Many entrepreneurs dream of being able to quit their job and focus on running their own businesses full time. This dream is achievable for some, but for many others, it’s unrealistic because they don’t know how to create a financial plan.
A financial plan is simply a set of numbers that tell you exactly what you need to make to achieve your goals. Whether you want to retire early, pay off your debt, or build a business empire, you need to create a plan that works for you.
We’ll discuss what is a financial plan, what your financial plan should look like, and how you can start creating one today and use it to reach your goals.
What is financial planning?
Financial planning is the process of determining how to accumulate, invest and manage money. Financial planning can help you meet your personal and financial goals, such as buying a home or saving for retirement. It can also help you avoid financial problems such as debt and bankruptcy.
Financial planning is different from managing your money on a day-to-day basis. Managing your money involves making decisions about how much money you have and what to do with it each month or year. Financial planning involves making decisions about where your money will come from and where it will go over a longer period of time (like five years).
Financial planners help people make sense of their finances by answering questions like:
Where does my money come from?
How much do I have in savings?
What are my current investments?
Financial planning consists of three main steps. The first step is to figure out where you're going, or where you want to be financial. The second step is to create a plan for getting there. And the third step is to maintain your plan so you can keep moving toward your goals.
The first two steps are often called the "what" phase and the "how" phase, respectively. The third step is often called the "do" phase because it involves actually doing what needs to be done — like saving for retirement or paying down debt.
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8 Financial planning steps to consider
Start by setting financial goals.
It's important to have a clear idea of what you want from life. If you don't know what your financial objectives are, then it's hard to figure out how much money you need to achieve those goals. It's also hard to gauge how much risk you can afford to take with your investments.
There are many things to consider if you're planning for the future, but one of the most important is setting financial goals.
The first step in goal-setting is to ask yourself where you want to be in five, 10 or 20 years. Do you want to buy a house? How about paying off your student loans? Or maybe you'd like to save up enough money for retirement.
Once you've identified your goals, set a deadline for achieving them. For example, if you want to buy a house in five years, plan on saving up 10 percent of that home's value each year until it's time to move in.
You should also determine how much money you'll need to save each month or week — and stick to that amount. Don't be tempted by an opportunity that looks great but will take away from your budgeted savings amount.
Understand your business finances.
A financial plan is an outline that lays out how much money you need to earn each month to reach your goals. It also includes an analysis of your expenses and assets.
You should understand the difference between “income” and “expenses”. If you’re running a business, your income is the amount of money that comes in, and your expenses are the amount of money that leaves.
You need to know your net “profit” before you can start creating a financial plan. This number is calculated by subtracting your expenses from your income. If you’re making money, you’re making a profit.
While your income and expenses are important, your net profit is what’s most relevant when you’re creating a financial plan.
Track your money and redirect your goals
Your monthly cash flow is a key factor in creating a financial plan, and it's easy to track.
First, get an accurate picture of your monthly expenses and income. How much money do you pay for rent? How much goes toward groceries? What about utilities, transportation fees, or other regular costs? Then add up the total amount that you bring in every month from all sources of income (including your paycheck, freelance gigs, and any other revenue).
Once you have this information at hand, start thinking about how you can redirect some of your money toward your goals. For example, if you have high-interest debt or are struggling to pay off student loans or credit cards each month, consider making a payment toward those accounts first before redirecting extra cash toward saving for retirement or buying a house down payment fund.
Get your employer match
One of the most important things you can do for your business is to make sure that your financial plan is in order. One of the best ways to do that is by getting your employer to match for a 401(k).
A 401(k) is basically an account where you can save up money for retirement and get an employer match on every dollar you put into it. For example, if your company gives a 100% match up to 5% of your salary, then for every dollar that goes into that account, they'll also put in another dollar—so it's like getting free money!
Of course, there are other benefits too: like being able to deduct your contributions on your taxes (which helps lower your overall tax bill). Plus, many employers offer free financial advice or tools to help manage your money better over time.
So take advantage of this opportunity while it lasts because it might not always be around!
