Building Your Financial Plan – The Ultimate Guide

You appeared to have a huge grin on your face when you woke up this morning.

Your bills were being paid on time, you weren't being charged outrageous interest on any of your loans or credit cards, your money was being invested appropriately, and you were seeing an increase in the balance of your savings account. Oh, and in that stress-free period, you would have enough money left over to invest in some things that bring you pleasure.

Even while you may not be completely financially free just yet, you are getting a glimpse of that independence here.

And despite the fact that the vast majority of people have a pessimistic view of achieving financial freedom, it is in fact achievable. Clarity, contentment, and the ability to lead a worry-free life are the three primary components that comprise financial independence.

The majority of Australians possess a bold and adventurous spirit. On the other hand, a good number of us spend our nights fantasising about spreadsheets and interest rates. Do you agree that life is too short to spend a lot of time thinking about numbers and percentages?

Your financial plan is the key to achieving freedom from your finances.

I put together this manual to provide you with a sound basis on which to construct a savvy approach to your financial situation. as well as to show how to put it into practise in order to achieve the freedom that is wanted.

1. Focus on your life's objectives

When it comes to the direction of your finances in the future, the adage "failing to plan is preparing to fail," despite the fact that it has been overused, rings especially true. Unanticipated expenses will, at some point, cause you to spend more money than you have, and as you get older, you'll start to think more and more about when and how you want to retire.

But all of this may be prevented in the first place by establishing certain goals that are lucid and within reach. In this area of your financial plan, you should describe your life objectives for the short-, the medium-, and the long-term perspectives with as much specificity as you are able to muster at the moment.

The following is a selection of samples from Investopedia:

• Saving $10,000 for an emergency fund is a short-term aim.
• Paying off all credit card debt within a year is a short-term objective.
• In four years, I want to pay off all of my college loans.
• Paying off all of my student loans is my mid-term objective.
• Long-term objective: Save money for retirement.
• Long-term objective: Have a completely filled college fund by the time your kids become 18 years old.

Setting goals using the SMART methodology is also vital for achieving financial freedom. If you're not familiar with SMART, it basically acts as a framework for setting time-bound, specific, measurable, achievable, realistic, and tight goals.

For instance:

• Specific: "I'll only go out to eat once a week" is a far more specific goal than "I'll stop eating out as frequently as I usually do."
• Measurable: Measurable progress can be made by resolving to consult with a financial professional about establishing at least a retirement plan. A quantitative statement would look something like this: "I want to discover out how people like me save for retirement."
• Achievable: If you can, saving $50 per month is more feasible than saving $500 per month.
• Realistic: If you schedule a time to do that, it only makes sense to commit to reviewing your finances daily.
• Time-bound: "Rather than saying, "I will look into it next month," it is more specific to add, "I will schedule a meeting with a financial advisor by the 15th of June."

2. Budgeting as a Foundation

The next thing you need to do in order to construct a plan for your finances is to make a budget and keep track of how much money you are currently spending. If you do not do this, it will be far more difficult to comprehend where your money is going. When there is peace in the world, this can be tolerated. On the other hand, this could backfire on you in a very chaotic circumstance.

By creating a budget, you may have a better understanding of where you stand financially right now and give yourself some wiggle space when it comes to setting objectives for the future. We recommend that you use the ASIC budget planner so that you have a complete understanding of where your money is going. You might learn something shocking, like how much your daily coffee costs over the course of a year.

Free budgeting software like My Wealth Portal dramatically simplifies the updating process, but you still need to get to know it. Budgeting and budget evaluation must be done frequently, therefore automating the process is helpful. You might also at least set alerts to do this frequently as an alternative.

You can start studying other critical indicators, such as your burn rate and cash-flow analysis, once your budget has been defined.

3. Do not burn your baby. Determine Your Burn Rate.

Even while the word "burn rate" is most commonly used in a business context, it is equally applicable to a number of situations that occur in our everyday lives.

To put it another way, your burn rate is the amount of money necessary to sustain the level of life you are currently living at, along with the period of time you have left until you will run out of finances. The core idea behind your burn rate is how long you can go without making any new money, and it's expressed as a percentage.

