The key to financial stability is taking control of your money. To achieve a high quality of life, you don’t need to have a six-figure income or run a business. All you need is to have smart money-saving habits and be able to manage financial resources properly.
Unlike some financial gurus, we won’t tell you to stop buying coffee from a local coffee shop or take advantage of free fitness classes. At the end of the day, financial freedom is not about getting rid of your desires, it’s about making conscious choices.
Financial planning isn’t about counting every penny or working 60 hours per week to make ends meet. It’s about having a full picture of your current finances, financial goals and strategies to achieve these goals.
Here are X dos and don’ts of planning your finances to reach financial stability and feel more confident about your money situation.
#1 DO start with a clear understanding of what a financial plan is
A financial plan is an overview of your current financial situation which acts as a roadmap that lays out milestones in the short and long term. It can simulate the financial effects of your choices, be it a new place to live, marriage, running a business, or having another child. A financial plan also serves as a good basis for you to understand your risks when it comes to investing.
#2 DO define clear goals in your mind
You wake up each day to go to work where you spend the better part of the day. Rarely does anyone ask themselves why they have chosen their job or whether this job provides the type of lifestyle they dream of.
The first thing you should do before making any steps towards changing your financial situation is to understand what your current financial situation is. Then, figure out what you want to change and improve to feel happier and more financially secure.
#3 DO take inventory of your income and expenses
Once you’ve set your financial goals, you need to take inventory of your monthly income and expenses. Make sure you are first looking at your net income amount which is all the money you bring in the form of wages and other payments minus required expenses such as taxes. The most common source of income is a paycheck. Other sources of income might include money made from a second job or selling goods on eBay, for instance. Passive income in the form of capital gains, dividends, or interest on investments or interest-bearing accounts should be included in net income.
After that, analyze your expenses to know where your money goes each day, each week, and each month. To make sure your expenses are easily tracked and properly organized, use budget trackers and planners. Here’s our list of top 3 favorite apps:
Mint automatically updates and categorizes transactions. Users can add their own categories, track bills, split transactions, and set budget limits that alert them when they’re exceeding their maximum spending threshold.
YNAB is a robust, hands-on app based on a zero-based budgeting system that allocates all of your money to expenses, savings, and debt payments. The goal is that your income minus your expenditures equals zero by the end of the month.
Goodbudget is based on the envelope system which allows users to allocate their money to specific spending categories.
#4 DON’T buy into get-rich-quick schemes
These days you can’t check your social media feeds without seeing someone get rich in a week. Vacation snapshots and fancy car images sometimes make us feel miserable and ‘defective’. However, you shouldn’t trust ‘easy money’ pictures you see on your social media channels. Remember that real, sustained wealth cannot be built in a week. Don’t risk losing your hard-earned dollars in easy-money schemes.
#5 DON’T borrow from a 401(k) to pay off debt
Some people believe their 401(k) is the first place to turn to in case they need money for some emergencies. However, you need to know that when you withdraw from your account, you lose out on the earnings and your balance may not reach the level you should have in your 401(k). You are also paying the loan back with after-tax money which means paying double taxes. That’s why borrowing from a 401(k) may not be a good idea.
#6 DON’T leave your partner out of the loop
Every family has its own system of managing finances. When it comes to financial planning, it’s important to communicate openly with your partner to make sure everyone is on the same page about financial goals and feels secure about the future.