September is Life Insurance Awareness month and this post is in partnership with TermLifeInsurance.com, which helps spread awareness of the importance of term life insurance. Learn more about how you can protect your family and your finances.
Are you ready to take control of your financial future?
You don’t need a financial advisor to develop your own financial plan. In fact, YOU are the best person to put one together.
When you’re directly involved in mapping out your finances you’ll be more likely to actually stick with your goals. Plus, you’ll have a keen awareness of where you stand financially and what it’s going to take to get you to the next level.
Here are six elements of a strong financial plan.
#1. Super Strong, Meaningful Goals
What’s the point of even having a financial plan if you don’t have any goals? There isn’t one.
If you want to make headway financially you need goals that are strong enough to inspire you to action. Goals are what allow you to practice delayed gratification.
For instance, if you have a goal of paying off $3,000 worth of credit card debt in six months, you know that if you spend $30 on a new shirt that you don’t really need, you’re robbing yourself of debt freedom.
Strong goals are what keep me in check. Once I am committed to a particular goal, short term sacrifices are pretty easy to make.
Start with strong goals. It’s near impossible to map out a personal financial plan if you don’t have a strong goal to begin with.
Here’s how to put goals into motion: How To Keep Your Goals And Achieve Results
#2. An Awareness of Income and Expenses (A.K.A. The Budget)
Next comes either the fun, or horrid part, depending on your personality.
I’ll go ahead and be the first to admit: I don’t like strict budgeting. However, I am very aware of what I spend my money on.
There’s no right or wrong way to budget. You need to find what works the best for you.
Common ways to budget:
The Zero Based Budget – A Zero Based Budget is where you map out where your money is going before you even get it. You’re essentially “spending” your money before it even hits your bank account. With a zero based budget every dollar has a purpose.
Saving From the Top – Another way to budget, which works wonderfully for those of us who don’t like the zero based budget, is to skim from the top. With this style you meet all of your financial goals before you spend any money on bills or other expenses.
For instance, you’ll have money automatically put in your investing, savings, or debt pay off accounts. You’re allowed to spend everything else.
This method is also great if you lack discipline. You’ll automatically meet your financial goals without ever having to lift a finger.
Bottom line: There are a ton of different ways to budget. The method you use doesn’t really matter. What matters is that you’re hyper aware of your income and expenses and are able to trim the fat where necessary and move those savings toward your goals.
If you want a FREE tool to help, we suggest Personal Capital to keep track of all your income and expenses.
#3. A Large (ish) Emergency Fund
You need a decent emergency fund before starting on other goals like accelerating your debt payoff, saving for a house, or saving for retirement.
Emergency funds come in handy and will prevent you from paycheck to paycheck living.
Most financial experts recommend that you have at least 3-6 months’ worth of cash set aside for emergencies. I agree, but ultimately, your emergency fund needs to be whatever makes you feel comfortable.
When saving an emergency fund you can also factor that if you did lose your income your expenses would probably be a lot lower. I know I would be slashing expenses like crazy if I didn’t have any income coming in.
#4. Savings/Investing/Debt Payoff Plan – The Order Depends on Your Specific Situation
After you’ve reached your desired emergency fund amount it’s time to really accelerate your financial goals.
This is the fun part!
If you have high interest debt, like credit card debt, paying that off should be your main focus. Once that’s done you can choose to pay off lower interest rate debt or move onto saving and investing.
We all live different lives and have different mindsets. I can’t tell you what you should be working on. You need to figure out what means the most to you and then go all in on it.
However, one thing you need to be aware of, is retirement savings. You should have a retirement savings plan as one of your goals.
You can take all that cash you’ve been funneling toward your emergency fund and spread it between your financial goals.
#5. The Right Kinds of Insurance – Won’t Wish You Had it Until You Need It
Insurance is often overlooked in a strong financial plan. The truth is, without the right type of insurance all of your hard work could go down the drain with one accident.
Don’t skimp on insurance!
Some insurances that you absolutely need:
Auto Insurance – Obviously, if you have a car you shouldn’t go without auto insurance. If you have a lot of assets make sure that you have high liability limits on your auto policy.
Homeowner’s Insurance – If you own a home you already know how important homeowner’s insurance is. Once again, your liability limits need to be high enough to protect you should someone get injured on your property.
Health Insurance – A major health problem could bankrupt you. This is one insurance that you do not want to be without. If you’re without health insurance I’d recommend that you look into getting an inexpensive, high deductible plan. You’ll pay a lot upfront with a high deductible health plan but in the event of a major medical issue your insurance will save you from financial catastrophe.
Life Insurance – For some reason, it seems that life insurance is the most skipped over insurance out there. If you have a family that you want to protect then you absolutely need life insurance.
Everyone’s situation is different. When factoring how much life insurance you need think of how your spouse/kids would be impacted financially if something happened to you. At the very least you should get enough coverage to pay off your mortgage.
Thanks to technology buying life insurance has become much easier. You can use a site like TermLifeInsurance.com to get term life insurance quotes from dozens of carriers all at once. From there you can see which carrier offers the best prices and apply.
And as a side note, I would highly recommend that you get a term policy over a whole life policy. It’s hard to beat the price and protection that terms policies offer.
#6. Increase Your Income Strategy
Last, but certainly not least, is a strategy for increasing your income.
For a lot of people, expenses aren’t the problem – its income. If you’re making $20,000 per year you’re never going to get ahead. You need to get creative and actively look to increase your income.
It takes hard work and hustle but anyone can do it. You just have to have the right attitude.
Review Your Financial Plan Often
As time goes by your financial goals and insurance needs will change. Review your financial plan often and readjust whenever necessary.
Do you have your own personal financial plan?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.