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  • Aaron Meaders

5 Essential Elements of a Sound Financial Plan | The Treasury of the People

Updated: Jul 14, 2022

Financial planning is vital because it helps people reach their goals. It also helps people avoid problems that could derail their plans. A good financial plan has five key elements:

  1. Know Where You Stand Now

  2. Set Goals

  3. Create a Budget

  4. Develop a Savings Strategy

  5. Pay Off Debt


Know Where You Stand Now

Before you start thinking about where you want to go, you should understand where you stand now. This will help you identify any issues that might prevent you from reaching your goals. Gather your financial statements and records to get a clear picture of your financial situation. This includes statements from your bank, investment accounts, and any other financial institutions you use. Once you have all your financial information in one place, look closely at it. Are there any areas where you're spending more than you can afford? Do you have any outstanding debt? Are your investments performing well? Answering these questions will give you a better idea of where you stand and what you need to do to reach your financial goals.


Set Goals

You must set goals before you can reach them. Without goals, you won't know how far you've come or how much further you still have to go.

To set financial goals, start by looking at your current financial situation. Determine what you need and want in the short-term and long-term. Once you have a good understanding of your starting point, you can set financial goals that are specific, measurable, achievable, relevant, and time-bound (SMART).

Some examples of financial goals include:

  • saving for a down payment on a house

  • paying off credit card debt

  • saving for retirement

  • creating an emergency fund

Remember, your financial goals will change as your life changes. Make sure to review and update your goals regularly to make sure they still align with your current situation.


Create a Budget

Once you have identified your goals, you must develop a budget. This is where you determine how much money you will spend each month to accomplish those goals. You also decide whether you will save money or borrow some.

To create a budget, you must track your income and expenses. This can be done using a budget template or app or simply writing down your income and expenses in a notebook. Once your information is gathered, you will need to categorize your expenses. This will help you determine where you can cut back, if necessary.

Some common expense categories include:

  • Housing

  • Transportation

  • Food

  • Utilities

  • Insurance

  • Debt payments

  • Savings

  • Entertainment

Once you have your budget created, it's essential to stick to it. This may mean sacrificing, but it will be worth it. If you struggle to stick to your budget, there may be room for adjustments. Don't be afraid to ask for help from a financial planner or advisor if you need it.


Develop a Savings Strategy

You should start saving as soon as possible. If you wait until you have enough money to cover your expenses, you might not have enough left over to invest in yourself. Start by setting aside $5 per paycheck. Then, once you reach $1,000, add another $5. Continue adding $5 every few months until you have at least $10,000 saved.

If you're unsure how to start saving, you can try a few methods. One popular method is the 50/30/20 rule. Under this rule, you would save 50% of your income, spend 30% on necessities, and use 20% for discretionary spending. Another method is the debt snowball method. This method saves you monthly money to pay off your debt. Once your debt is paid off, you use that money to save for other goals.


Pay Off Debt

If you're like most people, you probably have some debt. Maybe it's your mortgage, car loan, or credit card. Whatever the source, debt can be a financial burden.

One of the best things you can do for your financial health is to create a plan to pay off your debts. Here are five essential elements of a good debt payoff plan:

  1. Know your debts. The first step to paying off your debts is to know exactly how much you owe. Make a list of your debts, including the interest rate, minimum payment, and outstanding balance.

  2. Set a goal. Once you know your starting point, it's time to set a goal. How much debt do you want to pay off? When do you want to be debt-free? Having a specific goal will help you stay on track.

  3. Make a budget. To make your debt payoff plan a reality, you'll need to create a budget. Track your income and expenses, so you know how much money you have available to put towards your debt each month.

  4. Find extra money. Look at your budget and see where you can cut back to free up more money towards your debt. You may need to make some sacrifices, but it will be worth it when your debt-free!

  5. Stay motivated. Paying off debt can be a long and challenging process. It's essential to stay motivated throughout the journey. Celebrate your milestones and look forward to the day you'll be debt-free!

A plan to pay off your debts is essential in financial planning.


Final Thoughts

Financial planning is essential for anyone who wants to achieve their financial goals. There are five critical elements of a sound financial plan. Taking these steps can put you on the path to financial success.

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