Financial Planning 101: How to Remain Realistic

An effective financial plan can help you live within your means, determine your long-term financial objectives and gather the funds you need to achieve those goals. These plans can provide a feeling of financial security and can offer you some control over your financial future. A solid financial plan starts with assessing the reality of your current financial situation to build long-term financial security, while an unrealistic plan often uses guesswork, misinformation and wishful thinking.

A financial plan serves as a road map toward your desired financial destination.

A financial plan serves as a road map toward your desired financial destination.

Calculating a Monthly Budget

The first step in developing a financial plan is to calculate a monthly budget. A budget lists your income sources and expenses. A budget should provide accurate amounts of where the household money comes from, where it goes and how much is left over in a typical month. A realistic budget should also account for unexpected events, such as transportation breakdowns or medical emergencies. An unrealistic budget, on the other hand, may overestimate potential income, underestimate necessary expenses or fail to account for unforeseen circumstances.

Determining Financial Objectives

After you have calculated your budget, the next step is to determine the goals that you wish to accomplish with a solid financial plan. Realistic short-term goals can include saving for new purchases or paying down credit card debt. Intelligent long-term goals can include saving for retirement or paying off a home mortgage loan. These realistic goals can help you avoid pitfalls like spending beyond your means, such as buying a house or car that is beyond your budget.

Examining Debt Status

A realistic financial plan should include steps to reduce credit card and other consumer debt down to a reasonable level. "Credit card debt doesn't make sense," says Jim Kelly, a financial adviser and certified public accountant from Austin, Texas. "It's money that you need to pay down and put toward savings." A realistic plan would avoid the use of high-interest credit card debt to accomplish financial goals, such as starting a new business. A realistic financial plan achieves these goals either by increased savings or by low-interest loans.

Creating a Savings Plan

A comprehensive savings plan serves as an important component in any realistic financial strategy. Kelly says many of his clients present him with unrealistic expectations about how much they feel they need to save for their retirement. "People have no idea how much money they will need for retirement," he says. "The simple math is $1 million in savings over 25 years equals $40,000 per year. People need to save more and save sooner."

Researching Investment Opportunities

While savings accounts and CDs are often the safest ways to grow your money, they are not the only opportunities available. Financial planners typically recommend having a diverse range of investment instruments instead of relying heavily on one type or another, so a portfolio might include a blend of short-term instruments for quick potential profits, intermediate-term investments for growth potential and long-term savings opportunities for stability. The proportion of each type of investment can vary according to your goals and desires.

Adjusting to Changes

A financial plan that does not account for changes in personal circumstances, professional status or society at large does not reflect the realities of life, according to Kelly. A realistic financial plan should adapt to fluctuating market conditions, new technology and changing goals. "You should re-examine your financial plan every year," Kelly says. "You can schedule annual reviews (of your plan) to assess your goals." You can use your Quicken software to examine your goals, assess your strategies and make changes to your plan as needed.

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