Having a financial plan is key in being responsible with money. That responsibility can help a person gain good credit, save for a vacation, fix up a home, or just pay the bills on time. Starting a plan can be difficult if someone has never attempted to begin one before. The prospect of having to look at how much is being spent every day seems exhausting for some. However, as long as time is set aside, anyone can start a financial plan, and become disciplined enough to stick to it – which is the point in the first place.
Step one requires gathering all bills that are required to be paid every month, bi-monthly, etc. These should be separated into two categories: Essential and non-essential. The essential pile includes bills for electricity, water, mortgage or rent, car payments, etc. These are needed for life to go on in a decent manner. The non-essential pile should have credit card payments, debt payments, and the like. While these are necessary to pay for good credit, they are not essential for basic life needs.
Step two entails gathering income information. Paychecks/paystubs, and other documentation that shows a source of money coming in for the household’s use should be added up for a per pay period total. For those who receive their money in a disorderly fashion, an average is acceptable as long as it is in a conservative way. In other words… round down! Always assume you will make less than what the average is, because if you assume too much and the paycheck does not reach that goal, essential bills will not get paid.
Step three is creating a chart, but an excel spreadsheet would be better suited, especially for those who do not like math or who have little time to handle finances. The excel sheet allows for automated calculations that, otherwise, would have to be done by the user. A hand-made chart should contain the following information:
Estimated income and cost of both essential and non-essential bills. Actual income and cost of both essential and non-essential bills. Method of payment. Total of income minus cost of all essential and non-essential bills. Residual total gives a number. This number tells the user how much money is left over or how much money they are short on for that pay period.
This chart should be updated every pay period to keep track of what has been paid and how much it costs, as well as essential and non-essential bill cost changes.
Step four, in starting a financial plan, means looking at how much, in a pay period, the essential bills total comes to and comparing it to the income for the same pay period. From there decisions as to whether or not enough income is being made can be made, and, if need be, if more income is needed or cuts in the budget have to be made.
Step five is taking a snapshot of the budget discussed above, deciding what is left over, and what to do with that money. This is where creating a financial plan becomes a little complicated. Pull out a sheet of paper and pencil. Create two columns and two rows. The first column should read “Needs”, the second column should read “Wants”, the top row should read “Short term”, and the bottom row should read “Long term”. It should appear to look something like this:
Short-term: Replace broken dishwasher; redecorate bedroom.
Long-term: College tuition for son; vacation for family.
Short term needs must be met first, as these are usually the most dire. Therefore, these needs should be receiving the majority of the money that is left over. Long term needs should be considered before short term wants. They would get the next largest chunk of money. The third largest chunk would go to short term wants, and, finally, the smallest chunk would be saved for the long term wants. Keeping perspective will allow for more responsibility in handling money, and more discipline in sticking to a financial plan. How much is put away in exact numbers is dependent upon an individual’s income. Where the money is put away is dependent upon research regarding savings accounts, bonds, IRA’s, etc. Just know that the higher interest earned, means the faster the money grows.
The last step in starting a financial plan is dealing with any debt that exists. This is usually where people jump ship because it can be extremely overwhelming for some. However, there is a tried and true method that works to get out of debt. Pile all the non-essential bills together. Create a list, in order of smallest to largest debt, of the company name, address and phone number of each and every debt. Next to their name write down how much is owed to them. Create another space next to the amount that states if the bill is current, in default, collections, or has gone to a legal firm.
Next, prioritize the debts in this order:
Debts that have gone to a legal firm MUST be first in line to be paid. If not, this could result in repos and liens. It really could destroy part of your life and make it very difficult for credit to be obtained in the future. Debts that are in collections should have the next consideration, because after going through a few collection agencies the next stop is the legal firms. The rest of the debts should be paid on in a minimum every month to keep them current and out of the hands of collection agencies. Yes, you will pay more in interest, and, yes, it will take longer to pay off. But…
The goal with debt is to erase the most heinous items first, and then go from there. For each of the three categories listed above, debts must be placed in order of how much is owed – from smallest to largest. The smaller debts will not take as much time to pay off, so pay the minimum on the larger ones until the smallest ones are completely paid off, you have received a letter of confirmation that they have been paid off and that the account has been closed forever! Recording keeping here is extremely important to avoid scams where a phone call is placed telling you that the bill has not been paid. If you are ever unsure if a debtor is legitimate, you are within your rights to request a claim to the debt in writing from the debt collector.
Finances can be tricky and complicated to handle. But, with a good, solid financial plan that is organized and stuck to, money becomes more manageable, as does life! Use these steps to start that financial plan and watch how the money starts working for you, instead of the other way around.