Create financial forecasts and budgets
One of the best ways to make sure your business stays on track is to create a financial plan.
You can do this by creating forecasts and budgets for the future. Forecasts are predictions about what will happen in the near future, while budgets are an estimate of how much money you need to have at your disposal to meet those future needs.
If you're starting with nothing and have no idea what kind of resources you'll need, it's best to start small and make educated guesses about what might be necessary. For example, if you're starting a self-storage facility, it's unlikely that you'll need more than $50-$100 million on hand at first—but if your business takes off as fast as you hope it will, then it's good to know ahead of time that you'll need more money down the line.
Prepare Yourself For Emergencies
If you're a small business owner, you know how important it is to make sure your financials are in order. It's easy to get caught up in the day-to-day operations of running a business and forget about the big picture. But if you don't take the time to plan ahead, you could find yourself in a bad situation if something happens unexpectedly.
One of the best ways to build a solid financial foundation is by creating an emergency fund — meaning money that's set aside for emergencies only. We recommend starting small — maybe $500 or so — and building it up over time as needed. Your next goal could be $1,000 and so on until you've hit your target amount.
This is an especially good idea if you have employees who rely on their paychecks for basic living expenses like food or rent payments because they won't have access to those funds during times of crisis (which can happen when things like natural disasters strike).
You can also think about building credit for yourself as a business owner. Credit cards are great for this purpose because they allow you to build credit without having to borrow a large sum at once.
Review operating expenses and profits
A financial plan is a blueprint for the future of your business. It will help you determine how much money you need to have on hand at all times, and it'll help you plan out when you should take out loans, or even when it might be time to expand your operation.
As part of this process, you'll want to review operating expenses and profits. This means looking at what your business costs per month—for things like rent, utilities, insurance premiums—and balancing that against what kind of revenue it brings in during the same period of time. If there are significant discrepancies between those two numbers, then either something needs to be changed (or some things) or you need to rethink whether or not this is a viable business model for your company.
Operating expenses include things like rent, utilities, and payroll. They don't include capital expenditures (things like buying new equipment). These expenses are usually relatively fixed—they stay the same month after month—but they do fluctuate as your business grows or shrinks.
Profits are the difference between what you sell and how much it costs to produce those products or services. Profits are often variable because they depend on what you charge for your goods or services, but they can also be fixed if you have some fixed cost structure (like rent).
Protect and grow your financial well-being
A moat is a type of defense that protects an asset from attack. It’s a defensive strategy that is used by businesses, cities, and countries to defend themselves.
It’s also used to protect a business’s assets, such as real estate, from outside attacks.
For example, let’s say you wanted to invest in real estate and grow your money. You could use a strategy called “buy low, sell high.” This means that you buy an asset at a low price, and sell it at a higher price.
However, this can be dangerous if the asset is not protected by a defensive strategy. What if someone takes advantage of you by buying your asset at a low price and then selling it to you at a much higher price?
To protect yourself, you can build a moat around your property. This can be done by creating a fence or a high wall around your property, or you can create a barrier that makes it difficult for anyone to access the land.
Takeaway
As you can see, a business is not just a group of people who happen to be working together. It's an organism that needs nourishment and care in order to grow and thrive. This means that your customers are the most important part of your business—and they should be treated as such!
FAQ
How do taxes influence responsible financial planning?
Taxes play a significant role in responsible financial planning.
If you have investments, you need to consider the tax implications when making decisions about your portfolio. It’s also important to keep in mind that different types of investments have different tax consequences.
For example, if you invest in stocks, then they are taxed as capital gains, which can be beneficial if you have a long-term investment horizon. Conversely, bonds are taxed as ordinary income and short-term capital gains. Therefore, it is important for investors to understand how taxes will affect their investments before making any decisions about how much money should be invested and where.
It is also important to know that there are different types of accounts where investments can be placed—taxable accounts and tax-advantaged accounts such as IRAs and Roth IRAs—and that these accounts have different rules regarding when funds can be withdrawn without penalty (early withdrawal) or without paying additional taxes (retirement withdrawals).
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