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Are you prepared for your financial future? It’s easy to feel a bit overwhelmed and unsure of where to start when it comes to long term planning for a financially secure future.
Maybe it feels stressful enough managing money for the day to day, or thinking further forward just seems too distant?
It’s never too early to start planning ahead. Getting your finances into shape will help both in the here and now as well as later in life. Trust me, your future self will thank you!
Setting up for financial security
Put simply, financial security involves having enough money to cover your expenses and achieve your goals without worrying about running out of money. Achieving financial security needs a mixture of smart planning, budgeting, and investing.
To plan ahead for a financially secure future, you first need to have a good understanding of your financial situation and the steps you can take to improve it. It doesn’t need to be complicated, but you’ll need a basic grasp of financial concepts that are relevant to your life, such as budgeting, saving, investing, insuring and debt management.
Here are some simple steps to set yourself up for a happy and healthy financial future.
1. Setting financial goals
A good place to start when thinking about finances and the future, is setting some financial goals. Laying out both short-term and long-term goals is a great step towards creating a roadmap to financial stability throughout your life.
These goals won’t be the same for everyone, but will fit around what your personal plans and ideals are.
Short-term goals typically cover a period of one year or less. These goals are important because they provide a sense of accomplishment and can help you stay motivated as you work towards your long-term goals. Here are some examples of short-term financial goals:
- Paying off credit card debt
- Building an emergency fund
- Saving for a down payment on a house
- Saving for a vacation
Long-term goals might cover a period of five years and beyond. These goals require a bit more forward planning and discipline, but are just as essential for achieving financial security. These might be things like :
- Saving for retirement
- Paying off a mortgage
- Saving for your child’s education
- Starting a business
2. Budgeting and spending
The best first step to take when it comes to looking after your finances is to create a budget. Knowing how much money you have coming in and going out each month is so helpful in making informed financial decisions.
Creating a Monthly Budget
- Work out your monthly income: This includes your salary, any side hustles, or any other sources of income.
- List your monthly expenses: Make a list of all your monthly expenses, including rent, utilities, groceries, transportation, and any other bills.
- Categorize your expenses: Group those expenses into categories, such as accommodation, food, bills, travel, entertainment.
- Calculate your total expenses: Add up your total expenses and compare them to your income. If your expenses are higher than your income, you need to find ways to reduce your spending.
Managing Monthly Expenses
Once you have created a budget, you’ll then need to make sure you can manage your monthly expenses. Here are some tips to help you stay on track:
- Track your spending: Keep track of your spending by writing down every expense somewhere like Google Workspace. This will help you identify areas where you can cut back.
- Use cash: Consider using cash for your daily expenses, such as groceries and entertainment. This will help you stay within your budget and avoid overspending.
- Avoid impulse buying: Before making a purchase, ask yourself if you really need it. Avoid impulse buying, especially for non-essential items.
Paying bills on time is important, as it helps to maintain a good credit score and avoid late fees. Here are some tips to help manage bills:
- Set up automatic payments: Consider setting up automatic payments for your bills to ensure that they are paid on time.
- Prioritize bills: If you’re struggling to pay all your bills, prioritize them based on their importance. For example, your rent or mortgage payment should be a top priority.
- Negotiate with creditors: If you’re having trouble paying your bills, contact your creditors and see if you can negotiate a payment plan.
3. Being prepared with insurance
It’s not nice to think about potential misfortune, but it is important to be prepared for different circumstances.
Insurance policies can help protect you and your loved ones from financial hardships in the event of unexpected events such as accidents, illnesses, or even death, as well as things like breakages, theft and damage. They also offer peace of mind, knowing you don’t have to worry financially on top of anything else.
Understanding insurance policies
Before you take out any insurance policy, it’s important to understand what you’re getting into. Insurance policies can be complex documents with a lot of legal jargon, so it’s important to read them carefully and ask questions if you don’t understand something.
Some common types of insurance policies include:
- Life insurance: This type of insurance provides a lump sum payment to your beneficiaries in the event of your death. It can help cover funeral expenses, pay off debts, and provide financial support for your loved ones.
- Health insurance: This type of insurance can help cover the costs of medical expenses, including doctor visits, hospital stays, and prescription drugs.
- Auto insurance: This type of insurance can help cover the costs of damages or injuries resulting from a car accident.
- Homeowners insurance: This type of insurance can help cover the costs of damages or losses to your home and personal property.
Taking out life insurance
Life insurance is an important type of insurance policy that can help protect your loved ones in the event of your death. Obviously the death of yourself or a loved one is not something we like to think about, but having a policy in place can be both a weight off your mind and a massive help in the unfortunate event that anything did happen.
There are two main types of life insurance: term life insurance and permanent life insurance.
Term life insurance provides coverage for a set period of time, usually 10, 20, or 30 years. It’s generally less expensive than permanent life insurance and lots of people find that cheap term life insurance is a good option if you only need coverage for a specific period of time.
Permanent life insurance provides coverage for your entire life and can also include an investment component. It’s generally more expensive than term life insurance but can be a good option if you want coverage for your entire life and want to build up cash value over time.
When taking out life insurance, it’s important to consider how much coverage you need and how much you can afford to pay in premiums. You should also consider the financial needs of your beneficiaries and any debts or expenses you want the policy to cover.
You might also want to consider writing a will, to make financial arrangements for any children or family members.
4. Saving strategies
Saving is also key when you’re planning for the future. The earlier you start saving, the more time your money has to grow. Here are some saving strategies:
Establishing an Emergency Fund
An emergency fund is a key part of any financial plan. Having an emergency fund in place means you are prepared for unexpected expenses, such as medical bills or car repairs, without having to dip into your main savings account or retirement fund.
