In most areas of life, failing to plan means planning to fail. Without a procedure to follow, you’ll likely get distracted, stray off course, and delay the achievement of your most important financial goals.
However, creating a financial strategy can help you stay on track. This written plan is a road map that will lead to your version of success. It outlines the way you’ll use money to address today’s needs while preparing for tomorrow’s wants and over time turning your dreams into reality!
Below are 7 steps that will help you create a financial strategy for achieving your long-term goals!
Step 1 – Take Inventory
Before you can make any progress forward, you need to know your current financial standing. By understanding your complete financial picture, you’re able to see how your previous financial decisions have gotten you to where you are today.
The first step to building your financial strategy is to take inventory. Start by writing down all of your sources of income along with all of your expenditures. Then, next to each one on your list, note the amounts that you receive and spend.
Recording your assets and liabilities on a personal financial statement also helps you take inventory. They allow you to calculate your net worth which gives a clear sign of your current financial position.
A positive net worth shows that you’ve been making smart money moves and are building wealth! Whereas, a negative one uncovers that you’ve been living above your means and that a part of your future income has already been spent!
No matter your current financial position, the following steps will help you create a plan to progress forward!
Step 2 – Set Goals
Taking inventory gives you a better view of where you stand. It also helps to show where you’re performing well in addition to the areas that you can improve.
After reviewing the numbers, many people often discover they’re spending more than they earn. This may prompt them to choose to live on a budget and be more frugal with money. Others may find that they’ve dug themselves into a financial hole and that paying off their debt would significantly increase their sense of financial wellbeing.
Once you determine how you want to enrich your life, then you can set SMART financial goals. Your targets should be Specific, Measurable, Attainable, Relevant, and Timely. These factors set the criteria that define your version of success.
Be sure to write your goals down and review them often, too. This keeps them in the forefront of your mind and makes it more likely that you’ll be thinking about ways you can go about reaching them!
Also, consider these questions while setting your goals:
- Are your goals in alignment with your values?
- How will you feel once you achieve these goals?
- What is your definition of success?
- Why are these goals important to you?
Step 3 – Create A Budget
The foundation of your financial strategy is your budget. It determines how you’re going to use your income to pay for your expenses and reach your goals.
Your savings (not your income) is one of the main factors that determines when you’ll achieve your goals. To determine your currents savings, use your figures from Step 1 and subtract your expenses from your income. If the result is positive then you’re creating a surplus, but if it’s negative then you’re spending more than you make.
As long as you continue to live above your means, you’ll continue to take on debt. Unfortunately, this makes it harder to create wealth and achieve your goals. Even worse, it can trigger a financial hardship!
A healthy budget consists of allocating part of your income to your expenses and part to your savings. But, keep in mind the more that you spend, the longer it will take to achieve success!
Step 4 – Reduce Your Expenses
As of now, you’ve created a budget and determined where you want to make improvements. The next step is to find the money that will allow you to make this happen!
Start by reviewing your monthly expenses. Look through the list you made in Step 1 and focus on the amount you spend on each category. Most likely, the amount you’re expending in one or more of these categories will alarm you!
Most of my clients have this same realization, too, and that’s okay! These realizations are often times what it takes to start making changes. After all, most people get caught up spending habitually and are unaware of the places their money has been going.
To reduce your expenses, prioritize your spending on the categories that give you the most value. Begin by going through your list and ranking each category as a need or want. Next, rank your wants in order from most to least important. Then, find ways to reduce or eliminate the ones that provide little value so that you can stop wasting money on them!
Step 5 – Manage Your Risk
At this stage, you’ve created a financial strategy that’s increased your savings ratio. Now, you’re putting more money aside and your stockpile of cash is starting to grow larger!
As you accumulate savings, you climb up the Hierarchy of Financial Needs. You’re living more comfortably and don’t want to backtrack. To ensure that you don’t, you’ll want to reduce your risk of sliding back down it.
For most people, an unexpected event or expense triggers them to have a financial crisis. They don’t have a way to pay their bill which makes them desperate for fast cash and puts them back into debt.
However, you can pay for unforeseen costs by establishing an emergency fund. This money is there for you when you need it most and pays for one-time events so that they don’t completely derail your plans for the future. (Consider using reserve funds for the expenses you can anticipate, too)
Insurance is another strategy for managing risk. It allows you to protect yourself, your loved ones, and your stuff from sudden large expenditures. Oftentimes, it can help you pay for car repairs, doctor bills, and medical treatment costs, too.
As you age and create wealth, you may also want to consider life insurance and creating a will. Both of these can safeguard your nest egg and help keep your family’s’ finances safe for generations to come!
Step 6 – Increase Your Income
Early on in building your financial strategy, you created a budget which you have most likely adjusted to by now. These changes not only reduce your chances of extreme lifestyle creep but also allow you to concentrate on making more money.
If you’re currently employed, the easiest way to increase your income is to try and negotiate a pay raise. Start by listing the projects you’ve worked on, your role in them, and your accomplishments. Then, set up a meeting with your boss, present the information, and see what happens. You might be surprised by the results!
If that doesn’t work, or you aren’t satisfied with the amount, maybe now is the time to shop the job market. Look at sites like Glass Door and Salary.com to estimate how much you could be making.
Then, start exploring your options and consider interviewing with other firms. You may find that once you have other job opportunities, you now have more bargaining power with your current employer, too!
Side hustles are another way to increase your income. You can try working odd jobs, starting a small business, or even start investing!
No matter how you choose to increase your earnings, it will take financial discipline to keep your burn rate under control so that you’re able to maximize your savings!
Step 7 – Use Your Surplus
As a result of Steps 1-6, you’ve now gotten to a place where you’re optimizing your savings. You should be producing a cash surplus which you can now put to work to help you reach your goals!
To get the biggest bang for your savings buck, you’ll want to figure out your financial order of operations. This tool helps you determine the best use of your money and use it in the most efficient way possible!
It’s important to invest your savings as soon as possible, too. By putting this money to work, it can grow faster than inflation. It also compounds and allows you to reach your goals faster!
A financial strategy is a guide for you to follow that ultimately leads to your goals. But, it won’t guarantee that you will actually reach them.
To achieve success, you’ll still have to work hard, build good habits, and rise above the challenges that you face!
Which part of your financial strategy can you improve? Comment below.
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