When we have a consistent flow of cash coming in from our professions and investments, it can be simple to forget about the day-to-day costs associated with maintaining the lifestyle we have chosen for ourselves. Your expenses may include things like your son's karate courses, his Netflix membership, your mortgage, your health insurance, your phone bill, and your food bills, among other things.

If you want to stop throwing away money, calculating your cash runway can help. Imagine if you reached a moment in your life where you were no longer earning any money (because you had left your job, retired, etc.) or it was anticipated that you would be experiencing difficulties with your finances. After that, you will have access to the list of variable expenses that, by reducing them, you can bring down your burn rate.

The burn rate is a useful tool for estimating how long you might be able to keep living your current lifestyle after suffering a significant setback, such as being laid off from your work.

Find out your burn rate now:

• The first step is to calculate the difference between the cash balance at the beginning of the period and the cash balance at the conclusion of the period.
• Imagine that you do not have any income and figure out your burn rate.

- Assume that at the start of 2016 you have $50,000 in liquid savings and $10,000 at the end. The difference is worth $40,000.

- The result of multiplying the difference by the total number of months in the time period (12) is $3333.33.

- Your burn rate for the month is $3333.33.

With $10,000 in savings, you can avoid running out of money for three months. Yikes!

If you are able to determine your burn rate, you will be able to determine which of your spending may be reduced if you saw a significant change in your income. It is essential to have a solid understanding of this figure due to the fact that the majority of Australians have very little to no savings and live paycheck to paycheck.

If you have a general sense of how much money you will be spending each month and where that money will come from, it will be much simpler for you to concentrate on reducing unnecessary recurrent expenses and investing future earnings in projects that will bring you a profit. Your goal is to keep your metabolic rate at the lowest level that is physically possible while yet enjoying a high quality of life.

4. Take Control of Your Money with Cash Flow Management

Throughout the course of your professional experience, you have no likely been presented with a number of different investing options at some point. Regardless of whether the potential involves buying a piece of real estate or making a seed investment in your nephew's business, it is imperative that you take into account the cash flow that you have available at the moment.

The movement of money in and out of an organisation is referred to as cash flow. In addition, monitoring one's cash flow is a requirement for all types of investing.

Simply waiting for your salary to arrive and then paying all of your bills is not an efficient method for managing your cash flow; you are simply going through the motions.

The management of your cash flow is essential to the quality of your life; as a result, it is essential to comprehend all the factors that influence where your money comes from, where it should go, and how to make the most of the push-pull relationship to your benefit.

Cash flow elements consist of:

Your pay, any bonuses you receive, other income you receive, and investments all contribute to your total income (both active and passive). Your ability to make an impact will be severely limited unless you are able to increase your revenue-generating hours, clients, or assets.

Examples of fixed expenses include a mortgage or rent payment, as well as the cost of utilities. Unless you decide to make a structural adjustment, such as moving to a more costly or less expensive apartment, you have very little influence over the situation. If you do decide to make such an adjustment, however, you will have greater control. In spite of the fact that costs could be cut, structural costs almost always remain the same.

Costs that are determined solely by personal preference are known as discretionary costs. The amount that you spend out of your own free will is subject to significant variation depending on the decisions that you make. One simple modification you may make that might have a significant impact on your annual cash flow is to prepare your morning coffee at home rather than purchasing a latte on the way to work.

If you want to start saving money on non-essential purchases, you can cut costs by using coupons, but you don't have to buy a coupon book to do so. You can do it online with plugins like as Honey that, whenever you want to make a purchase, will search the Internet for the cheapest rates available. This is an alternative to traditional shopping methods.

The vast majority of individuals have an unpleasant relationship with the subject of taxes. The payment of taxes is generally considered to be an obligatory and mandatory deduction. On the other hand, if you owe a considerable sum of money to the government or obtain a return from them, these factors might have a far more significant effect on your cash flow analysis. If you are a person who works for themselves, this part is very important.

Your savings have a direct effect on all aspects of your financial flow, including but not limited to: This is the time when you can choose to keep your money. Either an active or a passive strategy for cost cutting is an option that can be pursued. After doing your cash flow analysis, you will have a crystal clear knowledge of where your money is going and what you can do to optimise the positive cash flow into your savings and reduce the negative cash flow that goes towards paying your bills and other expenses.

