How to Build Your Personal Financial Plan

1 October 2020

Two million Australians are in high financial stress. This prevents the average person from paying for emergency expenses, such as home repairs and large bills.

These struggles may have different underlying causes, but most lack of financial planning or the lack of knowledge to prepare for these emergency expenses.

No one likes emergency expenses and bills, but proper financial planning ensures you can handle these expenses when they arise. The first step is putting together a personal financial plan to improve your financial health and create a decent-sized savings account.

Here’s how to build your financial plan and how to build it fast.

Establish a Budget

Overspending is of the biggest causes of financial stress. That’s why one of the first things everyone should do is establish a budget. Track your spending habits to know where your money is going.

Look at each individual purchases and discover which ones you can eliminate. For example, if you buy coffee every morning, make your own coffee instead.

From here, regularly review your budget and your spending. Make sure you’re spending within your means and always save any extra money.

You’ll know where you stand financially and can better plan for your future goals.

Create GoalsAs cliché as it sounds, goals give you a purpose to save and invest. Without goals, you may not feel encouraged to save and will overspend.

Everyone’s goals differ. Of course, retirement is a goal that everyone should work toward. But you may also have some short-term goals you may want to achieve, such as saving up for an emergency fund.

This is why it’s recommended you separate your goals into short-term, mid-term, and long-term goals.

Just make sure your goals are realistic and you can work toward achieving them now. You can also use the SMART method when setting goals. SMART is a framework that sets specific, measurable, achievable, realistic, and time-bound goals.

Cash Flow Management

Whether you work one 9-to-5 or you have multiple investments, proper cash flow management will give you insight on the money you have coming in, how much you can expect, and where that money will go.
The best cash flow management consists of these factors:

  • Fixed expenses (mortgage, groceries, etc.)
  • All income sources
  • Taxes
  • Discretionary expenses (buying coffee, etc.)
  • Savings

How do you use these factors to manage your cash flow? Use your income sources to know how much money you’re working with over a set period of time.

Before anything, subtract your fixed expenses and the amount you aim to save. If you’re self-employed, deduct taxes from this amount.

From here, see how much money you have left toward your discretionary expenses. Use this plan to improve your daily quality of life while planning for a better financial future.

Calculate Your Burn RateBurn rate is a term in business that means the rate at which a new business is spending its venture capital. You can use this rate in your personal lives. Your burn rate is the amount of money you “burn” to sustain your lifestyle.

When calculating your burn rate, you want to look at more than how much you’re spending on different expenses. You want to know how long it will take to “burn” through your funds. This helps you budget and save better.

Burn rate can include fixed expenses, such as your mortgage. But your burn rate can also include leisure expenses you find necessary, such as your Netflix subscription.

Another reason why calculating your burn rate is necessary because it separates your fixed and discretionary expenses better. Let’s say you were to lose your job. You’ll be able to identify expenses you can let go while keeping the ones you need.

Create a Superannuation StrategySuperannuation (commonly known as “super”) are personal funds you save up to be used in retirement.

While retired Australians receive funds from an Australian government pension, this amount will likely not be enough to handle your necessary and lifestyle expenses. And just because you’re retired doesn’t mean you won’t continue falling victim to emergency expenses.

Creating a super is easy if you have an employer. Most employers save a percentage of your funds into a retirement account of your choice. But if you’re self-employed, you’re responsible for your own super.

When should you create a super?
Start as young as possible. You want to ensure you have enough money available for retirement, ideally enough to last you at least 20 years. Saving at a young age will ensure you have enough money saved up by the time you retire.

The biggest issue when saving for a super at a young age is young people have many life goals, such as buying a house. Some supers are flexible enough to be used for more than retirement, such as investing in property.

Are you still unsure which super option is right for you? What if you struggle to save for a super? You can hire a financial advisor who can help you make the best decision for your needs. Here are the best financial planners in Australia.

Plan Your Taxes Correctly

No one likes tax time but creating the right personal financial plan will make your taxes easy. If you have an employer, planning your taxes is easy. But self-employed individuals have to keep a record of their income, deductions, and necessary tax forms they need to report.

Tax time can also be difficult if you have multiple investments, your own property, and even some retirement plans can make reporting your taxes difficult.

But a few best practices can make this process easy. For example, never mix your business expenses with your personal finances. While claiming deductions is perfectly legal, you shouldn’t do anything that falls outside the limits of the law.

If you still struggle with your taxes, you can hire a tax preparer to ensure your taxes are correct while reducing your tax obligations.

Create a Personal Financial Plan Today

Emergency expenses happen to everyone but that still doesn’t make them easy to deal with. A personal financial plan can help you avoid these setbacks and achieve better financial health.