Introduction to Financial Planning
Personal finance covers a wide variety of money topics including budgeting, expenses, debt, saving, retirement and insurance among others. Understanding how each of these topics works together and affect each other is important for laying the groundwork for a solid financial foundation for you and your family.
At the very basic level of personal finance, you are dealing with a budget; you make money and then you spend that money. Even if you haven’t created a detailed and written budget you continue to budget on a daily basis. When you are faced with spending money on something you think about it and realize that by spending that money you will not be able to spend that same money on something else.
The problem that stems from not having a detailed budget is that we are faced with so many financial decisions it is nearly impossible to keep track of and remember everything. This lack of understanding can lead to overspending, debt problems or even the inability to adequately plan for your future.
When you create a budget you begin to see a clear picture of how much money you have, what you spend it on and how much, if any is left over. Once you can see the inflows and outflows of your money you can optimize your spending so that necessary items are sure to be covered while cutting back on wasteful spending that will allow you to save money.
After you have created a budget you can begin to see where expenses may need to be reduced in order to meet your goals. For some people, this means eating out less and for others, it could mean getting rid of that extra vehicle. Whatever the case may be, everyone has an area or two where money can be saved by reducing some basic expenses.
Getting Out of Debt
Even after creating a sound budget and cutting unnecessary expenses you may still find yourself with lingering debt to get rid of. Financial leverage, or using credit and taking on debt by itself isn’t necessarily a bad thing but there are two kinds of debt: good debt and bad debt.
When you borrow money to purchase a home you are taking on a lot of debt, but lower interest rates and the purchase of an asset that can increase in value is an acceptable form of debt. On the other hand, when you go to the mall and have yourself a shopping spree using your credit card with a 24% annual interest rate without paying it off in full right away is bad debt.
Getting out of debt doesn’t have to be difficult but it is essential in reaching a state of financial independence. The first thing to do when you find yourself in debt is to pay more than the minimum monthly payment. If you only pay the minimum each month it will often take decades to repay the debt and cost a small fortune in interest. Once you are paying more than the minimum you should look to lower your interest rate. High interest rates will make getting out from under the debt even more difficult.
Saving for Retirement
With fewer companies offering full pension plans and the uncertainty of Social Security it has become more important than ever to save and plan for your own retirement. Unfortunately, many people feel that they simply don’t have enough money left over each month to save.
Retirement savings needs to become a priority instead of an afterthought. The Internal Revenue Service has made saving for retirement even more attractive with special tax-advantaged accounts such as employer 401(k) plans, individual retirement accounts and special retirement accounts for the self-employed. These allow for tax deductions, credits and even tax-free earnings on retirement savings.
Whether you are just out of college and have 40 years until retirement or you plan on retiring next year it is never too late to plan and to maximize your retirement savings.
So you have created a budget, cut expenses, eliminated your credit card debt and have begun to save for retirement, so you are all set, right? You have definitely come a long way but there is one more important aspect of your finances that you need to consider.
Insurance is important because you have worked hard to build a solid financial footing for you and your family so it needs to be protected. Accidents and disasters can and do happen and if you aren’t adequately insured it could leave you in financial ruin.
Some insurance policies are required and everyone should have these types of coverage but there are many other types of insurance policies that are probably not needed and you could be wasting precious dollars that could be put to work elsewhere. There is a fine line between having enough insurance and being over-insured.