What is a personal financial plan?

Personal finance encompasses more than just your checking and savings accounts. It also involves things like your credit cards, loans, investments, insurance, mortgages, retirement plans, social security, taxes, and more — as well as the way you manage and organize all of the above. Budget, savings, spending, and preparation for future risks and events are all a part of personal finance.

That means an excellent personal finance plan needs to account for all of these factors and more. A good financial plan is essentially a roadmap: a means to define your needs and goals and a clear route to work towards them over time within the constraints of your circumstances.

Given this, the importance of good financial planning should be self-explanatory. Quite simply, if you want to fulfill your financial goals, you need a plan.

Having said that, all financial plans are not created equal, and you will need to tailor yours to your individual situation and needs. The good news is that some general principles are likely to apply to almost anyone.

To understand how to approach thinking about your unique plan, let’s start by taking a look at:

How to create a personal budget

If the past two years have contained any lesson, it’s this: all you can count on is change. However, a realistic, focused budget can help you take control of your spending and saving and provide yourself a financial cushion for when the unexpected occurs.

As it will.

To develop your budget every month, it’s often a good idea to start with a wider perspective.

If you can determine your long-term goals, be they buying a house or retiring with a certain amount of savings, you can work backward to determine how much you’ll need to save each month to get there.

Remember, to ensure your savings are there when you want them, it’s also essential to build an emergency fund. The exact size of your emergency fund can vary based on your obligations, needs, and other factors, but a good rule of thumb is to save enough to cover your daily expenses for six months. Again, once you determine what that amount is, you can back into the smaller amount you’ll have to save each week.

Next, identify monthly outflows such as living expenses. To create a buffer for yourself, estimate high for these figures and low for your monthly income. You should also factor in occasional large purchases, like a new car or even that entertainment system you’ve had your eye on. It’s not an irresponsible purchase if it’s part of your financial plan!

Additionally, be sure to consider debt management when developing your budget. Make sure you allocate funds to pay down your existing debt and be aware of interest rates. It’s often a good idea to first focus on paying down debts with the highest interest rates while making minimum payments on other accounts.

Finally, be realistic when making your budget. Be sure to include discretionary expenses and budget for fun! You’re not a machine, and there’s nothing wrong with earmarking some money for a fancy dinner or tickets to the big game. After all, that’s part of what a budget is for.

Once you put your budget into effect, be sure to keep track of how it’s working. Are you coming up short on your monthly savings? Spending more than you anticipated on groceries each week? Or did you get a big bonus and need to factor it in? No problem. Just keep your eye on those long-term goals, and work backward to the present circumstances to determine how to proceed.

That leads us to the subject of:

How to grow your savings

You’ve already factored long-term savings into your budget. Now it’s time to think about ways to boost your savings by helping your money grow. You can accomplish this with various tools, from a simple savings account that accrues interest to stocks or mutual funds that can increase in value. 

The easiest way to meet your savings goals is to “set it and forget it.” Online banking offers plenty of options for automatic transfers and deposits. So if your budget calls for you to put 15% of each paycheck into your retirement account? Just set it up to happen automatically. You’ll most likely never even notice the money is gone, but your future self will thank you for it. 

Another way to grow your savings in the short term is with a Certificate of Deposit (CD). This type of savings account holds a fixed amount of money for a fixed period of time with an interest rate that is typically higher than that of a regular savings account. When you redeem your CD after the set amount of time, you receive the money you deposited initially plus any interest it has accrued. 

To save over the long-term, you may want to consider…

Investment Planning

Some people feel intimidated by the idea of investing, but it can be as simple as contributing to a 401(k). Other tax-advantaged investment accounts include Traditional or Roth IRAs or 529 college savings plans

Stocks, bonds, money markets, mutual funds, commodities, real estate, and options are the most common types of investments. Most financial professionals will recommend diversifying an investment portfolio across the different spectrum of assets. 

It is also essential that you know the risks involved with any investment. Some of these risks include:

  • Market risk: This is the risk that the value of the investment will be below the purchase price when or if it needs to be sold.
  • Inflation risk: If the increase in value of an investment is less than the increase in the inflation rate, the future purchasing power will be less.
  • Liquidity risk: Not all investments can be sold at a moment’s notice. Some investments do not have a marketplace where they can be sold.
  • Interest rate risk: If an individual buys an interest-bearing investment and interest rates go up, the current investment value can decrease.
  • Tax risk: Buying and selling repeatedly for a profit will lead to taxable gains. The tax paid presents a threat to the investment value.
  • Political risk: Specifically, political changes within a country can decrease investment values when investing globally.
  • Currency risk: Fluctuations in world currencies will cause investment values to rise or fall, independent of the investment’s actual value.

Finally, no personal financial plan would be complete without considering…

How to manage your taxes

The tax code can seem impenetrably complex to the average person. To make things even more confusing, the last few years have seen pieces of legislation such as the Tax Cuts and Jobs Act, the American Rescue Plan, and the recent bipartisan infrastructure bill impact tax law in profound ways. With the Build Back Better Act still working its way through Congress, there may be more changes yet to come. 

However, the bottom line is that there are still plenty of approaches you can use to maximize your tax breaks, even if you aren’t an expert. For example, keeping your receipts and tracking your expenditures can go a long way towards taking advantage of more deductions or tax credits to leave less money on the table. 

Increasing your retirement account contributions or putting money into a Health Savings Account (HSA) can also provide some relief at tax time. Improving your home’s energy efficiency or buying an electric-powered vehicle can additionally make you eligible for additional tax credits. 

Finally, to ensure you can enjoy the maximum possible benefits, it may be a good idea to consult a tax professional. As always, Rosenberg & Chesnov stand ready to assist you with trusted counsel and expertise.

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