Personal Financial Planning: How to Make a Financial Plan

A Financial Plan has three parts:

Your current financial situation
Your financial goals
The steps you will take to get where you want to go.

You will complete seven steps: calculate your net worth, determine your cash flow, set your financial goals, create a budget, establish your investment strategy, manage your risk and monitor your progress.
Financial plans can and should be modified when your situation changes.

You might think that financial planning is something that only wealthy people do. That's not true. Financial planning is how people of all income levels and life stages control their money and create a better future for themselves and their families.

A financial plan can help you balance your current needs and future goals. It can help you solve the money problems you've gotten into and avoid those problems for years to come.

What is a financial plan?

A financial plan can be as simple as a family budget or as complex as a multigenerational estate plan.

The nature of your financial plan depends on your needs. The best way to think about a financial plan is to start with your current financial situation and then consider the conditions that are likely to arise in the future.

Often, a financial plan is made up of many different projects. When you think about your goals for the next few years, you will work in several stages to achieve your objectives.

After all, you have different demands on your money at various stages of your life. A financial plan can help you figure out how to divide your money to reach each goal at the right time.

Personal Financial Planning Goals

What are some examples of objectives that a financial plan might cover? Below are some of the needs you might have over the years, with some comments on how a financial plan can help you meet those needs.

Make Extremes Meet

Stretching a paycheck to make ends meet involves choosing which bills to pay first, how much to spend each week on food, when to buy clothes, etc.

These needs arise at different times and in different amounts. You can't just throw money at the first thing that comes along because then you may not have enough left over to pay the next bill.

Organizing what you can afford to pay and when you will have to pay it requires a plan. You need to compare your income and you need to develop a budget that ensures money will be available at the right times.

A simple household budget is the first type of financial plan most people have. It will remain a vital part of any financial plan for the rest of your life.

Getting Out Of Debt

As if making ends meet wasn't challenging enough, the challenge is even more significant if you are in debt.

The problem with debt is not only that making payments adds another demand to everyday costs like food and housing. Debt also gets more expensive the longer you hold it, costing you more interest every day.

A personal financial plan can help you with debt in three ways:

Budget to have money available to make your debt payments on time.

Organize your debt to pay the lowest possible interest rates.

Accelerate payment to reduce the amount of time you will pay interest.

Establishing a good credit score

Credit cards, car loans, mortgages, etc.: loans are a routine part of managing household finances.

Being able to borrow and how much it costs to borrow depends on how good your credit is.

Whether you need to establish or re-establish credit, a financial plan can help you take the steps that will provide you with a good credit history.

Creation of an Emergency Fund

Once you have worked out a plan to cover your routine expenses and debt payments, you should plan for the unexpected.

From car repairs to the loss of a job, unexpected setbacks will create a variety of demands on your money outside of your financial plan.

An emergency fund can make the unexpected less disruptive to your finances. An emergency fund is a pool of money in savings or another type of account that you can access quickly.

Budgeting to create an emergency fund should be an early part of your financial plan.

Manage Taxes

Taxes take a bite out of your budget, usually before you even get your paycheck. So what can you do about it?

While taxes depend primarily on how much money you make, other factors determine how big a bite the taxman takes.

Where you live, the deductions or tax-advantaged vehicles you take advantage of, and various investment decisions affect the amount of tax you must pay.

Therefore, if you do not want to pay more than your fair share, make tax considerations part of your financial plan.

Buy A House

This is probably the largest single investment I've ever made, so naturally it requires some planning.

After all, the financial impact goes beyond a one-time purchase. It is felt for years, both before and after that purchase.

Personal financial planning can help you with these tasks:

Getting your credit in shape to qualify for a mortgage

Save a down payment and closing costs

Finding the best mortgage for your situation

Budget for your mortgage payments and the other costs of homeownership.

However, some of the individual functions of a financial plan, such as tax preparation or investing, require specialized expertise. In particular, because laws and conditions are constantly changing, it can be helpful to work with a professional who keeps up to date with the latest information.

Whether you hire a professional or do-it-yourself, putting together a plan is an essential step in your financial journey. As the old saying goes, "those who fail to plan, plan to fail."

Making A Will

Estate planning is not just for the wealthy. If you have a family, you should have a financial plan for what happens after your death.

This goes beyond figuring out who inherits what. It may include making arrangements for the children in the event they lose both parents. It may also involve calculating how much life insurance would be needed to replace the loss of income.

Think of it this way: the final stage of any financial plan should involve how you will transfer your finances to the next generation.

How to Create Your Own Financial Plan?

When thinking about a financial plan, most people start with two things: paying their bills month to month and saving for retirement.

Those are critical goals, but you probably have a number of smaller goals between now and retirement. You may need to save for your next car. You may want to buy a house. It would be nice to take some money out to splurge on a big vacation now and then.

If you have children, there are even more factors to consider. A financial plan for a family might include budgeting for the additional costs of food, clothing and medical care for the children, saving for their college education and providing for them when you die.

Creating a financial plan is like a journey into the future: from now until the end of your life and everything in between. You must consider the various financial needs that will arise along the way, detail how to meet each one, and figure out how all the pieces fit together.

As complicated as it sounds, it is much easier if you take it one step at a time. The following section covers seven steps you can take to formulate a personal financial plan.

Financial Plan Steps

Here are seven steps to put together a comprehensive financial plan:

1. Calculate your net worth. Let's assume that financial planning is primarily about setting goals for the future. In that case, this first step is to measure where you are today. That means adding up your assets (including bank and investment accounts and real estate) and subtracting your debt.

2. Determine your cash flow. This is a measure of the money coming in and going out each month. First, determine your income, including after-tax wages and other payroll deductions. Then subtract your monthly bills and what you typically spend on necessities such as groceries, plus discretionary items such as entertainment, gifts and clothing.

3. Set financial goals. As discussed earlier in this article, these can include short-term goals, such as getting out of debt and establishing an emergency fund. And longer-term ones, such as sending children to college and funding your retirement.

4. Create a budget. Once you've looked at your cash flow and listed your financial goals, you can see how much money you'll have available to put toward those goals each month. Budgeting a set amount to save for those goals helps ensure that you set aside enough money to save rather than spend in the short term.

5. Establish an investment strategy. Savings for long-term goals will be most effective if invested productively. You should decide on an investment strategy that fits your cash flow, the timing of your goals and your tolerance for risk.

6. Manage risk. The appropriate level of risk for your investments changes over time. This depends on both your resources and how close you are to needing the money. Make sure your investment approach changes as your situation changes.

7. Monitor progress. Naturally, when you make plans that span decades, not everything goes as you expected. Staying on track requires watching your progress and making adjustments when necessary.

What Do Financial Planners Do?

What role do financial professionals play in all this?

There are a variety of specialists who can help you with your financial needs. These include:

Tax accountants

Real estate lawyers

Insurance agents

Investment advisors

Debt Counselors

Financial planners are professionals who can bring it all together. They are familiar enough with all of these functions to incorporate them into a complete plan. Often, if they don't have expertise in a particular specialty, they can refer you to someone who does.

Can You Make Your Own Financial Plan?

Do you need a professional to put together a personal financial plan for you? Or can you do it yourself?

There are many resources to show you how to make a financial plan. These range from templates for financial planning documents to complete guides on how to make a plan.

Especially if your needs are fairly basic, you may be able to put together your financial plan, at least as a starting point.

Whether you hire a professional or do-it-yourself, putting together a plan is an essential step in your financial journey. As the old saying goes, "those who fail to plan, plan to fail."