Financial Planning Process | The 6-Step Guide For the Average Joe

Financial planning is an ongoing process that takes time and effort to develop. Beginning your financial planning process may be overwhelming and intimidating, but we’re here to help. In this article, we’ll discuss what the financial planning process looks like and get you started.

If you're like me, then chances are you grew up with a minimal understanding of personal finance. For years, I considered finance as something that was only for the pros to handle. It wasn't until I gained more exposure to the stock market through my friends and online communities that I began to fully understand the value of taking control of my money.

Since beginning my financial journey, I realized that there are many steps I can take on my own to jumpstart my financial planning process. Contrary to popular belief, you do not necessarily need a certified financial planner (CFP) or a financial advisor to set your finances in order. You can start taking matters into your own hands from the comfort of your home with a bit of financial education. If you want to begin your financial planning process, you can follow our 6-step process to get started. End goal? Make your money last a lifetime, and enjoy financial security.

Key Takeaways

A financial plan is an outline of your financial goals and involves setting up a process to reach those goals. To get started with your financial planning process, you need to: 

  1. Understand your financial circumstances
  2. Set financial goals and expectations
  3. Create an action plan based on your financial situation
  4. Implement your action plan
  5. Keep track of your action plan
  6. Make adjustments to your plan as needed

What is a Financial Plan?

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A financial plan is a blueprint for your financial goals. It takes into consideration your current money situation and outlines a personalized strategy for achieving your financial goals and building wealth. You can create a financial plan on your own (like I have) or seek assistance from a professional, such as a certified financial planner. Typically, the financial planning process involves setting future expectations and goals, which includes creating investment accounts, eliminating debt, establishing a savings plan, and creating retirement goals. Depending on your goals, the planning process can take place over the course of months, years, or even decades. For example, if you are in your 20s or 30s, saving for retirement will be a longer-term goal than building an emergency fund. However, your financial plan can be flexible and adapt to changes in your personal life.

Why are Financial Plans Important?

Before I started my financial planning process, I often had no idea where my money was going. While I did not have any significant debt, I spent a lot of money on things I didn't need without realizing it. Fast forward to today, I actively track every dollar I spend and only buy what I need. Creating a financial plan helps you understand your overall financial health and opens up a pathway to build and accumulate wealth.

There are many benefits to having a financial plan. By keeping track of your money regularly, you can better understand your current financial situation, including your income, current cash flow, debt-to-equity ratio, etc. Seeing the whole picture allows you to develop a strategy that helps you build on your existing capital and improve your financial health. Only by seizing control of your money can you can begin your journey towards financial security and freedom.

6 Steps to Get Started on Your Financial Planning Process

While each person's financial journey will be different, there are a few common steps that you can take to tackle the financial planning process like a pro. We outlined six key steps below to help you jumpstart the process.

1. Understand Your Financial Circumstances

Before you begin your planning process, you should first review your current financial status and understand what is happening in your personal and financial life. Some factors to take a look at include:

  • Current cash flow from your day job, investments, and/or side hustles
  • Outstanding debts i.e. mortgage, credit card loans, car payments, student loans, etc.
  • Current spending habits
  • Savings and investments rates
  • Your net worth

By starting with the basics and getting a comprehensive financial picture, you can better assess your financial situation and set priorities based on your unique circumstance.

2. Set Financial Goals and Expectations

After you evaluate your financial situation, you can then set goals and expectations. What do you hope to accomplish through financial planning? What are your short-term, medium-term, and long-term goals? Where are you at right now financially, and where do you want to be? By envisioning the future you want, you provide clarity and focus on what you are working towards and how you will get there.

The key here is to set specific, actionable goals. Don't be vague. Instead, try to have a dollar value attached to each goal you set. For example, one of my medium-term goals is to reach a 6-figure net worth by early to mid-2022. To hit my goal, I am aggressively saving and investing roughly 60-75% of my after-tax income.

Examples of Short-Term Goals

Create an emergency fund

Depending on your financial situation, we recommend saving enough money to cover at least 3-6 months of your current expenses in case of any unexpected events. If that seems overwhelming for you, start by setting a goal of $500 or $1,000 and then scale up from there.