To set up an emergency fund, start by setting a savings goal. Aim to save at least three to six months’ worth of living expenses. This may seem like a lot, but it’s important to have that cushion in case of an emergency.
Try not to worry if you don’t have much cash available to put aside – the main thing is to start that emergency account off, and whatever little you can add is still worth it, it will build over time.
Try and create a separate savings account specifically for your emergency fund. This will help you avoid the temptation to dip into it for other expenses.
Paying Yourself First
Following the pay-yourself-first method is another great strategy for saving.
Paying yourself first means making saving a priority. Before you pay any bills or make any other purchases, set aside a portion of your income for savings.
One way to do this is to set up automatic transfers from your checking account to your savings account. This way, you won’t even have to think about saving – it will happen automatically.
Another way to pay yourself first is to increase your savings rate every time you get a raise. For example, if you get a 3% raise, increase your savings rate by 1% or 2%.
5. Managing debt
Debt can be a huge stumbling block when it comes to both current and future finances, and getting on top of debt is really important when trying to establish financial security.
Dealing with credit card debt
Credit card debt can easily spiral out of control so it’s good to try and deal with it quickly. Here are some tips for dealing with credit card debt:
- Pay more than the minimum payment: If you only pay the minimum payment each month, it will take you a long time to pay off your debt and you’ll end up paying a lot of interest. Try to pay as much as you can afford each month to reduce your debt faster.
- Create a budget: Make a budget and stick to it. This will help you avoid overspending and accumulating more debt.
- Consider a balance transfer: If you have a high-interest credit card, consider transferring the balance to a card with a lower interest rate. This can help you save money on interest and pay off your debt faster.
- Avoid using your credit card: If you’re struggling with credit card debt, it’s best to avoid using your card until you’ve paid off your debt. This will help you avoid accumulating more debt.
Understanding interest is also important when it comes to managing your debt. Here are some things to keep in mind:
- Interest adds up quickly: If you have a high-interest rate, your debt can quickly grow out of control. Try to pay off your debt as quickly as possible to avoid paying more in interest.
- Compound interest: Compound interest means that you’re not only paying interest on your original debt, but also on the interest that has accumulated. This can quickly add up and make it harder to pay off your debt.
- Shop around for lower interest rates: If you have a high-interest credit card or loan, consider shopping around for a lower interest rate. This can help you save money on interest and pay off your debt faster.
There are a few different strategies that can help when dealing with debt. Two popular approaches include:
a) The snowball method – this involves tackling each debt individually, one at a time, starting with the smallest. Once the smallest debt is paid, you add the money you were paying towards that to paying off the next biggest, and so on building up towards the biggest debt, hence the name ‘snowball’.
This approach takes no notice of how much interest you’re paying, rather the aim is to see progress faster and stay motivated.
b) The debt avalanche method – with this approach you list your debts in order of which has the highest interest, then any money you have on top of the minimum payments you put towards your highest interest debt first. This method means you pay less interest overall.
Investing is another thing you might want to consider what planning financially for the future
Investing allows your money to grow over time and can help you achieve your long-term financial goals. However, investing can also be risky if you don’t understand the stock market and don’t diversify your portfolio.
The stock market is where stocks and other securities are bought and sold. Investing in the stock market can be a great way to grow your wealth, but it can also be risky. It’s important to understand the basics of the stock market before you start investing.
One of the most important things to understand is that the stock market can be volatile. This means that the value of your investments can go up and down quickly. It’s important to have a long-term investment strategy and not make rash decisions based on short-term market fluctuations.
Another important concept to understand is diversification. This means spreading your investments across different types of stocks and other securities. Diversification can help reduce your overall risk and protect you from market downturns.
7. Retirement planning
Retirement planning is another essential part of financial planning. It is never too early (or too late!) to start planning for your retirement.
401(k) and IRA Options
A 401(k) plan is a retirement savings plan offered by an employer. It allows you to contribute a portion of your salary to a retirement account on a pre-tax basis. The contributions are invested in stocks, bonds, and other securities, and the earnings grow tax-free until you retire. You can contribute up to $19,500 to your 401(k) plan in 2023. If you are over 50, you can make catch-up contributions of up to $6,500.
An Individual Retirement Account (IRA) is a retirement savings account that you can open on your own. There are two types of IRAs: traditional and Roth. With a traditional IRA, you can contribute up to $6,000 in 2023, and your contributions are tax-deductible. The earnings grow tax-free until you retire, and you pay taxes on the withdrawals. With a Roth IRA, you can contribute up to $6,000 in 2023, and your contributions are not tax-deductible. The earnings grow tax-free, and you don’t pay taxes on the withdrawals. Other variants do also exist however such as ones that operate on gold rather than paper assets, and you can learn more at IRAInvesting.com if you wish.
Social Security is a federal program that provides retirement, disability, and survivor benefits to eligible individuals. To be eligible for retirement benefits, you need to have earned at least 40 credits, which is equivalent to 10 years of work. The amount of your benefit depends on your earnings history, and you can start receiving benefits as early as age 62 or as late as age 70.
To maximize your Social Security benefits, you need to plan carefully. You can delay your retirement benefits to increase your monthly payments. For example, if you delay your retirement benefits until age 70, you can receive up to 32% more than if you start receiving benefits at age 66. You can also coordinate your benefits with your spouse’s benefits to maximize your joint income.
Achieving financial independence
The biggest goal that lots of people have when planning for their future is achieving financial independence. This means having enough money to support yourself and your family without relying on a paycheck from an employer.
Achieving financial independence requires careful planning and discipline, but the steps we covered above such as budgeting, savvy saving and investing, and making sure you’re financially prepared for different eventualities, should have you well on your way to a stress free, financially secure future.