Building Your Financial Plan – The Ultimate Guide

Most people know they should have a financial plan, but they don't know where to start. This guide will walk you through the basics of building your financial plan to get on track for a secure future. So whether you're just starting or struggling to stay on top of your finances, this guide has something for you.

Are you feeling lost when it comes to building your financial plan? You're not alone. It can be tough to know where to start or what to do next. But don't worry - we're here to help. We'll walk you through everything you need to know about creating a financial plan that works for you in this ultimate guide. 

Building your financial plan can seem daunting, but it doesn't have to be. This guide will outline everything you need to know to get started. We'll cover how to create realistic goals, track your progress, and make adjustments.

This article will discuss the basics of financial planning and show you how to create your plan. So whether you're just starting on your own or struggling to get your finances in order, read on for some helpful tips.

Let's get started!

Building A Budget

Budgeting basics

• First, check that you have sufficient funds to cover your day-to-day living expenses, which include things like bills and other recurring fees. Keep in mind the semiannual bills as well as the variable charges, such as your power bill for the winter.

• To keep yourself motivated, you should begin with simple goals that are easily attainable and add some rewards in your plan. For instance, when you've paid off the credit card that had the smallest balance, reward yourself by going out to dinner.

• Create a standing transfer from your checking account to your savings account on a regular basis. Make your money go further by opening a savings account with a competitive interest rate.

• Maintain your flexibility; there will be moments when the bills start piling up. You need to come to terms with the fact that you won't be able to save as much money this month. That is acceptable so long as it is not something that happens on a consistent basis. Should this be the case, you will need to look over your budget and make any necessary adjustments.

• Keep an eye on your spending for a few months, and then evaluate whether or not your budget requires any adjustments after that. The next step is to examine it on a regular basis to see if you are still on the right path.

• If you are fortunate enough to get an unexpected windfall, such as a bonus or tax return, put that money right into savings.

Step 1 – what comes in?

It is likely that your wage is the primary source of money in your household. Include any payments you receive from Centrelink, such as family assistance or interest on your savings and investments, as well as any recurring income, such as rent from an investment property. Be stringent: wage raises and bonuses that you might or might not earn do not belong in your budget, regardless of whether you get them or not.

Step 2 – what goes out?

To keep track of your rent, loan repayments, insurance, and other monthly expenses like phone and power bills, you should begin by looking at your bank statements and credit card bills.

It is advisable to keep track of variable expenditures, such as food, gasoline, entertainment, and the occasional costly purchase, while you are out and about for at least a few weeks. Then, if there is anything that you can't find, use your best judgement and include any fees associated with maintenance, such as getting your automobile serviced.

The Australian Securities and Investments Commission (ASIC) has a helpful and free tool on its website called TrackMySpend; however, if you don't want to use your phone or don't have a smartphone, a good old-fashioned pen and paper can do the trick.

Step 3 – to the cutting block

Adding up all of your expenditures could give you a rude awakening:

• Take your daily cappuccinos as an example; how much do they come to in total?
• How much do you often spend on takeout food and sandwiches?
• Do you have a high-priced supplemental health insurance plan, but you never go to the physiotherapist, you never wear glasses, and it's been more than a year since you went to the dentist? If so, you're wasting your money.
• How much of a balance do you carry over from month to month on your credit card, and what is the interest rate on that balance?
• How much do you spend each month on bank fees, especially those annoying fees charged by overseas ATMs?

You can frequently find a great deal of money by simply looking about. Below is a list of a handful of them.

Tips for quick savings

• You can lower the amount of money you spend on power by turning off appliances at the PowerPoint, and you can also see if you can find a better bargain on energy.

• If you make your monthly premium payment for your health insurance policy before the first of April, you can avoid the premium rise for that year.

• Consider this: Do I really need additional health insurance? You could also try to get a more affordable plan for your health insurance.

• Change your banking institution and read our articles on the top credit cards with the lowest interest rates and the finest fee-free savings accounts.

• Read our advice on how to cut down on credit card debt and face the facts about using credit cards.

• Start putting money away right away so you can spread the cost of Christmas shopping out across the entire year.

• Take back control of your cupboard by making a meal plan that features simple ingredients that won't break the bank.

• Create a list of what you need to buy, and then do all of your shopping at once once a week. Our research revealed that Aldi was the supermarket chain with the lowest overall grocery prices. Our findings also revealed that greengrocers offered the best deals on seasonal fruits and vegetables. Check out the deals that are offered in the major supermarkets.