Review: Your cash flow analysis is instantly impacted by your budgeting and burn rate analysis. Even though the three sections overlap quite a bit, they each focus on a distinct aspect of your financial strategy.

• You may automate your budgeting to keep track of rising costs.
• Your burn rate enables you to assess the magnitude of your financial condition, which helps you prepare for investments and significant life changes.
• You get a complete picture of your cash inflow and outflow through your cash flow analysis.

We'll now go through both defensive and offensive strategies for saving money, setting goals for the future, and enhancing your current standard of living through financial planning.

5. The most awaited season of the year is tax planning season

The time of year associated with doing taxes does not have to be a particularly unpleasant experience every year.

You may adopt a shrewd tax planning strategy that streamlines the process and decreases the amount of anxiety you feel about filing your taxes rather than letting the thought of tax season consume your thoughts throughout the year.

A few examples of ways to accomplish this goal include compiling a list of all of your current and future tax-deductible expenses, engaging in tax-advantaged investment strategies, and elevating the amount of charitable contributions that can be deducted from your taxable income.

Tax planning is organising one's activities in such a way as to reduce taxable income while yet conforming to the requirements of applicable laws.

One should not be confused with the other when it comes to tax preparation and avoiding taxes. A lot of people find themselves on the incorrect side (hint: it's the side that's against the law) or they don't take advantage of the perks that come with tax preparation.

If you allow it, your taxes have the potential to make your life more unpleasant, despite the fact that there are benefits associated with appropriately paying less tax.

The government may also pay attention to particular tax arrangements, and if it is discovered that your account is operating in violation of the law, you may be subject to repercussions.

A few warning signs are:

• Tax deductions are remarkable when compared to income. The greatest and most visible red flag may be how legally you have set up your property.
• You are fusing your personal and work spending.
• It involves making an investment now that you don't expect to see a return on for many years or extending a loan that might never have to be repaid.
• Financially complex structures without a definite commercial objective.

Usually, if a tax arrangement sounds too good to be true, it probably is, and you could be the target of an audit. A licensed tax planner or financial counsellor's involvement considerably lowers the likelihood of such penalties.

6. An aggressive pension plan

Your superannuation, which is also referred to as "super," is the money that you set aside while you are working in order to have a reliable source of income when you are no longer actively working.

The typical retiree in Australia should have a goal of spending at least twenty years enjoying their golden years. When you reach the age of 65, the government will begin making contributions towards your retirement, up to a maximum of $28,000 each year (the age is set to increase to 67 in 2023). Even if you are receiving a pension from the government of Australia, your quality of life may still be very different from person to person.

To put this into perspective, assuming that the burn rate you estimated earlier, which is $50,000, remains constant and that you receive the full $28,000 pension, you will need to have saved a total of $440,000 by the time you retire in order to maintain the same quality of life after you stop working. This does not take into account any additional unanticipated costs that may arise in the future.

Let's take it for granted that you were the one who made the commercial choice and complied with the Super Guarantee law. In such a scenario, your company is required to put 9.5% of your total revenue, which includes any commissions, bonuses, and loadings you receive, into a superannuation account that is held in your name. Until you reach the age of 60, you are exempt from paying taxes on the money in this super account, which is technically a super fund. Even while the vast majority of businesses put their money into a predetermined fund, you can frequently request that your money be put into a different fund instead.

If you opt to work for yourself, you are the one who decides how much of your money goes into your retirement account. This sense of autonomy is not always secure.

Your plan for your superannuation requires that you make payments into your super account each year. This will allow you to benefit from money that is exempt from taxation once you reach retirement age. You will give your money more time to develop and multiply if you start making smart investments while you are young. This is why it is a good idea to start investing when you are young.

Only eight percent of Millennials in Australia think they will have a better financial future than their parents, according to research conducted by Scott Pape of the website BarefootInvestor.com.

The government has placed limitations on how and when you can use your superannuation account to ensure that your money will be available for you when you retire.

