An average American living in Wisconsin earns about $50,000 annually, significantly lower than the national average of approximately $60,000 annually. As such, creating an effective financial plan to help you meet your financial goals requires extra effort. However, it is pertinent to mention that creating a solid financial plan requires specific skills and expertise.
Nevertheless, you can still hire an accounting professional or CPA to help create a flawless financial plan catering to all your financial needs. From Bookkeeping in Watertown, WI, to tax preparation, these professionals can provide various financial services to individuals and businesses.
Exploring the areas of personal finances
Personal financial planning usually involves working on the following five areas.
- Income: Your income is the starting point of your financial planning. It implies all the money you can consider as a cash inflow, i.e., the received amount that you can allocate towards savings, expenses, investment, and protection. Salary, dividends, wages, etc., are some types of income.
- Spending: An outflow of cash is spending. Mortgages, rent, home repairs & furnishing, travel, entertainment, eating out, groceries, hobbies, etc. are examples of spending. Individuals must ensure that their spending does not surpass their earnings to avoid financial hardship.
- Savings: Saving is the part of your income left after spending. Experts advise that one should aim to have enough savings to support their living expenses for three to 12 months. However, due to inflation, accumulating more cash than that can lose its purchasing power over time.
- Investments: Investment is a very critical part of financial planning. It involves purchasing assets, like stocks and bonds, that can provide a good return on investment and increase your wealth over time.
- Protection: Protection refers to methods that protect you from unexpected events like illness and accidents. Life insurance and health insurance are the best examples of protection.
Types of financial goals
Financial goals can be near-term or distant. They can broadly be categorized into the following three types.
- Short-term financial goals: Short-term financial goals are those that can be achieved within a year. Creating a budget and sticking to it, building an emergency fund, paying down credit card debt, etc., are some examples.
- Mid-term financial goals: A mid-term goal acts as a bridge between short-term and long-term goals. Some examples are getting life insurance, paying off student loans, buying a first home, etc.
- Long-term financial goals: A retirement plan is arguably a working individual’s biggest long-term financial goal. You can strategically invest in an employer-sponsored retirement plan or an individual retirement account to create a substantial retirement fund.
Understanding the process of financial planning
Creating a financial plan is an extensive process requiring you to consider several financial aspects. While seeking professional help to create an effective personal financial plan is advisable, here is the process of creating one.
- Set realistic financial goals, like buying a house, paying off a loan, creating a retirement fund, etc.
- Track your income and expenses to determine your total income and how much you can spare towards savings and investment after expenditures.
- Create a budget to tackle emergencies, like unexpected medical bills or house repairs.
- Create a debt pay-off strategy by paying down the high-interest debts first.
- Create a sound retirement plan by investing in a 401(k) plan or individual retirement account (IRA).
- Have a solid tax plan to reduce the taxable income through deductions and tax credits.
- Consider estate planning to ensure that your assets pass on to your desired beneficiaries in case of a mishap.
- Review your plan periodically to ensure financial well-being.
Final takeaway
Financial planning is essential for securing one’s economic future. Furthermore, a sound financial plan gives one peace of mind. Therefore, it is necessary to consider every aspect and seek professional help, if needed, when creating a financial plan.
