Financial planning is the process of figuring out how much money you have, what your expenses are and where your future financial goals should be. For millennials and Gen Z, it can be particularly challenging.
Achieving financial independence means having enough savings and investments to live comfortably without working. It also means being debt-free.
1. Make a Budget
Financial planning can help you prioritize your spending, pay off debts and save. To do so, you need to create a budget.
Identify the non-negotiable expenses you need to meet like your rent or mortgage, bills and food. Then decide what’s expendable. This might include your shopping splurges, specialty lattes or gym membership.
It’s important to pay more than the minimum on your credit cards and other high-interest debt, as the sooner you eliminate those debt burdens, the more money you can put toward savings and investments. Make a savings plan and automate payments so that money is directed toward your goals right after each paycheck. Ensure that your emergency fund covers 3-6 months of expenses. This will give you peace of mind that you can cover unforeseen life events without going into debt.
2. Create a Savings Account
One of the first steps in financial planning is knowing exactly what you have coming in and going out. To make this easier, start by tracking your spending using a budgeting app or spreadsheet. Once you know how much you are spending, you can begin to cut expenses. For example, try to pack your lunch instead of buying it at the office, or brew your own coffee rather than going out for Starbucks.
Next, set aside money into savings and investments. You can do this by creating an automatic savings plan where a certain amount of money is deducted from your paycheck every month and deposited into savings or investment accounts. By starting this early, you can benefit from compounding interest. This will help you achieve your long term goals.
3. Pay Off Debt
As a new generation enters the workforce, it is faced with a unique set of financial challenges. With high rates of inflation, expensive college costs and an ever-rising mortgage rate, many Gen Zers are struggling to save money for emergencies and to pay off debt.
Getting in the habit of budgeting can help millennials keep track of their baseline costs and minimum loan payments. Then, subtract the baseline budget from their take-home income to find out how much discretionary income they have to spend on variable expenses and to pay off debt. A common strategy is to prioritize paying off debt with the highest interest rate, while still making the minimum payment on all other debts. This is known as the avalanche or snowball method.
4. Create an Emergency Fund
Most financial experts recommend having three to six months of expenses saved in an emergency fund. This is money you can use if something unexpected comes up, like the loss of your job or a costly home repair.
Typically, an emergency fund should be a top priority after paying off debt. It’s important to save as much as possible in an account that offers easy access (like a savings or money market account) and is separate from other spending accounts.
Earmarking a percentage of each paycheck into your emergency fund is an effective way to build it over time. You may also want to look for ways to economize, such as carpooling to work or cutting back on streaming services you don’t use. Any windfalls, such as tax refunds or birthday and holiday money, should be earmarked for the emergency fund too.
5. Start Investing
The first step in financial planning is to create an accurate picture of your current financial situation. This includes assessing what’s coming in and going out, including any debt payments.
After creating a budget and paying off debt, you can start saving for the future. This will help you reach long term goals like retirement. Depending on your risk appetite, you may consider investing in stocks or real estate.
Set a goal to save at least 10%-15% of your income. This can be done through a savings account or a taxable brokerage account. As you get closer to your goal, increase the percentage with each paycheck. Also, consider automating your savings through direct deposit to grow your money. This will make it easier to stick with a plan.