As a result of modifications made to the law, citizens of Australia now have the ability to "self-manage their super." Undoubtedly, you've heard of SMSFs (Self Managed Super Funds). As a result, you have more options for your superfund funds' investments, including the option to own real estate within your super fund. There are several situations where doing this is a wise financial move. Your financial status has the most influence, though.

To fully understand your post-retirement circumstances and what you can do right away to dramatically enhance your future, it is best to consult with a financial counsellor.

7. Water the Grass and It Will Grow

If you have reached a stage in your life where you have so much money that you don't know what to do with it, putting it in a savings account may not even be the best decision for you to make at this point.

Despite the fact that it may make you feel more at ease, the return of 0.2 percent on your savings account is not doing anything to bring down Australia's inflation rate of 1.5 percent. It's possible that now is the right time to start investigating other kinds of investing opportunities. For example, the first step in our approach is to make sure that we are paying ourselves first before moving on to any other investments. Rather than waiting until you have a large sum of money to invest all at once, it is in your best interest to start an ongoing investing plan and put aside 10 percent of each paycheck right immediately.

There is no such thing as a guaranteed investment, not even in stocks or property. Your investment approach need to be compatible with the quantity of chosen cash liquidity, your level of comfort with risk, and the length of time you have available.

• Can your stock portfolio sustain a sudden 30% drop? If not, you might want to steer clear of volatile stock markets and put your money instead in low-yield bonds and reputable businesses.
• Do you have to have access to cash on you at all times?
  If not, you should plan your investment to be able to be sold. While selling stock can be done quickly, selling a house at the right time is not always achievable.
• Does your investment significantly affect your life directly?
  A young, healthy 32-year-old losing $20,000 is not the same as a 65-year-old contributing his $20,000 in savings.

Illiquidity need not be a bad thing. Holding illiquid assets that generate a sizable return can have a major value, claims Michael Pedler.

8. Do You Want to Be Rich? Revenue Streams

The average millionaire makes money from seven different sources on average.

1. Income That Is Earned Or Received as a Salary This refers to the money that I receive from my employment. Let's say that you have a job that brings in $80,000 annually for you.

2. Profit: When you sell something for more money than it cost you to manufacture it or paid someone else to make it, you will have made a profit. Profit is the term used to describe this type of financial gain. If you believe you can make $15,000 per year from selling bracelets from China, you should consider starting a side company doing so.

3. Interest: This is the money that is returned to you as a result of a loan that you made to a separate person or company. This can be accomplished by purchasing government-issued Treasury bills, maintaining cash reserves at a bank, or giving the money to a friend as a loan. Suppose that each year you are able to pull $5,000 from this endeavour.

4. Dividend Income: The majority of businesses will pay you a certain sum that is proportional to the number of shares you own in a corporation. You have the option of paying for these on either a yearly or quarterly basis. Imagine that you have 1,000 shares in Company A, and that each year the company pays out a dividend of $5, bringing your total annual profit to $5,000.

5. Rental Income: You were able to get this money as a result of renting out one of your properties. It's possible that this is a building, a residence, a storage facility, or perhaps some property. Let's imagine that the annual rent you receive for your flat is $12,000.

6. Capital Gains: This refers to the profit you make as a result of an increase in the value of an asset that you possess. This asset could take the form of stocks or a piece of property. Consider the possibility of purchasing one thousand shares of Company B for $15 each and then selling them for $17 each. The increase in value of your investment would be $2,000.

7. Royalties: These are payments that someone makes in exchange for using your ideas, methods, or products. In many cases, a predetermined percentage of their total income will be stipulated in the contract that you have with them. Let's say that the licencing of your online video course with a third-party website brings in royalties of $5,000 per year for you.

You would have finished the year with a total pretax income of 124,000 dollars, given that you had these seven sources of income. It could appear challenging at first to find new sources of income, but it can take years to establish these sources and get them to the point where they are profitable.

Tax considerations vary according on the nature of each source of income. It is imperative that you have a sound tax strategy in place if you are actively pursuing a strategy to diversify your sources of revenue.

9. Debt management while playing defense

There are a lot of different kinds of debt. All of these things have the potential to contribute to increased tension, which can make it harder to fall or stay asleep.

Nevertheless, things do not need to be in this state.

