We have just entered 2023, and as with every new year that comes along, it’s a time for many to set New Year’s resolutions. These are typically goals such as exercising more, traveling more, or learning a new skill/hobby. It can be easy to set a bunch of goals. However, sticking to them is a whole other ball game.
One of the more common New Year’s resolutions is to save more. While that is an admirable goal, I’d take it a step further and say there’s more to financial planning than just increasing our savings. According to a survey done by Capital One and The Decision Lab, 77% of Americans report feeling anxious about their financial situation, with more than half the population having difficulties controlling their money-related worries.
And that’s the case with a large chunk of the global population. Setting financial goals can help us figure out where we want to be money wise and what our priorities are. Saving more money is just one part of this financial journey. Let’s help you create better financial goals.
How can you start?
When it comes to setting financial goals, it helps to be specific, realistic, and to write down your goals. You can start by listing your short-term, medium-term, and long-term goals. For example, you may have a short-term goal of saving for a car, a medium-term goal of saving for a house, and a long-term goal of saving for retirement.
Here are seven steps to help you create a financial plan.
1. Start an emergency fund
An emergency fund is crucial to your financial plan. It helps deal with those unexpected costs, like if you suddenly lose your job or need to pay off an unplanned car repair cost. You want to make sure you are prepared for the worst (*coughs* COVID). Build up an emergency fund of 3-6+ months of your monthly expenses to provide you with a safety net.
2. Pay off your debts
In Islam, we are advised to avoid debt. However, if you do find yourself in any debt, it’s best to get rid of it as soon as you can. Debt is your biggest hindrance when it comes to achieving your financial goals. There are two main methods of getting rid of your debt - the Avalanche method and the Snowball method. The Avalanche method pays off the highest-interest debt first, and the Snowball method focuses on paying off the smallest debt first.
3. Create a savings and investment plan (or review your current plan)
Savings help you with your short-to-medium-term goals. Setting aside money for these goals will help you achieve them faster. If you want to build long-term wealth, that’s where an investment plan comes in. You can allocate a certain percentage of your monthly income toward your investments. Having a basic understanding of what you are investing for, when you’ll need the money, and what your risk tolerance is will help to create your investment plan.
If you have already dove into the world of investing, take the opportunity to review your portfolio to see if it (still) fits in with your investment goals. It’s also a great idea to have a quarterly/annual health check to make sure your investments still meet shariah compliance and you can take this time to rebalance your portfolio if your investments no longer fit in with your goals.
4. Create a retirement plan
Retirement may seem far away (or it could be around the corner!). Either way, set up a retirement plan, taking inflation into consideration, to help you work out how much you will need to save and invest for when the time comes. Use a retirement calculator to help you figure out how much money you need to set aside.
5. Plan for taxes
Taxes are something often overlooked when planning finances. Not factoring them into long-term projections can drastically impact your cash flow. Have a look into tax-saving investment accounts like a Roth IRA (USA) or an ISA (UK), and you may just find that you save a big chunk of cash in the long run. Speaking to a tax accountant or financial planner can help if you are unsure about taxes.
6. Create an estate plan
As Muslims, it is important to have a will. It is essential to determine exactly what happens to your assets after you are gone. Set things up legally and officially by creating a will with a financial planner or estate lawyer.
7. Review your plan frequently
It is important to review your plan frequently and make necessary adjustments if your goals or circumstances change. Having a regular check-in date can help ensure things are going to plan. A financial plan can help you achieve your financial goals and get you to where you want to be. Stay the course and learn from your mistakes.