Where to Start In Planning Your Financial Future
When you picture your life in five or ten years, what do you see? Do you hope to own a house, a boat, or a motorcycle? Do you want to take luxurious holidays and go on refreshing getaways? Whatever your dreams are, you can begin to make them a reality by creating a plan for your financial future. You can take action on your financial situation today. Starting the process now of planning and saving for your financial future gets you one step closer to achieving the exact lifestyle you want.
1. Start with your one-year goals
Dreaming big and envisioning your future is important.
But it’s easier for the human mind to follow through on actions if we start with smaller goals that are more manageable.
To do this, think about the immediate financial goals you want to achieve. Here are some ideas to get you started:
- Go on a dream holiday to a certain location
- Buy a vehicle
- Pay off a student loan
- Save $1,000 in an emergency fund
- Contribute to a retirement account
- Remodel your kitchen
- Anything else that makes you excited for the future
Be sure to keep your goals tangible and specific. It’s easier to achieve a goal that is well-defined.
2. Track your income and spending
In order to understand what funds you need to achieve your goals, you have to know where you currently stand from a financial perspective. The first step to planning your financial future is to figure out where you are.
With a personal budget, you can see how much you’re spending and how much you’re saving—on a month-to-month basis.
Once you have two or three months of financial information at your fingertips (by using a personal budget), you’ll know how much cash you have to put toward the one-year goal you set in Step #1.
3. Determine the gap
Using the information you gathered in Step #2, you know how much money (approximately) you have to put toward your financial goal every month.
In other words, you have either an excess or a deficit each month. This excess or deficit factors into how you’ll achieve your financial goal.
Now, what if you don’t have any excess funds? Don’t worry. That’s what we are going to discuss here.
These simple calculations will help you determine your monthly gap (i.e. the difference between what you have and what you need to achieve what you want).
Part A. Determine the monthly need to achieve your goal in one year.
Formula: $ need for one-year goal ÷ by 12 months = $ monthly need.
Example: If you want to place $1,000 in your retirement account by the end of one year, divide that number by 12 months.
$1,000 ÷ 12 months = $83.34 monthly need
Part B. Calculate your monthly gap (the difference between your monthly need and your excess or deficit).
Formula: $ monthly need – your monthly excess or deficit = $ monthly gap.
Example (if excess): You usually have $55 extra every month and your monthly need is $83.34.
$83.34 – $55 excess = $28.34 monthly gap
In other words, you need an additional $28.34 every month in order to achieve your goal within one year.
Example (if deficit): You have a typical monthly deficit of $125 and your monthly need is $83.34.
$83.34 – —$125 = $208.34 monthly gap
Note: When you’re calculating your monthly gap with a deficit, be sure to use the negative number (i.e. —$125) in your calculation.
Your monthly gap number tells you exactly how much additional money you need each month to meet your goal and start planning your financial future.
4. Make a plan for closing the gap
Once you know your monthly gap, create a plan that helps close that gap, allowing you to hit your target monthly need.
Closing the gap looks different for everyone.
You can either earn more money to close the gap or reduce your spending.
Ideas to make extra cash to close the gap:
- Pet or house sit for a neighbour or friend
- Babysit on evenings or weekends
- Make cash online (see these 10 ways to make cash online)
- Sell the belongings you longer need or want
- Rent out a spare room
- Become an Uber driver
- Sell your blood plasma
Ideas to save extra cash to close the gap:
- Use coupons and sales when buying groceries
- Forgo ‘luxury’ spends like manicures and pedicures
- Reduce the number of dinners you eat at a restaurant
- Pack your lunch everyday for work
- Lower the frequency of shopping for clothes and accessories
- Host social events at home vs going out
- Unsubscribe to magazine and other monthly subscriptions
- Forgo spending in any area that’s not necessary
5. Stick to the plan
Forming a plan to achieve your goals is only the beginning of planning your financial future.
Living within the plan is where the action really happens.
Taking action to close the gap—between what you have and what you want—is where you’ll achieve your financial goals and dreams.
To make sure you meet your goal each month, consider taking the following action:
- Write your financial goal in a place where you’ll see it every day (i.e. on your fridge, on your bathroom mirror, at your computer desk)
- Check your personal budget at least once a week to make sure you’re staying in line with your plan
- Ensure the money you save each month is in a savings account that isn’t being used for other things
- Minimize spending in unnecessary, ‘fringe’ areas
- Consider a side job to make up any difference.
6. Celebrate success
Small rewards help keep you motivated to continue achieving your financial goals.
If you stick to your plan for two months, treat yourself by buying a new piece of clothing or going out to the movies. Be sure your reward doesn’t get in the way of achieving your goals.
Celebrate, but stay on track.
And when you achieve the one-year goal you set in Step 1, such as paying off a loan or saving for retirement, be sure to celebrate with a significant other or friend. You’ve worked hard, and it deserves some recognition!