The very nature of debt positions it to function in your favour. You can put the money you get now into investments or use it to buy whatever you want; the only thing you have to do subsequently is pay the money back. The only way that debt can turn into a monster is if it is disregarded and neglected to an extreme degree.

According to an article published in The Australian, "Australian households overtook the Swiss this year as the world's most indebted, with outstanding debt equal to 125 percent of GDP and no let-up in sight." Over the course of the preceding five years, the overall amount of outstanding loans to owner-occupants as well as investors increased from $1.2 trillion to $1.6 trillion. It is important to keep in mind that this does not pertain to the government's debt in any way. Everything is held in the strictest confidence.

To employ debt management, choose between two strategies. The first strategy is taking out loans with the objective of increasing one's income in some other area. The second step is to get control of existing debt and begin paying it off in order to stop excessive spending.

It is not necessary for you to pay late fees and interest simply because the majority of households in Australia are carrying a balance on their credit cards.

Vikas Vashishtha advises not hastily dismissing the possibility of gaining financial gain through the use of loans.

You should make sure that you pay all of your bills on time and that you check the interest rates on your credit cards on a regular basis. These are two frequent measures that you can do. If you fear that the amount of debt you are carrying is too much for you to manage, seeking the advice of a financial counsellor is almost always the best course of action to take.

10. A Financial Plan for Independence

If you make a list of your life goals, you may use this as a guide to design a solid financial strategy and construct a financial fortress to secure your ambitions.

If you have a comprehensive understanding of your current circumstances, you will be able to precisely plan how to protect your current financial situation from any potential setbacks and how to improve the overall quality of your daily life through strategic investments and strategic tax planning strategies (through budgeting, figuring out your burn rate, and performing a cash flow analysis).

The levels of your financial strategy are interdependent on one another. As opposed to a piece of paper that remains the same over time, think of your financial plan as a dynamic, living document that evolves as your life does.

Because your life goals and circumstances will invariably shift throughout the course of your life, it is absolutely necessary that you constantly update your financial plan in order to account for these shifts.

What six essential elements make up a financial plan?

A Successful Small Business Financial Plan Has These Six Elements.

1. planning sales. Your sales revenue should be estimated every month, quarter, and year.
2. spending plan.
3. Statement of financial position (assets and liabilities)
4. Cash flow projections.
5. Breakeven analysis
6. operational strategy.

What exactly does financial planning entail?

All aspects of your finances must be considered when planning for them. Your financial plan should cover every facet of your finances, such as debt repayment, insurance, taxes, retirement planning, and estate preparation. You ought to invest and preserve money as well. The entire definition should include provisions for taxes and retirement planning.

What are the six processes involved in making a financial plan?

Establishing the client-planner connection, defining it, gathering client data, including goals, and analyzing and assessing the client's current financial status are the six steps that make up the financial planning process.

What are the five steps of financial planning?

The six logical steps of the financial planning process are as follows:

• (1) determining your current financial situation.
• (2) Choosing financial goals.
• (3) Select the alternative course of action.
• (4) evaluating potential answers.
• (5) creating and implementing an economic action plan.
• (6) Reevaluating and revising the plan.

What main things make up a financial plan?

Important Elements of a Financial Plan

1. Goals and Objectives: Goals and objectives should be as specific as is practical and listed in priority order;
2. Tax-Conscious Planning;
3. Financial Statement;
4. Issues & Problems;
5. Risk management and insurance;
6. Retirement, special needs, and education;
7. Cash Flow Statement and Investment Planning.

Which financial elements are there?

Financial elements are planned to pay our fee in conjunction with a lawsuit. Case components are the rewards or responsibilities for which a major client may be qualified, such as personal usage. The financial element is either a benefit payment or a fee for a responsibility, depending on how the category is structured.

What are some examples of financial planning?

Financial Plan Example – Cash Management and Net Worth

Your assets include things like money, a house, investments, and any other valuable property. Financial commitments like credit card debt, mortgages, and school loans are examples of liabilities.

What are the types of financial planning?

Different Financial Planning Models and Strategies

• methods and models for various forms of financial planning;
• Cash flow planning: Investment planning;
• Planning for retirement: Insurance;
• Tax Planning;
• preparing for a move;
• Establish both long-term and short-term financial objectives.