also consider you a high-risk borrower if you’ve accumulated a huge amount of debt, therefore reducing your chances of qualifying for other financial products.
Apart from impacting your credit score and qualifying chances, you may also end up paying a huge sum of money in accrued interest charges. Start by creating a clear debt repayment plan and adhere to it. From your existing budget, assess how much money you can comfortably put toward paying down your debt each month.
The best strategy for paying down high-interest debt is to start with the highest-interest debt then move on to the second highest APR, and the cycle continues. This strategy is referred to as the avalanche method. Ultimately, you’ll reduce the amount of interest you pay over the long run.
Step 5: Save for a Large Purchase or Personal Investment
It might be overwhelming to think about the amount of money you will need to save for a large purchase, like the down payment on your first home, but paying in cash is undoubtedly your best bet. Even when you can’t pay the entire amount in cash, it’s good to have some money set aside for a deposit or down payment.
Having a savings plan for a personal investment like a car or home can help you avoid taking out a huge loan. While borrowing money for a large purchase gives you more time to enjoy it because you’ll make the purchase sooner, the interest on your loan will obviously increase the entire cost of your purchase. So, you will have it sooner but pay for it longer.
The easiest way to achieve this is setting up an automatic transfer from your checking to your savings account. This helps ensure you won’t skip saving just because you don’t have enough cash left towards the end of your pay period. Establishing a time frame to save for your personal investment or big purchase will help you figure out the amount of money you need to save each month.
Step 6: Save for Retirement
Even if you’re several decades to retirement, it’s never too early to start putting money aside for retirement. The earlier you start saving for your future, the more it could grow. The longer you wait to get serious about this goal, the more you’ll need to contribute to reach retirement in good shape.
Your employer may provide a retirement account that you could open and deposit a portion of your paycheck for each pay period. Remember, you don’t have to wait until you land a full-time job to start saving for retirement. A Tax-Free Savings Account can be an excellent alternative for you to set up recurring transfers from each paycheck so you’ll never miss any contribution.
Step 7: Pay Down Low-Interest Debt
Low-interest debt can be as detrimental as high-interest debt to achieving your financial goals. While you could easily avoid interest charges with a no-fee credit card, the average interest rate on an unpaid credit card balance could soar as high as 20%. Paying down your low-interest debt is one of the smartest financial moves you can make towards building financial security.
If you only have one credit card with debt and are on a tight budget, make attempts to pay off at least the minimum amount once you get your credit card bill. You may also consider consolidating debt if it’s spread across different cards. This will help you reduce the number of accounts you should pay every month and possibly give lower interest charges than a credit card.
You might also want to check whether you can qualify for a credit card balance transfer if you have a solid credit score. A balance transfer credit card may waive your interest payments for an introductory grace period. Not paying interest for 6 months or a year gives you some time to make a large repayment without interesting piling up.
Step 8: Save for Other Goals
You might think that saving for a big purchase, retirement or an emergency fund is enough, but having an extra pocket of savings will save you from living paycheck to paycheck. Start by setting your savings goals and constantly work towards them. You could separate your priorities into three buckets for short-term, medium-term and long-term goals. Saving for your short-term goals should be highly liquid, meaning the cash should be easily accessible.
Good vehicles for saving money for other goals include a high-yield savings account, money market account and a GIC.
Conclusion: Get Started Today
Making smart money moves has long-term benefits that can steer you towards future financial success. The 8 steps listed above can help you work towards creating and sticking to a budget, being debt-free and saving money for major life milestones or retirement. Remember, this is your journey, and it’s never too late to get started. Planning for the finances you desire is 100% worth it.
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