• Cook and bake a lot on the same weekend once a month, and then freeze the resulting meals in individual portions to use as tasty and nutritious lunches during the week.

Step 4 – where do you stand?

Once you've determined whether or not you can make any savings, assess how you currently stand:

• Do you routinely spend more than you bring in each month?
• Do you put any of the money that's left over into savings at the end of the month, or do you spend the whole thing when you are paid?
• Do you have money set aside for unexpected expenses, and if so, how long will it last you?

Then divide all costs into four different columns.

• Things that can't be avoided, like paying the rent and buying food.
• Movie evenings, cocktails with friends, and takeout food are all nice extras to have.
• Occasionally splurging on things like massages, cosmetic treatments, concerts, or sporting activities is OK.
• Having money for unexpected events, the purchase of a new vehicle, the beginning of a family, or retirement are all worthy goals.

Are you currently making progress towards achieving your goals? How long, for instance, until you will have enough money saved up if you continue to stick to your savings plan and do not touch it?

Step 5 – new beginnings

You are now in a position to formulate an updated strategy. Be careful not to create goals that are impossible to achieve, and give in to your cravings every once in a while. Creating a budget does not mean giving up the activities you enjoy in favour of cutting back on expenses, although this may be the case. For instance, take advantage of inexpensive nights at the movies. Always keep in mind that the ideal budget is the one that serves your needs.

Investing Advice: Water the Grass and It Will Grow

If you've reached a moment in your life when you have more money than you know what to do with, letting it sit in a savings account isn't the greatest option. Instead, you should consider investing it in something more lucrative.

Your 0.02 percent annual return on savings accounts isn't helping much to combat Australia's 1.5 percent inflation rate, despite the fact that it may give you a sense of security. Therefore, it seems like it would be a good idea to start looking into alternate investment options.

One component of our method, for instance, involves making payments to yourself before making any other investments. It is preferable to create an ongoing investment strategy and save ten percent of each paycheck in a savings account rather than to wait until you have a significant amount of money saved up and then invest it all at once.

There is no investment, whether stocks, real estate, or anything else, that comes with a guarantee. Your level of comfort with risk, your preferences about the availability of cash, and the amount of time you have available should all inform the investing approach you choose.

1. Can you stomach a sudden 30% drop in your stock portfolio?

If this is not the case, you should probably avoid volatile equities and instead invest in bonds with low yields and blue-chip companies instead.

2. Do you need to be able to carry cash with you?

If this is not the case, you will want to structure your investment so that you have the ability to sell it quickly. It is possible to convert stocks into cash in a reasonably short amount of time; however, it is not always possible to locate a buyer for a home when one is in need of immediate funds.

3. Does your investment have a significant direct impact on your life?

There is a significant difference between being a 32-year-old person in good health who loses $20,000 and being a 65-year-old person who puts his savings of $20,000 at risk.

Want to Be a Millionaire? Income Streams

On average, a billionaire may attribute their wealth to the contributions of approximately seven different sources of income.

• Earned income, often known as salary, refers to the money that a person receives from their employment. For example, let's say your job pays you $80,000 a year.

• When you sell anything for more than you paid for it or more than it cost you to manufacture, you will have made a profit. Profit is money. You decided to create a part-time business selling bracelets from China, and it currently brings in $15,000 annually.

• When you lend money to another individual or company, you will receive interest in the form of further monetary compensation. This could involve anything from purchasing Treasury bills directly from the government to putting the money in the bank or giving it to a friend as a loan. Let's imagine that this brings in $5,000 for you annually.

• Dividends are payments made by most firms to their shareholders in the form of money and are calculated based on the number of shares owned in a company. You have the option of paying them semiannually or annually. For instance, you own 1,000 shares of Company A, and each share earns a dividend of $5 each year, bringing your total yearly dividend income to $5,000.

• Earnings from renting out one of your properties is an example of rental income. This could refer to a storage facility, a building, an apartment, or even a piece of vacant ground. Take your apartment as an example; let's say that it brings in $12,000 in annual revenue for you.

• Capital Gains: This refers to the profit that is made as a result of a rise in the value of an asset that you own, such as stock or property. You spent $15 to acquire 1,000 shares of Company B, and then you sold those shares for $17. Your return on investment would be a total of 2,000 dollars.

