Dealing with finances is one of the most challenging things we face in life. Though many people are saying that “money is not everything”, finances still plays a very huge role in our lives. It could spell the difference between a successful and happy life from a miserable and struggling one.
Proper financial planning is an art and it is essential in the road towards financial security. One of the reasons why many people struggle financially is because they don’t properly plan their finances or if ever they do, they are doing it the wrong way.
Despite the differences in approaches, making an effective financial plan has some ingredients in it. Dealing with finances is like following the scientific way of solving a problem, it has steps and it is a process, not a one time event nor will it happen overnight. Here are some tips in drafting out a good financial plan so you could reduce some financial pressure.
1.) Assess your finances. Before starting out anything, examine your finances. How much are you earning in a month? Do you have any standing credit or debt? What are your financial obligations (bills, mortgages)? Knowing each of these in detail is the first step in making a financial plan. Drawing out a financial plan without knowing your financial status is just like going to war without any weapons and without knowing who your enemy is. If you’re blinded, you’re sure to fail.
This is one of the things that many people miss out. They make a plan first and fit everything into their plan. It should be the other way around. Know your status first and design a plan out of it. What you want is to become financially secure so you should address your problems first rather than coming up with something without even knowing what you’re trying to solve.
2.) Increase cash flow. Increasing your income could drastically improve reducing your financial stress. Most financially secure people doesn’t rely on only one source of income, they have numerous sources of income. In general, people rely only on their jobs (salaries) and that traps them into the rat cycle. They have to work in order to earn something. They don’t strive so much on looking for another source of income.
Create sources of passive income, an income that comes along even if you won’t work for it. Passive income basically comes into two categories: [1] Having the money to make more money for you, or [2] having other people work/make money for you. Starting a business, investing in paper assets and tangibles such as real estate, or even venture capitalism are some ways to create passive income. Be imaginative and creative.
3.) Get yourself covered. Health care and insurance are essential in building a financial foundation. In fact these two are the first two things to consider in working towards financial security. The reason for these two is that they will cover your loved ones in case your income generating capacity is gone. The premiums comes in normally reasonable.
Health care and insurance are two of the most important things to consider yet are very underrated and misunderstood. How many people went down the drain financially because somebody in the family got sick or died? How many people went bankrupt when their properties suddenly lost a huge chunk of its value because of a natural calamity? This is where health care and insurance comes in so handy. They might not be enough to take care of the emotional loss but they sure are helpful enough to cover you and your loved ones financially.
4.) Get out of debt quick. Debt is a major finance killer. It has this psychological effect that will keep you from progressing financially. If you have debt, settle it as quick as you can to avoid the incurring interest rates. Credit card debts are among the top debts and many people lost a lot of money in credit cards. Pay credit card bills quick to avoid the high interest rates.
There are two types of debt: a good debt and a bad debt. Good debt is defined as a debt that could make money for you such as business loans. Bad debt on the other hand is a total liability because it doesn’t bring anything back to you and it is growing by itself through the interest rates. So why is it that you should pay off good debt fast as well? Because good debt is still debt and it brings with it interest rates. Pay it fast and you could save a few more cash and spare yourself from thinking too much about it.
5.) Think long term. Successful people are visionaries and these are the kind of people that are not just financially secured, they are financially well off or in other words, filthy rich. Don’t focus and settle for the present and short term goals, think long term. There are a lot of investing opportunities out there that could yield really great income in the future. Plan for your children’s educational plan in the future or your retirement plan or start a business that you see could be profitable in the future or accumulate assets that would appreciate in value in the future.
This is one of the biggest mistakes that common people make, they don’t think and do long term. All they’re focused at is in the present robbing themselves off some great opportunities to earn a lot and live a very comfortable and peaceful life in the future.
6.) Find a mentor and constantly increase your financial IQ. Knowledge is the greatest investment that we could ever have. Find a reputable and reliable mentor as many as you can in different fields. Having a number of mentors gives your different ideas and it will broaden your horizons.
Attend seminars, read books, and if possible be proactive in financial literacy drives. Invest in knowledge. What separates a rich man from the common folks is not in the amount of money that he owns but in the knowledge that he possesses.
7.) Make a plan and stick to it. Now that you’ve drawn out a financial plan in detail, stick to it. A plan is not a plan if you’ll deviate from it so soon. Though things might change in the future, be sure that such changes are still in line to your plans or are things that are a lot better than your plans.
Drafting a financial plan is challenging and doing it harder. However, if done right it could also give you great rewards. Take it one step at a time and you’ll just soon realize that you’re in a lot better shape in no time.