Pay off high-interest debt

If you have any outstanding credit card debt or other high-interest debt, try to pay those off as fast as possible. If you consistently carry high-interest debt, that can prevent you from achieving other financial goals you may have.


Examples of Long-Term Goals

Downpayment for a house

If you want to become a homeowner, do some research into the average cost of housing in the area where you want to purchase a home. From there, you can devise a plan on how to save up enough to cover the downpayment. Generally, you will need anywhere from 3% to 20% in cash, depending on your financial situation. Providing a downpayment of at least 20% will free you up from paying the added interest from Private Mortgage Insurance (PMI). 

Retirement 

Based on the age you plan on retiring and your anticipated expenses in retirement, you will need to set aside enough assets to meet all your retirement needs. The rule of thumb is to save at least 10-15% of your take-home pay in a retirement account, such as a Roth IRA or 401(k), but how much you should save will be based on your projected retirement needs.

3. Create an Action Plan Based on Your Financial Situation

Once you determine your goals and expectations, it is time to create an action plan. Your plan should include some of the action items mentioned earlier, such as a retirement fund, an emergency fund, a monthly budget, and diversified investments. To make the process more fun, you can set milestones for each goal based on your priorities. For example, if you want to tackle all your short-term debt as soon as possible, you could start by setting aside $300 a month to pay off your debt. Once you feel more comfortable or have more cash flow, you can gradually escalate the amount until your debt goes to zero. 

Depending on your financial education, risk tolerance, and personal preferences, you can look into several different investment vehicles. If you are saving for retirement, some tax-advantaged accounts you can research include the 401(k), Roth IRA, and Traditional IRA. Non-retirement assets you can look into include real estate, cryptocurrencies, bonds, stocks, and gold. The key to building wealth is to develop strategies that work for you, diversify your holdings, and stay consistent.

4. Implement Your Action Plan

Once you identify a course of action, the next step is to implement your plan into your everyday life. Following through with your plan will probably be the hardest step because it requires you to stay on top of your goals and keep the momentum going. Because your goals can span years or decades, it can be easy to lose motivation.

We recommend implementing some accountability measures to keep you focused and motivated. If you have an employer-sponsored 401(k), automatically deposit a set percentage of each paycheck into your 401(k). If you want to stick to your budget, use an app like Mint to keep track of all your expenses and check it once a month or once every few months to ensure you are not overspending. If you are building your emergency fund, automatically transfer a set amount of each paycheck to your fund. Remember that the financial planning process is a long game, so setting realistic expectations and staying persistent will be crucial.

5. Keep Track of Your Financial Plan

You're not done yet! Once you implement your action plan, you need to continue monitoring your progress to see if you are reaching your goals and expectations. If certain obstacles prevent you from making progress, you need to identify what they are and how to overcome them. If you find yourself becoming complacent, you should consider seeking outside help from friends and family or talk to professionals for advice on how to get back on track.

Your financial journey is an ongoing process, so you should actively manage and track your financial plan. As mentioned earlier, you can use Mint to track your monthly expenses. If you want to track your net worth, you can start by using Personal Capital. If you can't find a tool that tracks everything you want, you can also create your own spreadsheet. Currently, I use both Mint and Personal Capital. However, I find them a bit less accurate for calculating my total net worth and month-over-month spending. That is why I created my own spreadsheet to track everything.

6. Make Adjustments to Your Plan as Needed - Keep Iterating

With any plan, things can come up that throw your plan into complete disarray. That's why, in addition to tracking your financial progress, you should regularly evaluate your financial health and make changes as needed. Significant life events, such as marriage, starting a family, the death of a loved one, or purchasing a new home, can lead you to change your priorities. By keeping all your information relevant and up to date, you'll create a comprehensive and bulletproof financial plan.

The Bottom Line

This 6-step financial planning process is not easy to do. But, if you have read to this point, you're taking the right step towards building wealth and achieving financial independence. If you still do not feel confident, you should consider seeking the advice of financial professionals to get started. Our recommendations are by no means absolute and are simply an outline for you to set yourself up. Ultimately, your financial journey is a marathon, not a sprint, so there are always more things to learn and add to your knowledge base.

We are not financial advisors. The content on this website and our YouTube videos are for educational purposes only and merely cite our own personal opinions. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know that all investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing. Always remember to make smart decisions and do your own research!

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