• Royalties are a form of income that you receive in exchange for allowing another party to use your ideas, products, or manufacturing method. In most cases, the agreement you have with them will stipulate a tiny portion of their total earnings. As an illustration, let's imagine that you licenced your online video course with a third-party website and that site pays you royalties of $5,000 per year.

You would have been able to finish the year with a total pretax income of $124,000 if you had these seven streams of income. Discovering new avenues of revenue may appear to be challenging at first, but setting them up such that they can function in an effective and efficient manner typically takes years.

Each source of income is associated with its own unique set of tax implications; therefore, if you are actively pursuing a strategy to diversify your sources of income, you must also have a tax strategy that is rock-solid.

Playing Defence: Debt Management

There are a lot of different kinds of debt. All of these things might generate increased levels of tension and make it harder to fall or stay asleep. On the other hand, things don't have to be this way.

By its very nature, debt is a helpful financial tool. You are provided with money to buy or invest in something right now, and all that is required of you is to pay the money back at some point in the future. On the other hand, debt can blossom into a monstrous problem when it is grossly mismanaged and disregarded.

According to what was reported in The Australian, "This year, Australian households surpassed Swiss households as the world's most indebted, with outstanding debt that is equivalent to 125 percent of GDP and no sign of letting off in the rate of increase. Over the course of the previous five years, the total amount of outstanding loans for owner-occupants as well as investors has increased from $1.2 trillion to $1.6 trillion." Keep in mind that this does not pertain to the national debt; rather, all of this debt is private.

The management of one's debts can be approached in one of two ways. The first strategy is to make use of debt with the objective of generating a higher return on investment somewhere else. The second step is to establish a plan for dealing with existing debt and paying it off in order to prevent spending additional money than is necessary.

It is not fair that you should have to bear the burden of late fees and interest payments simply because the majority of households in Australia are struggling with debt.

You should make it a habit to evaluate the interest rates on all of your credit cards on a consistent basis and to pay all of your payments on time. If you are feeling overwhelmed by the amount of debt you currently have, speaking with a financial counsellor is almost always the best course of action to take.

Financial Advice for Creating Good Finance Habits

1. Realise that it is entirely up to you to cultivate a healthy relationship with monetary resources

Changing the way that we think about money is the first step in improving our current financial circumstances. It is possible to remove any barriers that are preventing you from enhancing your financial wellbeing by releasing any bad feelings, such as uneasiness or worry around money.

Australians are more concerned about their financial situation than any other aspect of their lives. According to studies conducted by the Australian Psychological Society, our concerns regarding our financial situation frequently rank first.

Your relationship with money is not static; rather, it is something that can develop over the course of your life. The following are three essential points to remember regarding the psychological underpinnings of your connection with money:

• To begin, it's important to remember that money is about more than just finances.
• Second, the fear of dealing with money problems or the avoidance of doing so can start a vicious cycle.
• Third, your upbringing may have an effect on how you handle your financial matters as an adult.

You can begin the process of making financially autonomous decisions about your money once you have gained awareness, insight, and knowledge.

2. Be aware of the places where you are spending your money

Developing a new behaviour or habit can be easier if you break it down into smaller, more manageable steps. Try keeping a record of everything you spend for a certain time period, such as the next month, for instance. Why? It has the potential to shed light on the ways in which you now spend money and may bring to your attention the manner in which even insignificant amounts of money can accumulate up over time.

If you were to buy a coffee that cost $4 per day, five days a week, for a whole year, that would amount to more than $1,000. Tracking it can also expose areas of expenditure that would otherwise go unchecked, such as paying for subscriptions to several digital streaming services that you may not use. This is an example of an area that would normally go unchecked.

You should make an effort to record each transaction in the money diary that you find most useful. This could be done using paper, a journal, a document on your computer, or an application such as Pocketboo. Your choice of a money journal is entirely up to you. Consider using the Davidson Institute's Money Diary, which is available for download, to assist you in getting started with keeping track of your expenditures.

3. Decide on a budget and savings targets

The first step in goal-setting is to imagine something for yourself in the future that does not yet exist. Visualize the future in as much detail as you can so that you may obtain a sense of what it will be like in the future. When you can see both your objectives and the time frame in which you would want to accomplish them, it is much simpler to devise a plan of action that will enable you to make steady progress towards achieving them.

