Most people want to get on the path to financial freedom; but getting started can feel overwhelming. Here are 7 steps you can take to create a simple (but effective) financial plan for 2024:
1. Determine Your Starting Point
First, print out the last 3 months of bank & credit card statements to evaluate spending, create custom categories to organize spending. This should answer the question, "Where is my money going?"
2. Three Buckets
Place your custom categories into 3 buckets:
1) Fixed: expenses you have to pay no matter what.
2) Discretionary: "fun" expenses you could eliminate in an emergency.
3) Savings: money for "future you".
3. Evaluate your Percentages
The rule of thumb is:
50-60% fixed
20-30% discretionary
10-20% savings
Be sure they're customized to you.
4. Prepare for the Entire Year
For custom categories, ask yourself:
Where do I want to spend more in 2024?
Where do I want to spend less?
What can stay the same?
For the 3 buckets, ask yourself:
Do I need to bring my fixed or discretionary costs down?
Do I need to increase my savings?
5. Calculate your Net Worth
The formula is: assets - liabilities
This is one of the most important metrics for determining your level of financial freedom.
Update this annually.
6. Liquidity
Review your available cash.
Check the balance in your checking account, savings accounts, and emergency fund.
Did you have more children?
Did expenses increase?
If so, you may need to increase your emergency fund and/or average balance in your checking account.
7. Automate
Use your % savings goal to set up automation. If your new goal is to save 20% of your income, set up a system that will take care of itself:
$X to your 401(k)
$X to your emergency fund
$X to your Roth IRA
Start with small numbers and re-evaluate regularly.
A full financial plan should also consider:
- Taxes
- Estate transfer
- Risk management
- Short & medium term goals
But these 7 steps are a great starting point.