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The Basics_ Plan Post Featured Image

The Basics: How to Create a Financial Plan

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What you’ll learn:

  • How to create a Financial Plan
  • What is a Financial Plan?
  • How to determine your Net Worth
  • Key elements to include in your Financial Plan

What is a Financial Plan?

A financial plan is a blueprint illustrating your short and long-term financial goals and a strategy to successfully reach those goals. Each family’s financial plan will look a bit different. We all have different goals and ideas for how we want to spend our lives. In the same sense, there are some common elements beneficial for everyone! Those particular elements are what we’ll cover here. If you want to learn more about why a financial plan is important, go here.

Determine Your Networth

Before we dive into the main elements of a financial plan, it’s important to mention something called your net worth. Your net worth is a measure of how much you and your family are worth. Your net worth determines the health of your financial state. Let’s break this down ..

ASSETS – LIABILITIES = NET WORTH

Why Your Networth is Important

Why is your net worth important? If your net worth comes out positive, reaching financial goals within your plan may be easier to attain. If your net worth comes out negative, then reaching financial goals may be challenging.

(Side note: I am absolutely aware your home is listed under both, the asset and liability column. You’ll include your home’s current value under the asset side and the amount you still owe on your mortgage under the liability side.)

There are multiple net worth calculators available. Here is a great place to plug in some quick numbers and have an idea of your net worth. As your asset column becomes more and more positive, goals such as college savings or real estate investing become more doable. When your liability column takes precedence, you’ll likely have to focus more on paying off debt and decreasing your output. Net worth sets the stage for how you should lay out your financial plan. Now let’s look at some key elements!

Key elements to a financial plan

1. Financial Goals

Goals determine how the rest of your plan is laid out. Short-term goals may include paying off your credit cards or paying your vehicle loan. Creating an emergency fund or saving for family vacation. Long-term goals are saving for retirement, paying for children’s college education, or creating multiple income streams.

2. Cash Flow

This is essentially your budget. You need to know how much money is coming in and going out. If you are spending more than you earn and/or have high interest debt, you will not be able to reach your financial goals.

3. Risk Management

Risk management includes all of your insurances. We don’t necessarily need many of these things until we do. From home owners insurance to health insurance to life insurance, insurance is important and a crucial part to your financial plan.

4. Savings

Have you ever heard the saying “pay yourself first?” Ideally, savings should be a part of your budget. Make sure you are paying yourself so that you can begin saving! From an emergency fund to college funds and beyond, a savings plan needs to be integrated in to your financial plan.

5. Investments

Investments are going to be your main source for building wealth. Employee retirement plans, individual retirement accounts, real estate, and personal stock options are a few examples of investment opportunites.

In Summary

Creating a financial plan is key for succeeding with financial goals. A great place to start with building out your financial plan is to include these key elements: financial goals, cash flow, risk management, savings, and investments.

The Basics_ Save Post Featured Image

The Basics: How to Create a Savings Plan

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What you’ll learn:

  • What is a savings plan?
  • Why is a savings plan important?
  • How to create and build your savings.
  • Why you need to save.

What is a Savings Plan

A savings plan is just that: a plan to save a portion of your income. Savings plans come in many shapes and sizes, depending on what you are saving for. Smaller goals may be saving for Christmas gifts or vacation. Larger goals may be saving for a home down payment or a vehicle upgrade. Each of these goals should be a part of your financial plan. From there, you’ll be able to track how much you should be saving each month.

Why a Savings Plan is Important

The sooner you begin to save, the better. An emergency fund is of utmost importance and a great place to start. Consider your emergency fund as an insurance account for your savings. It’s not necessarily needed until your HVAC goes out, your tires need to be replaced, or you find yourself unemployed. An intial goal would be an emergency fund of $1000. Then look towards building a 3 to 6 month expense emergency fund.

It’s important to plan ahead, and a solid savings plan will set you up for financial success.

Ways to Build your Savings

Know your Budget – find areas to cut costs

If you don’t already have a budget in place, this needs to happen first. Or else, you won’t know how much you could be saving each month. Don’t stress if your budget is tight and there’s not much wiggle room for saving. Maybe start with as little as $25 a month. Even the inital, little wins will give your confidence a boost. Then, when there’s even more income that can be saved, you’ll have the motivation to save more instead of spending!

When you have a better understanding of your budget, you may find areas where you could cut back on spending. A few examples include morning coffee at home and meal prepping lucnhes. Or, talk with your family about the different media outlets you pay for every month. You may not need cable, Netflix, Hulu, and Amazon prime. The first couple of months may seem challenging when it comes to sacrificing a few of our normal comforts, but the reward at the end of the journey is worth it!

Keep your savings goals in plain sight. Put up a chart to visual how much you are accruing. Post pictures of the vacation spot or dream home on the fridge. Keep your savings goals in conversation. Encourage your family often. Create a special dessert or throw a family dinner party at the end of the month once a savings goal has been reached.

