Creating your personal financial plan can seem like an intimidating task, but taking small steps to simplify it makes the process simpler. Start by reviewing paychecks and bank statements and using an app like BudgetCup to track income and expenses. Financial tracking shows what’s coming in versus going out, which can assist with controlling spending habits and saving for long-term goals.
1. Set Goals
Establishing short- and long-term goals is the first step toward creating a financial plan that works. These could include paying down debt or starting an emergency fund; long-term goals could include saving for retirement, a home purchase, or starting your own business.
As a starting point, gather an inventory of your assets (savings accounts, investments, and property) and liabilities (such as credit card debt and student loans), and subtract the liabilities from the assets to calculate your net worth—this will give an indication of where you stand financially while giving you a measure to gauge progress towards reaching financial goals.
2. Organize Your Expenses
At the core of any successful savings plan lies an understanding of where your money goes—tracking monthly income and expenses with a spreadsheet or budgeting app can give you a clear snapshot of where you spend it all.
First, identify all of your fixed expenses, such as rent or mortgage payments and utility costs, as well as loan and debt repayments. Next, determine monthly expenses such as grocery shopping, meals out, streaming service subscriptions, or workout classes. Create categories of expenses such as needs, wants, and leisure, and consider how these compare with your income.
3. Create a Budget
Begin by gathering data on what your take-home after taxes and expenses costs each month, including both fixed and variable expenses such as shopping, dining out, gifts, vacations, and gas costs. Past credit card or bank statements can provide estimates for these monthly spending areas.
Your plan should also provide an overview of both debts and savings accounts, with regular reviews as your life changes or you set new goals. Most important, though, is having a clear idea of the money coming in and going out.
4. Set a Savings Goal
Saving is key to meeting long-term financial goals such as buying a house or car, paying down debt, and planning for retirement. Once you understand what your financial objectives are, set monthly savings targets within your budget plan to reach them.
Make your savings goals realistic by breaking them down into details: who, what, where, when, and why. This allows your creative thinking part to collaborate with the action-oriented and practical parts of your brain. Since most people won’t be able to save for all their goals immediately, it is helpful to list them in order of priority.
5. Create a Spending Plan
Creating and adhering to a spending plan is crucial to reaching your financial goals. Start by documenting all sources of income (job, allowances, and side gigs) as well as expenses (rent, utility bills, etc.) using checking or savings account statements as estimates, as well as variable expenses like food, clothing, transportation, gifts, and entertainment.
Make use of a budgeting method like the 50/30/20 rule when setting up your monthly income allocation; this way, you can allocate 50% for needs, 30% for wants, and 20% for savings or debt repayment. Take an honest assessment of where you might be overspending to adjust accordingly and reduce spending in those areas where possible.
6. Create an Investment Plan
Once you have established your financial goals and determined how much money needs to be saved, the next step should be creating an investment plan. Your choice of stocks, bonds, or alternative investments such as real estate will depend on your goals, time horizon, and risk tolerance.
Assuming you have enough time until your money is needed, taking more risks should become easier. Investments have time to profit from upswings and recover from declines. But it’s important to remember that there are no guarantees in investing. Working with a financial professional is the surest way to keep your investment plans on track.
7. Create a Retirement Plan
An effective financial plan should include your long-term goals. Setting milestones will help keep you on the path, but it is equally essential to diversify your savings and investments to prepare for unexpected expenses or changing circumstances. A professional can offer advice about selecting an asset mix suitable for both timeline and risk tolerance.
Immediate financial goals may include paying down debt (credit card debt, personal loan debt, and payday or title loan debt). A midterm goal might include setting aside three to six months’ worth of living expenses as an emergency fund.
8. Create an Emergency Fund
An essential step towards financial health is setting aside an emergency fund. Most experts suggest saving enough to cover three to six months’ essential living expenses as a target amount for your emergency fund.
As part of your strategy to reach your savings goal, automate contributions to a separate emergency fund account so they are out of sight and mind—this way they won’t get spent impulsively! Establish an emergency fund and save any unexpected windfalls, such as tax refunds or cash gifts, in it.
9. Create a Payment Plan
Financial plans are tools designed to help you achieve your financial goals. Planning is essential no matter your age and stage in life; however, creating one is especially important when confronted with significant changes to personal circumstances.
These changes could include unexpected income increases, large purchases, serious illness, or unexpected expenses. A payment plan is an agreement that allows you to pay debts over an agreed-upon timeframe; creating one may seem intimidating; however, there are resources to guide you through it step-by-step.
