When it comes to managing your personal finance there is more to it than just drawing up a budget and saving for a rainy day. It’s about creating a balance between protecting your income and building wealth at the same time. You will need to be able to overcome instant gratification so that you can achieve sustainable goals.
Here are 8 steps that will help you to start your financial planning journey the right way.
You will need to set goals that are important to you. Separate your goals and categorise them so they are easier to manage like retirement goals, saving and investment goals, estate planning goals and risk protection goals. You should not let affordability put you off from setting your goals. At the start of your career, you will probably not be able to afford all the financial solutions that you need, but once you have created your goals, you can prioritise them and implement them as your finances allow.
Draw Up Your Budget
Once you have your goals down, you will next draw up your budget. You will find that not all your goals will be achievable at first, but having a budget will help you to manage your cash flow. Your goals should be a priority and your money should be channelled to your most important goals.
Protect Your Risk
Once you have analysed your goals in terms of your risk and taking into account what would happen in the event of your death, ill-health or disability then you need to look for solutions. There are plenty of insurance companies and it can be overwhelming, which can make it difficult to make an informed comparison. An independent financial advisor can help you with this by comparing insurance companies for you and advise on the best and most cost-effective solution.
Manage Your Debt
You will need to understand the difference between good and bad debt before you undertake a debt payoff strategy. Good debt is low interest loans for a home or education, which you need so that you can pay for these as they would otherwise be unaffordable. On the flip side, debt that is incurred due to buying clothes, tech and other goods is expensive debt because of the high interest rate.
If you have amassed debt on credit cards and store accounts, then you need a strategy in place to eliminate this debt. It is almost impossible to save and invest whilst you are paying off high interest debt.
Start Your Emergency Fund
An emergency fund is used to protect yourself from unexpected expenses. If you do not have an emergency fund, then you will need to borrow money to pay for these expenses. This can then create a debt cycle that is hard to get out of. This is why you should start an emergency fund. It does take time to create one, but setting aside even a small amount at the beginning can help in the long run. As a rule, you should have at least three months of your salary in your emergency fund.
Have a Retirement Fund in Place
You not only need to prepare for the now and the close future, but you also need to prepare for your long term future and you should start investing early on in your career.
With a longer investment timeline, compound interest has more time to work. With long-term investing, you can achieve financial freedom when you do retire. A newer retirement annuity choice is unit trust based retirement annuities that offer investor flexibility, greater cost-effectiveness and transparency.
A retirement annuity (RA) is also tax efficient as you can build capital during your working years, so that once you retire, you will have enough money to enjoy the same standard of living. It then makes sense to maximise your RA contributions.
Have a Will
No matter your net worth, age or marital status it is advisable to have a will. Your will is only valid if it meets certain requirements, so you shouldn’t make your own will.
You may also want to consider a living will or advance directive, which is a declaration of your non-consent to artificial life support if you are not in a position to declare in person. A living will is not part of your last will and testament.
Invest Extra Income
Any additional income should be invested. You can invest in a tax free savings account, unit trusts and endowments.
Unit trusts or collective investments provide growth to your investment and an independent advisor can help you with this process.
The amount of time that you want to invest will determine how you will invest. If you want to invest money for a two year period because you are saving towards buying a property, then a low risk fund like a money market might be best. If you want to invest for three to five years then a fund that is stable with some share exposure but retains a large portion in low risk investment and cash might be a good option. A five to ten year investment might benefit from a balanced fund and longer term investment will warrant a greater exposure to shares and property as you can tolerate more investment risk.
Get your finances organised, know where you stand and start building your wealth for the now and the long term future.