What Are the Steps in Personal Financial Planning?
If you want to get your personal finances under control, the first step is to make a plan. There is not one plan to fit every single person—you have to evaluate your circumstances and goals so you can make a plan that fits your life. A financial plan will help you get from where you are now to meeting primary savings goals and even into retirement—it is your guide to earning, spending, and saving wisely.
Everyone can benefit from a financial plan, no matter how much you make or what your situation is. But what are the steps in personal financial planning? How do you create a financial plan? This quick guide will help you get started.
1. Write Down Your Financial Goals
Your first step in personal financial planning begins by looking to the future. What do you want to do with your money? Think beyond “paying my bills” or “building wealth.” Separate your goals into short-term and long-term goals by thinking about what you want your money to do in the next five, ten, and fifteen years.
Do you want to save up for a down payment on a house in five years? Pay off all your debts and help your kid pay college tuition in ten years? Save a specific amount for retirement in fifteen? Make your goals specific: Specify how much you want to earn, invest, or save, and by when. Knowing what you want to do with your money will help you know where you are going financially, give you a path to get there, and motivate you along the way.
2. Evaluate Your Spending and Saving
Track how you’ve used your money over the past three to six months.
- How much do you earn each month?
- How much do you contribute to savings?
- How much do you have invested or in retirement accounts?
- How much are you spending on bills, such as debt payments, utilities, and rent or mortgage?
- How much goes toward discretionary spending?
Review your credit card statements, bank statements, and paychecks. Taking time to evaluate your saving and spending will help you notice ways to cut back and create a personal budget to help you put more money toward your financial goals.
3. Set a Budget
Once you’ve examined how you spend and save, you can create a realistic budget and hold yourself to it. Try using the 50/20/30 rule:
- 50 percent of your income goes toward necessary expenses, such as rent, car payments, groceries, healthcare, insurance, etc.
- 20 percent of your income goes into savings.
- 30 percent of your income can be used for nonessential purchases: eating out, new clothes, technology, cable, vacations, entertainment, etc.
4. Build an Emergency Fund
The most important savings for anyone to start building now is an emergency fund. The goal is to eventually save enough to cover your living expenses for six months or more. That way, when something unexpected happens—job loss, injury, death, or damage to your home or car—you and your family will have enough money to get by, even with lost income or added expenses.
Not having a built-in buffer when an emergency happens can really set you back financially and make it challenging to pay bills and make ends meet. Prepare for a rainy day now by building up an emergency fund.
5. Pay Off Debts
Getting out of debt is one of the critical steps in personal financial planning. While you are paying off student loans, personal loans, car payments, and credit card debt, you’re limited in how much of your income can go toward your emergency fund, savings goal, or retirement. Make a plan to tackle your debts. One common strategy is to tackle the smallest debt first, then work up to the largest while making minimum payments on the rest. Another approach is to start instead with the debt with the highest interest rate. Either way, find a strategy that works for you, tighten up your budget, and focus on getting out of debt.
6. Invest
Investing makes your money work for you rather than the other way around. Investing is the best way to build wealth and increase your monthly income. You might want to seek professional guidance in how best to invest your money. In general, think about these issues before investing:
- When will you need the money back that you are investing?
- What are your goals with investing—what will you do with the money you earn?
- What is your tolerance for risk in investing?
Any type of investing—stock market, real estate, small business, etc.—involves risk and is a long-term game. If you’ll need your money back in five years or less, it’s best to put it into a savings account. If you have years to let it grow, invest it in the stock market.
7. Plan for Retirement
Even if you are young and just beginning your career, start planning now how you will save for retirement. Does your company offer you a pension or 401(k)? If your employer matches contributions, contribute the maximum amount. Do you need to open an IRA? Explore your options now, so your money has time to grow.
How do you create a financial plan? There’s no one-size-fits-all solution, but the point is to plan and be deliberate. No matter your current financial situation, you can start planning now to get your finances in order and prepare for a better financial future.