We all want to be financially secure and have the freedom to make choices that make us happy. But what steps do we need to take to ensure a secure financial future? Designing your financial future can seem intimidating, but there are strategies and tips you can use to make the process easier.
Understanding your financial goals
One of the first steps to designing your financial plan is to understand your financial goals. There are many reasons why people have financial goals. Some may be saving up for a big purchase, like a home or a car. Others may want to be financially independent and retire early. In order to design your financial plan, you must understand your financial goals. Once you know what you are trying to achieve, you can start taking steps to make that happen.
Create a budget
Creating a budget is the first step to creating your financial plan. A budget allows you to see exactly where your money is going and where you can make adjustments to free up more money for your financial goals. However, many people don’t like the idea of creating a budget because it requires them to be extremely disciplined and organized, and this can be hard for a lot of people.
Luckily, there are different types of budgets you can choose from that can make the process easier. Below, are the three most common types of budgeting rules that can help you achieve all of your financial goals. However, it’s important to keep in mind that there is no one-size-fits-all when it comes to budgeting. The important thing is that you educate yourself and find the perfect fit for your personal financial situation.
The 50/30/20 rule
The 50/30/20 rule is a general budget that allows you to cut costs in your day-to-day living to free up more money for your financial goals. This rule proposes splitting up your net income in a structure that pays more attention to individual expenditures:
Half of your income should be allocated to basic necessities. These requirements include things like rent and associated costs, transportation, communications, and groceries.
30% of your finances should go towards your personal expenses. This encompasses going out to restaurants, your various subscriptions each month, getting clothes, and anything related to maintenance services.
20% of your earnings should be set aside for savings. Whether it be for a venture, a down payment, or a financial buffer, setting aside 20% is an excellent start for fiscal stability.
Depending on your lifestyle, you can adjust the percentages of each category. For example, if you own a house or are inclined to put more money into your home, the 60/20/20 rule or the 70/15/15 rule might be a better fit.
The 80/20 rule
The 80/20 rule is a simplified version of the 50/30/20 rule because it states that 80% of your income should go toward your spending, and 20% should go toward your savings. However, it’s just a little less rigid. By not specifying how much of your money should go toward necessities and toward personal expenses, it gives you a bit more freedom to spend on either category, depending on the kind of lifestyle you want to lead. What’s ultimately most important is that you set 20% of your income aside for savings. Keep in mind, however, that if you have a lot of debts, that 20% should focus solely on paying them off first. Once you’ve finished paying off your debts, you should start saving.
Zero-based budgeting
Zero-based budgeting is a technique used by organizations to manage their finances. This plan requires all expenses to be justified from the beginning. Meaning, each dollar must be allocated to a specific purpose, such as paying existing debt, monthly bills, or retirement savings. This system is especially beneficial for those attempting to avoid or reduce debt.
So, what are the advantages of zero-based budgeting? It helps in preventing you from being tempted to make impulsive purchases, it guarantees that your primary needs and necessities are paid for, it helps you stay disciplined, and it can help you recognize the warning signs (i.e, if you’re falling behind on your debts).
Pay off your debts
Once you’ve created a budget, it’s important to pay off your debts. Debt is an easy trap to fall into, and it may seem like there’s no way out. But there are ways you can make paying off your debts easier. The snowball method and avalanche method are two strategies you can use to pay off your debts quickly.
The snowball method involves paying off your smallest debt first, no matter what the interest rate is. As you make payments on this debt, you will feel a sense of progress as it gets closer to being paid off. Once the first debt is paid off, you can apply the money to the next debt.
The avalanche method involves paying off your highest-interest debt first. This method will allow you to save a lot more money on interest in the long run.
Create an emergency fund
An emergency fund is important for any financial plan. An emergency fund is used to cover unexpected expenses, like car repairs or plumbing fees. Having an emergency fund will allow you to cover unexpected expenses without taking out a loan or using your savings, which can put your financial future at risk.
It’s important to save enough money in an emergency fund to cover unexpected expenses for at least three to six months. Having an emergency fund will allow you to relax and know that you have enough money to cover unexpected expenses.
If you don’t have an emergency fund, there are other ways you can prepare for unexpected expenses. You can set up a system where you automatically divert money from your checking account to a savings account each month. This will help you save money without having to think about it.
Prioritize retirement savings
As you create a budget and start to pay off your debts and save money for emergencies, you need to start thinking about retirement as well. Your 20s and 30s are the perfect time to start saving for retirement, especially if you don’t have a lot of debt.
Employers often offer registered pension plans (RPP) to their employees. If you don’t have a retirement savings plan at your job or have extra money to put toward retirement, consider contributing to an RRSP. If you are younger and have a lot of debt, it’s important to get that paid off before you start saving for retirement. Once you are debt-free, start contributing to your retirement savings plan as soon as you possibly can.
From creating a budget to diversifying investments, you can take control of your future and make the right decisions to set yourself up for financial success. With the right approach and with the help of Allevia’s online budgeting tool, you can secure your financial future and create the life of your dreams.
