Everyone has a financial framework. Even those without a budget have a financial framework. And yes, even those without financial goals have a framework. But that isn't to say it's a great one! If you want to build a strong financial plan – a robust financial framework – you're going to have to follow a few steps.
Building your own financial plan isn't easy, and it can take time to produce something that will last over the years. Remember, when you're looking to build a financial framework, you want something that will apply to at least the next 5 to 10 years of your life – not something that will fizzle out as soon as an emergency strikes.
When I first got married, I spent a lot of time drawing flowcharts and diagrams on how money should flow from our income sources to our expenditures, debts, and investments. That financial picture has changed quite a bit since that time, and for good reason . . . I didn't have a clue what I was doing!
Since then, I've learned a great deal about budgeting and planning for the future. I'd like to share these steps with you so you can build your own financial plan.
Step 1: Gather Sound Financial Principles.
This may take some time if you're just starting to improve your financial life. But it is a step that can continue as you grow and learn about personal finance. Always be learning, and never close your mind. Be open to the advice of others – but being open doesn't mean you follow everyone's advice!
Here are a few of the most important financial principles I've learned over the past few years:
- Get and maintain a budget.
- Spend less than you earn – and confirm you are by tracking it!
- Debt is like a cancer to your financial life.
- Emergency funds are truly wonderful – they keep you from going into more debt.
- Giving should be at the top of your prioritized spending list – it keeps money in perspective and purpose in your work.
- Focus on individual financial goals will help you achieve financial freedom faster.
Step 2: Learn From People Who Are Winning With Money.
Chances are, there are people in your life that are winning with money. But they aren't always the ones driving the fancy cars or wearing expensive clothing. Many times, they're ordinary folks who don't spend very much money and keep a low profile. Seek them out and learn from them.
You can also learn from great financial advisors like Dave Ramsey. Take his 7 Baby Step plan as a starting place to develop your own financial plan. Our financial plan consists of Dave's plan with some of the finer details filled in by the financial wisdom we've learned over the years. You can do the same!
Dave's plan is a framework in which you can choose to operate. You're free to create your own rules as long as they come within the boundaries of the baby steps. Who knows, you might even decide to detour and go off his plan for a bit of time in order to reach a financial goals such as paying cash for a car. Just make sure you have a sound framework to work within.
Step 3: Prioritize Your Financial Goals By ROI And Risk.
I don't know about you, but sometimes the most difficult financial decisions I have to make have to do with two great choices I have to choose between. For example, do I invest in my 401(k) now or save up for a new house? If I can't financially do both, which one should I choose? The answers are not always easy to find. But I think answer comes more easily when I consider two things: return on investment and risk.
Return on investment shows me a mathematical perspective on the choices I'm making. Risk shows me the possible negative outcomes of the choices I'm making. It's important to measure each of these aspects when trying to determine what to do next.
Combine these three steps together, and you're going to be well on your way to developing your own financial plan.
What do you say, are you ready to create your own financial plan?