When you are setting your goals, it is essential to keep in mind the following:

• What aspects of your financial situation are most significant to you?
• Where do you see yourself settling down?
• What does your perfect way of life look like?
• How can you strike the perfect balance between your career and the way you live your life?
• What sorts of tools, such a laptop computer, may be useful to you in order to make your job and leisure time more enjoyable?
• Where would you prefer to spend your time off from work?
• Do you ever wonder if you could see yourself working and living in another country?

An effective way to help you achieve your goals is to set Specific, Measurable, Achievable, Realistic and Time-bound (SMART) goals.

For example, Linda might set herself the following goal:

• Specific: In December of 2021, I want to take my spouse on a trip to Western Australia for a total of ten days.

• Measurable: I wish to stay for a total of eleven days and ten nights. I would want to pay less than $2,000 for airline tickets, and I would like to pay no more than $2,000 for lodging; nonetheless, my overall budget cannot exceed $7,000.

• Achievable: To make this trip around Western Australia, I need to save $7,000 over the next 18 months, which comes out to about $389 each month. I'm going to put aside some money each month for savings, put aside any presents that come with my tax refund, and look for other methods to save as much money as I can.

• Realistic: This is connected very closely to the concept of accomplishable, and it enables Linda to picture the outcomes of her efforts. Realistic implies acknowledging that Linda may have the desire to stay at a five-star hotel, but there is no point in fulfilling that want if doing so will eat all or the majority of her budget and prevent her from engaging in any other activities while we are at our destination.

• Time-bound: For us to be able to purchase our airfare and reserve our accommodations, we will need to have $4,000 of my $8,000 by January 2021. This is because I do not want to leave these things till the very last minute.

Your financial and lifestyle goals might be easier to achieve with the help of a straightforward budget, which gives you the freedom to make deliberate decisions regarding how you will spend your money. It can assist you in allocating your expenditures so that you can live within your means and make progress towards accomplishing goals such as purchasing a new vehicle. Give this innovative approach to managing your finances a try by filling in the blanks with the appropriate action: "If I make and keep to a budget, I will be able to____________ ."

Motivating yourself to act can be as simple as reminding yourself of specific objectives that correspond to upcoming life milestones or experiences.

4. Think about using the three-category budgeting method

Keeping your budget straightforward is one of the most important things you can do to ensure its success. To begin, you will need to have an idea of how much money is coming in. This may be your income after taxes from your job, or it could be from investments, such as the interest you get on your savings. Seeing where your money is going out the door, in the form of your expenses, would then be helpful to you. When analysing your spending, you should pay close attention to the following three categories:

• Commitments are payments that you have very little influence over because they reflect a legal responsibility to pay. Examples of commitments include your rent, loan repayments, phone plan, and utility bills such as your power bill. Commitments are a type of financial obligation.

• Include things like the money you spend on your groceries and other food items under "everyday expenses."

• Expenses that occur less frequently fall into the third group, which includes everything other than your regular commitments and day-to-day costs. It shows costs that we have influence over because of the choices we make. It could include, for instance, the money that you spend on clothing, presents, and entertainment.

The spending budget with three categories is straightforward to implement, and if you take the appropriate steps, it may have a beneficial effect on your overall financial well-being.

It's time to put your plan into action now that you've established your objectives, calculated your income and expenses, and thought about the aspects of your financial plan that you'd like to have more control over, such as your savings.

Try to ask yourself, "Do I really need this?" as often as possible so that you can cut down on your sporadic spending. In the event that your response to this question is "No, but I want it," then. The next thing you should do is question yourself, "Do I want it enough to give up something else?" You will then have the option of either purchasing the item you desire at the expense of something else or deciding that, despite the fact that you desire this item, you will have to postpone purchasing it until a later time.

The Roadmap to Financial Independence

In order to construct a strong defence for your life objectives, the first step in developing a solid financial strategy is to document those objectives.

You may accurately plan how to safeguard your existing status from any hits by budgeting, calculating your burn rate, and analysing your cash flow. Additionally, you can accurately plan how to raise the quality of your daily life through strategic investments and tax planning tactics.

There is a seamless transition from one level of your financial plan to the next. Instead of a static piece of paper, think of your plan as an organic, living document that will develop alongside you as time goes on.

Because your life expectations will unavoidably shift over time, it is essential that you consistently revise and update your financial strategy to take into account your newly established priorities and conditions.