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Five Steps to an Effective Financial Plan


It is important to set and reach financial goals. A long-term financial plan will help you to reach your long-term goals and give you a focus for your short-term goals. This plan will vary from individual to individual and a financial advisor can help you solidify the plan, especially when you are ready to start investing. Once you are successfully following your plan you may want to consider giving back through donations or volunteering. Your financial plan will help you to make the best financial choices, so you can set yourself up to win financially.

1. Budget Successfully

In order to truly manage your money you should have a working budget for each month. A budget allows you to give each dollar you make a purpose. It puts you in control of your money. It lets you track your spending and helps to measure whether or not you are meeting your financial goals. Although a budget may seem like a lot of work or too basic when you think about creating a long term financial plan, it is the key to real, lasting financial success. A good budget will prepare to make each financial step as it comes.

2. Eliminate Your Debt

The second step is to get out of debt. This is important because it does not make sense to save or invest money when you are paying a higher interest rate on the money that you owe to others. Getting out of debt takes discipline, but it is possible. If you have a lot of debt you will need to drastically cut your spending and increase your earnings in order to pay the debt off more quickly. You should include of all of your debt in this except for your first mortgage on your home.

3. Build an Emergency Fund

Once you are out of debt you should build an emergency fund of six months of expenses that you leave in the bank. This cushion will allow you to leave your investments alone in case you fall on hard times. It should only be used for real emergencies such as a job loss, and it is set up to protect your investments and retirement savings. If you dip into your emergency fund you should focus on bringing it back up to the full amount as quickly as possible.

4. Save for Retirement

After you have done that you should work towards building your retirement and investing savings. Many financial advisors, such as Dave Ramsey, recommend putting fifteen percent of your gross income into retirement each year. However if you have specific retirement goals you may need to increase this amount. You should talk to a financial planner who can help you determine the amount you need to be able to retire comfortably. You can use your 401(k) at work as part of your plan, but you should also use a Roth IRA and other investment tools to increase your investments.

5. Invest and Diversify

Once you match out your eligibility on your retirement accounts you can use other tools such as mutual funds, annuities or real estate to increase your investment portfolio. It is important to diversify your types of investments. If you are consistent and careful with your investments you will reach a point when your investments generate more income than you do. This is a good thing and you should have this in place by the time you retire.

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