The Five Golden Rules of Financial Planning
The benefits of financial planning include stress reduction, wealth building and earning a high credit score. There’s an old adage that when a person fails to plan, they essentially plan to fail. Truer words were never spoken, particularly when it comes to planning for a sound financial future. The following five golden rules of financial planning are designed to lay a solid foundation upon which one can begin building a stable future.
1. Needs, not wants
Needs and wants are not the same thing. The first rule of sound financial planning is to learn the difference between these two. Spending that is based solely on a person’s needs and willingly sacrifices wants in order to achieve financial goals ultimately leads to success, as overspending is curtailed and debt is kept to a minimum.
2. Embrace the learning process
Planning a financial future is a process. Teaching aids are valuable, but there is no one book or product that will teach everything a person needs to know. Embrace financial planning as a process and learn as much as you can, whenever you can from wherever you can. Lessons leading to financial empowerment are everywhere and as soon as goals are met, new ones should be established, which makes financial planning a lifelong process.
3. Stick to your budget
Financial decisions made today affect one’s quality of life tomorrow. People who spend haphazardly or who do not adhere to a strict personal budget usually pay for this poor planning with bad credit and a lack of savings. While it is OK to get a loan till payday when in a temporary cash crunch, people who don’t seriously heed this advice find themselves constantly relying on personal loans and accruing credit card debt just to finance their daily needs.
4. Only use credit when necessary
Credit cards create debt. This doesn’t mean that they shouldn’t be used, but that they should be used very sparingly and only when absolutely necessary. A person has to realize that beyond the instant gratification of purchasing items they can’t afford to buy outright, each purchase made on a credit card is creating debt. When this golden rule is understood, people tend to use credit more sparingly and more wisely, which helps them move closer to a debt-free lifestyle.
5. Be careful creating debt
It is easier to get into debt than it is to get out of debt. While some people go into debt because of rising medical costs, divorce or some other life-altering circumstance, others go into debt simply because they have poor spending habits and even poorer impulse control. For these people, getting into debt can start out being fun as they finance exotic vacations, luxury cars and mortgage loans for homes in pricey neighborhoods.
However, when the time comes to pay for these decisions, many become overwhelmed with doing so. Often, they fall behind in these payments and find that they become trapped in an endless cycle of high interest rates, penalties, and creditor phone calls. This is why each decision to create debt must be assessed according to whether the decision is based upon a real need or a want.
The Importance of Financial Planning
People who desire control over their money and their credit rating follow the golden rules of financial planning because they know that these fundamentals pave the way for future stability. Individuals who do not realize their importance often find themselves fighting a whirlwind of debt and struggling just to make ends meet. Even so, it is never too late to begin practicing these rules and doing so, in tandem with acquiring other wealth education strategies, can go a long way to assist in debt recovery.