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The easiest 5 step financial plan

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By Capital Partners Wealth Planning

Step 1: Set your Goals.

Having any financial plan involves setting great goals. A 5 step financial plan combining these basic principles will set the foundation of how you can turn your goals into a reality. People are often aiming to buy a house, or go on a holiday. If you’re really organised, you might have set out some milestones – get the kids through private schooling, go on a holiday each year, retire when you’re 60…. Equally as important, your starting goal might be to have some emergency cash set aside, so you’re not sweating every time you need to pay for something unexpected.

It doesn’t matter what it is. You have to decide on something. If there is a specific reason to make the 5 step financial plan, you will stick to it. So set a goal.

If you need help with your goals, we have an article all about setting great goals.

Next, assign a value to it. How much emergency cash will make you feel comfortable? $1,000? $10,000? Or how much does the new car you want cost? How much do you think you need as a lump sum to retire comfortably?

Step 2: Look at what you’re spending.

This is the hard, stare at yourself in the mirror and own up to your habits part. It is eye-opening and can be difficult but also strangely satisfying. It’s about knowing where all that money goes!

Your bank might already categorise transactions for you, so you know how much is classified ‘groceries’ or ‘utilities’. My bank doesn’t, so this is how I do it. Download a CSV file (Excel) of transactions for a 12 month period. Then sort them by narration. This groups all the same ones together, so it’s easy to identify what they are. Then you give them all a category – a budget planner can help you here. It will give you all the categories like insurance, groceries, dining out, entertainment, car expenses, household expenses etc.

When you’ve done this, you can figure exactly what you spent in the year and where you spent it.

Step 3: You’ve got to save something.

Now there’s some analysis required. How much did you earn (all your income, salary, interest, dividends, government benefits), and how much did you spend? If your income less your expenditure is positive, congratulations, you might have saved without trying. But I bet you can do better.

Look at your new budget (yep, that’s kind of what this is) and decide where you could do some trimming. In fact, how about you set yourself some targets week to week or month to month? If you were to stick to these, how much could you save?

You need to come up with a realistic savings figure that you can stick to, enabling you to progress towards your goals faster than a snail’s pace. It has to be a meaningful amount.

And remember! You don’t necessarily need to increase your salary or completely stop spending. Look through your house. Are there things you really don’t need that could be sold? Do you need to pay to park at work every day, or could you catch the train or cycle? There are many options out there and a myriad of different side hustles. The question is, how dedicated are you to your financial goals?

Step 4: Now for a bit of strategy

Now you know what you spend, and you’ve done some work on what you SHOULD be able to save, so how long will it take you to save for your goal? You can calculate it – for example – if you can save $1,200 a month, and you need $40,000 for your house deposit, it’s going to take you about 34 months, or just over two and a half years.

If you’ve got more than one goal, you need to do some prioritizing here – will you put off going on a holiday so that you can buy a car a little sooner?

Or – if you wanted to buy a house in 3 years, but to save for the deposit, you won’t have any money left over for a holiday – will you put your homeownership dream on hold for another 2 years so that you can take a holiday each year?

This is where you need to look at how much you can save each month (or year) and decide how it is best allocated to each of your competing goals. Perhaps a certain percentage each month goes to each goal (50% for the house, 25% for a holiday and 25% for the emergency fund?).

If the goal you are saving for is long term (for example, retirement), you might consider investing the money so that it starts working for you. If the goal is shorter term (i.e. in the next 3 to 5 years), then you can invest the money, but you need to consider what you would do if the market went down? Would you be happy to put off achieving your goal? If the answer is no, you might be better off keeping the money in cash or term deposits so that you have certainty that the money will be there when you need it.

Step 5: Discipline

The last step is the most boring but also the most satisfying. Now that you have your plan – you know what you want, you know how much you need to save to get there, you have to be disciplined about doing it.

Whatever strategy you decided, regularly investing or regular saving – stick to it. As the dollars start to add up, your goal inches closer.

Taking action and being in control of your finances is a great feeling – full of satisfaction and a little bit of smugness! Enjoy the journey (and, of course, the destination – your chosen financial goal!).

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

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