A common misconception about money is that you have to make a lot of it to have a shot at financial freedom. This idea is far from the truth. What matters isn’t how much you make, but rather, how much of your income you can set aside and save. Without proper financial planning, even someone who earns upward of $10,000 per month will find themselves living paycheck to paycheck. You need to live within—if not below—your means.
Unfortunately, not many people know how to manage their money. Filing taxes, investing in stocks, venturing into business, and property hunting aren’t taught in school. The lack of financial education gives birth to educated young professionals who are ready to work and make a living but don’t know how to handle money wisely.
What is Financial Planning
Financial planning is a multi-step process the includes management of the following:
Taxes
The Internal Revenue Service (IRS) is very strict when it comes to filing and paying taxes. Whether you’re employed or self-employed, there are certain income tax guidelines you’ll have to follow. Ignoring them will lead to legal consequences.
With that in mind, make sure you always file and pay your taxes on time. If for any reason you’ll be unable to pay this year’s income taxes, contact the IRS and appeal for an extension or apply for a repayment plan. The worst you can do is completely ignore your dues.
Bills
It’s important to manage your expenses properly. In fact, a CNBC report states that 21% of Americans fail to set aside money from their monthly income because they’re making just enough to cover monthly bills.
A good way to keep your dues to a minimum is to live below your means. Avoid unnecessary spending on night outs, designer clothes, luxury items, and gadget upgrades, among others. Ideally, the majority of your expenses should only consist of essentials.
Savings/Emergency Fund
There’s always the risk of losing your major source of income, no matter how stable your current job or business might be. Unfortunately, bills, expenses, and dues will continue to pile up. To ensure you don’t go bankrupt, make sure you have savings or an emergency fund to rely on. Ideally, your savings should be equal to three to six months of your current income.
Investments
The average savings account in the U.S. has an annual interest rate of 0.04%, while high-yield accounts can give account holders up to a 0.70% increase. Going by these rates, you’ll earn between $0.40 to $7.00 for every $1,000 you keep. This isn’t the ideal rate for long-term savings.
The best approach here is to look for investment vehicles that provide a higher return on investment (ROI), such as stocks, bonds, and index funds. The S&P 500 claims that pre-inflation returns on stock investments are at a conservative 10%.
Retirement Fund
One reason most young professionals fail to work on their retirement funds is they do not know how to get started. All they know is they have automated IRA and 401k salary deductions. If this is something you struggle with as well, don’t worry.
Before looking into the best retirement fund investment vehicles, assess how much you need to save up first. You can’t just draw a random number, either. Experts generally recommend having enough available funds to cover 80% of your pre-retirement salary. If you were making $100,000 annually, you’ll need to have $80,000 available annually for the next decade or two.
Income
Boost your earning capacity. Having the ability to set aside money from your income is great. However, you’d be able to achieve your financial goals much faster if you could also increase your monthly cash flow. It would generally take less time for someone who makes upward of six digits to acquire a new business venture or investment asset than someone who only makes minimum wage.
Top 3 Reasons Why You Should Start Managing Your Finances Properly
1. Achievement of Financial Goals
Do you find yourself wasting your savings on unnecessary items? It might help to set financial goals. Not only is it easier to stay committed when you’re working toward a goal, but doing so also allows you to create a more precise, clear-cut plan of action.
When it comes to short-term goals such as building an emergency fund, buying a second-hand vehicle, or getting a gadget upgrade, choose an accessible investment vehicle that allows you to withdraw funds whenever you need to. Meanwhile, for long-term goals such as acquiring rental properties or building a retirement fund, go with an investment vehicle that has a high return on investment and a long lock-in period (e.g., stocks).
2. Debt Freedom
Many debtors fail to pay off outstanding debt due to poor management. This issue especially applies to those facing multiple dues from various lenders and credit institutions. To make things easier, we’ve listed down two of the most popular debt reduction strategies:
Debt Snowball Method
The goal of the debt snowball method is to have debtors gradually reduce their total debt amount by paying off the smallest dues first. This method is quite uplifting and you’ll see progress quickly. The downside, however, is that your repayment period might last a bit longer than expected since you’re making small payments.
Debt Avalanche Method
The debt avalanche method is where the debtor prioritizes paying off the dues with the highest interest rates. This method allows you to save money on accrued interest charges and fees in the long run.
One disadvantage, however, is this method isn’t very motivational. It will take quite a while before you start seeing results since you’re paying off a high amount. The debt avalanche method works best for patient individuals.
Once you pay off your debt, you can work toward building a solid credit score. Processing Card notes that good credit can help individuals get better credit card terms, qualify for all types of loans, and in some cases, land great jobs.
3. Wealth Accumulation
Financial planning is extremely crucial to wealth accumulation. It doesn’t matter how much money you make if you keep blowing it all every month. Live below your means. The more you save, the faster you’ll be able to venture into high-income businesses and acquire assets that generate passive income.
Of course, this isn’t to say that creating good cash flow isn’t important. You’ll find it much easier to set money aside if you’re earning exponentially more than your regular dues and expenses.
Here are some ways to make more money:
Open an eCommerce Store
The eCommerce market is a fast-growing industry that’s set to exceed $6 trillion by the year 2022. What’s more is there’s a low entry barrier to start an online business. In fact, you can set up your own shop in just a few minutes using platforms like Amazon, Facebook Marketplace, or Ebay. Find a good product to sell, launch your store, then market to the right audience.
Pro Tip: Are you ready to take your business to the next level? Equip your website with a credit card payment processor that can process transactions made all across the globe.
Invest in Rental Properties
Rather than letting your money sit in the bank, consider putting it in real estate. Find a good piece of property that you can get for cheap, fix it up, then lease the place out. The difference between what you paid the mortgage and repairs versus the total amount you get for rent is your profit.
Start Freelancing
A good way to make some money on the side is by freelancing. The idea is to take on various white-collar jobs on a contract basis. In most cases, you’ll be paid per project.
To get started, you first need to identify what high-income skill you can leverage. There are thousands of writing, graphic designing, web development, email marketing, and social media management gigs online.
Next, market your services. You could either cold call prospects or look for job postings on platforms like LinkedIn, Upwork, or even Facebook. The latter is a bit easier for beginners.
Once you’ve found a suitable project you can handle, make a pitch, send your portfolio, then wait for a response. Gig openings are often fast-paced, so expect a quick response.
Note: Do not blindly sign up for the first gig that comes your way. Screen your client or employer to ensure they are legitimate and trustworthy. Trust us, there are plenty of scammers in the freelancing industry.
Final Thoughts
Overall, financial planning is a very important life skill everyone should have. Establish your long- and short-term financial goals, assess where you are right now financially, and determine the best, most efficient ways to work toward your goals. Having a clear-cut plan is the first step to financial freedom.
If you’re having trouble managing your finances, consider working with a professional financial adviser. After all, money is a sensitive topic that causes many of us to act a bit rash and emotional at times, so having someone provide objective, efficient advice can be quite beneficial.
Just make sure to avoid sleazy agents that operate under the guise of being a financial adviser. You need a skilled professional to help file taxes, manage investments, and boost cash flow, not someone whose only goal is to sell some kind of insurance or investment product.
Do you have any tips on how to properly manage money? Share your financial planning tips with us in the comments section below!
