If you were to set out by car for a weeklong journey across the country, you'd probably take a map. If you're the technological type, you may have a fancy GPS device instead. Either way, you'd have some means for tracking your progress from here to there.
If you read from the beginning to the end of this article and follow its instructions, you will have created a similar roadmap for your financial life. It's not hard, but it's essential. Without a financial plan, money comes in and money goes out every month, but it may not be furthering your dreams. Like Lewis Carroll wrote, If you don't know where you are going, any road will take you there.
So, go get a pen and a piece of paper and stick with me for about 10 minutes. I promise this will be mostly painless. There won't be any numbers or math involved.
First, ask yourself whether you want to achieve any of the major financial goals you usually read about in personal finance columns. This is the list of big stuff; the options include retiring, getting married, buying a home, having children, sending those children to college, and starting a business.
If you collect a paycheck, you should definitely put retirement on your list. Even if you love your work, you'll want to stop someday. Everyone should also write down the words emergency fund. This is a cushion of three to six months' worth of expenses that no financial traveler should be without.
The rest of the list is yours to customize. Write down each goal you want to achieve and make a few notes about what each means to you. If, for example, you know you want to retire by a lake in Canada at age 65, write that down. If you want to open a small knitting and yarn shop, write that down. If you want to buy a home with a hot tub and laundry chute, write that down.
Next, ask yourself how you like to spend your time. Then, extrapolate any financial goals that may stem from those hobbies, pursuits, and desires. If you love to cook four-course dinners for your family and friends, you may want to take cooking classes or remodel your kitchen. If you love adventure travel, you may need to make a special allowance for your vacation fund and scuba lessons.
You may also have hobbies that cost you very little money, like hikes in the woods or 1940s noir movies on late-night television. Write them down, too, and draw a couple smiley faces in the margins of your paper. Add a few stars. Write down the name of your sweetie or your pet and draw a heart around it.
OK, enough doodling. Back to the list. Now, start a new list on the other side of the paper. Write down anything that you spend money on that doesn't mean much to you. Make yourself think of five things. This may be a vast collection of DVDs that you never watch, a brand-new car that lost its luster, or a closet full of exceedingly fashionable handbags that were used only for a month at a time.
After you finish that, stop and look over your plan for a second. What you've just done is created a list of your priorities and generated some ideas for painlessly trimming your budget. (That wasn't so hard, was it?)
Now to put the list in order. Rank all of your goals in terms of priority, and note any deadlines that may occur to you. (I promised there would be no numbers, so use letters of the alphabet to rank your list if you want to.) Write down retirement and emergency fund as your first two items. Why?
Retirement goes first because the best way to pay for it is slowly and steadily over a really long time. The earlier you start, the better. Even if you think you have more pressing goals today, you'll lose valuable time when your retirement assets could have been growing. The emergency fund goes second because it's the cushion against financial calamity that could wipe out your ability to achieve anything else on your list.
Once you've ranked your goals by priority, voila! You've got a customized financial plan that reflects your life and goals.
Now, the bad news. This is just the beginning, but it's an essential beginning. Without this plan guiding you, who knows where your financial path would be heading? So, it's up to you to take this plan and make it happen. You'll need to look at your spending and see whether it matches your priorities. If not, you'll need to rearrange your finances to match your goals.
We have lots of resources at The Motley Fool to help you with that. Start at the Retirement and Savings Centers. You might also want to check out the myriad discussion boards, where Fools gather to chat about everything from budgeting to photography, to cooking and sports.
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