The 3 Keys of Effective Financial Planning

By Markets Fool.com

The potential number of financial planning topics you can think about, plan for, and consider is pretty near limitless. But at the end of the day, there are only three things you really need to be paying attention to.

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1. Your spending
I know you're already rolling your eyes, but it's true: No amount of savvy investing or career success will make up for poor spending habits. Overspending puts you in debt, which puts you in trouble.

Head this kind of trouble off at the pass by prioritizing. You have a finite amount of money, so you where do you want it to go? What do you actually really want to spend money on?

No one can tell you that your priorities are wrong: If you want to buy lattes every day because it pulls you away from your desk at work, more power to you. But to make your budget work, you might need to cut out something you care about less, like going to the movies or buying new shoes.

This is not a new concept, of course. But it's hard to do because it takes time and it involves setting boundaries. That's why it helps to think not about what you can't have, but rather what you must have.

Prioritize spending for the musts and enjoy them thoroughly. Then forget about the rest.

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2. Your saving
When developing a budget (that's what spending priorities are, in the end), you assume that you have an income. But what if something happens and your income dries up?

This is the reason one of your priorities should be savings. The last thing you want is to be evicted or go into debt because you didn't plan ahead for volatility. And in this day and age, volatility is pretty much par for the course.

So, what do you do? Save. Save as much as you can. Make it a game if it helps, or start small and build from there. The secret is that the actual number is far less important than the habit itself. Whether you manage to sock away $200 a month or $2,000, you will be amazed at the results.

It might not seem like much at first, but that money will grow far faster than you realize -- and then you can explore the fun and exciting world of investing.

But for now, just save. Something, anything.

3. Your debt
Nothing will crush awesome saving and spending habits like debt. It's unfortunate, but it's true.

Your totally affordable mortgage is one thing. I'm talking about hairy high-interest debts, like credit cards. No amount of savings will appease the insidious growth of a credit card balance, so make this another priority.

Tackling your debts as soon as possible will not only save you money; it'll also lob off another part of your discretionary income that you can later apply to savings. It's a nifty little trick that will make the savings habit all the more satisfying.

Of course, it's also frustrating. Here you thought you could prioritize your morning coffee, when in fact those types of expenses necessarily have to take a backseat to the real priorities. But even if you put yourself on a crazy debt-reduction and savings plan, build in some space for fun. Maybe it means living in a smaller house so you can still travel, or maybe it means carpooling to work so you can enjoy your lattes.

Whatever your plan, tackle these three critical areas and you are very much on your way to financial security.

The article The 3 Keys of Effective Financial Planning originally appeared on Fool.com.

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