Open a High Yield Savings Account

What is a high yield savings account? A savings account that offers a higher interest rate on your savings than a standard savings account. When discussing high yield savings accounts interest rates, another term you may see is annual percentage yield, or APY. The high yield savings account APY is higher than standard savings accounts APY. This is where you get the name “high yield savings account”.

For instance, say you save $1000 annually. In a standard savings account, where the national average APY is 0.06%, you’ll earn back $60. In a high yield savings account, where the APY is 0.5%, you’ll earn back $500. That’s quite a difference in your return. Now take this return and watch it grow right alongside your savings .. voila! Compound interest!

You may find your current bank offers a great high yield savings account, which makes your job easier as far as opening an account. Most online banks offer high yield savings accounts.

In Summary

A savings plan is a to save a portion of your income. Your financial plan should include a section for a savings plan. This is a great way to keep from going into debt for larger goals and purchases. Look through your budget and see where you may be able to cut costs or open a high yield savings account to take advantage of better interest rate than a standard savings account. Set goals, have patience, and enjoy the reward of paying in full for your next purchase!

More Posts on Savings

The Basics Budget Post Featured Image

The Basics: How to Create a Budget

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What you’ll learn:

  • What is a budget?
  • Types of budgets
  • How to create a budget that’s right for your family

What is a Budget?

A budget is simply a plan for how you spend and save your money. A budget consists of your monthly income and a breakdown of how much money is allocated to particular categories. Your budget will be the backbone of your financial plan, no matter what your financial goals look like. Your budgeting system may change over time as your financial goals change, but a budget is absolutely necessary for financial success. To learn more about why a budget is so important, go here.

Types of Budgets

The 50/30/20 plan

Within the 50/30/20 plan, 50% of your income goes towards necessities, 30% goes towards wants, and 20% towards savings and debt. This is a nice, basic plan to calculate whether you are spending too much in certain areas and need to refocus your money. For instance, if your necessities can’t be met with 50% of your income, then you’d use income from the wants category to compensate.

the envelope system

The envelope system is a great option for those that need to follow a strict budgeting plan. While most mortgages and monthly utilities are automatically debited from accounts, the envelopes are used to keep the rest of your monthly spending under control. Envelopes for groceries, dining out, entertainment, home improvements, etc. The envelope system works well for those on a limited budget and for those looking to really pay down debt.

The zero based budget

The zero based budget literally takes all of your monthly income and gives a name to each dollar. If you’ve created your monthly budget and have $200 left over, then that $200 needs to be tasked. Otherwise, that $200 could just disappear. That’s $2,400 a year you could place into an IRA account. I plugged $2,400 annual contribution into a simple Roth IRA calculator. If you started age 35, retiring at 65, with a 7% return, that $2,400 annual contribution can grow into almost $250,000! Creating a zero based budget can seriously add up over time.

How to Create a Budget that’s Right for Your Family

So how do you decide on the best budget system for your family? This depends on the goals you’ve written for your financial plan. You could initially plug your income and expenses into the 50/30/20 plan to get an idea of where you may be overspending or underbudgeting. Then, use these percentages to best decide on your budget. If one of your goals includes paying off a great amount of debt, zero based budgeting would be beneficial. Any extra income left over could be allotted to debt repayment. If you are on a tight budget without much wiggle room, the envelope system may be the best option.

Our personal budget system

For years, our income was on a much tighter budget, and we used the envelope system and kept a notebook of our expenses. Envelopes truly hold you accountable for your spending, and we were able to look back through the notebook to see exact expenditures. The physical aspect of handing over cash (versus a debit card) and visually seeing on paper where we spent our money (versus an online data bank) made a big difference in our mentality about wasting money.

During this season, I keep our budget within a spreadsheet system. The spreadsheet is broken out in a 50/30/20 plan, and all of our income is accounted for similar to the zero based budgeting system. While we aren’t using the physical envelope system, we have separate debit cards for expenses. There’s a household card used for groceries, gas, dining out, etc. Then each adult has there own personal card with spend money for the month. This keeps us on track and works for our home right now.

I print off my spreadsheet each month to keep in a budget binder. This is part of my organizational system. I find having physical copies of my financial plan, budget, meal plans, etc. beneficial to staying abreast of our actual expenses. It’s much less easier for purchases to slip through this way!

In Summary

A budget will be the backbone for your financial plan. The three systems mentioned here are a great place to start. The 50/30/20 plan will give you a visual for where your income may be healthy or unhealthy. The zero based budgeting system will keep extra income from disappearing. The envelope system will keep the most strict budgeters on track.

I’ve created an editable spreadsheet that looks like my budget system. Just download, fill in, and print off to keep in your budget binder.

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MamaKnow$Money is a site dedicated to providing financial wisdom for stay at home mothers. It’s mission is to encourage, motivate, and inspire mothers to come alongside their families in making financial decisons and building wealth.

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