When it comes to our finances, the thought of balancing between our current needs and financial future can be overwhelming and intimidating, particularly when we start getting into budgeting, investing, financial forecasting, and planning for unexpected events. From buying groceries to paying rent to saving for retirement, it can become hard to figure out how to tackle bills every month while investing in our future.
Creating a solid financial plan can help take you step-by-step through everything you need to know to get your money in order. We will give you a framework to build a financial roadmap and achieve your investment goals in seven simple steps. If you have already started on a couple of these steps, that’s great! If not, that’s perfectly fine. Just start with one task at a time and keep moving forward. Let’s get started!
- A good financial plan provides a roadmap for an individual’s financial goals and creates a strategy to make them a reality.
- The sample plan below provides a 7-step financial planning process for beginners. But, a comprehensive plan should consider an individual’s personal circumstances.
- The financial plan should start with calculating an individual’s net worth and ends with a strategy to track progress.
What is a Financial Plan?
A financial plan provides a comprehensive overview of all your finances. It includes your current financial situation, financial goals, and strategies to help you visualize and reach those goals. There is no right or wrong way to the financial planning process, but good financial planning should include details about your net worth, cash flow, investments, debt, spending habits, etc.
The good news is that the financial planning process is not just for the wealthy anyone and everyone should create a roadmap for their financial future. You can make a financial plan yourself, get help from a financial advisor, or use online services like robo-advisors.
With financial planning, there are no set formats. It is an ongoing process meant to help you navigate your finances and reach your goals, whether that’s paying off student loans, buying a house, or securing a nest egg for retirement. Depending on your needs, your plan may focus on one specific element or address several goals you’d like to achieve over years or decades.
Understanding the Financial Plan
Regardless of whether you decide to create a financial plan yourself or seek help from a financial planner, try to develop healthy financial habits as soon as possible to set yourself up for success. Let’s look at a few steps you can take to take control of your personal financial situation.
1. Calculate Your Net Worth
First, you should figure out your current net worth to get a baseline for your plan. That includes:
- Your assets, including your house, cash in your checking and savings accounts, individual brokerage accounts, retirement accounts, gold, cryptocurrencies, art, etc.
- Your liabilities, including credit card debt, student loans, car loans, a mortgage, etc.
To calculate your net worth, subtract your total liabilities from your total assets. With this simple calculation, you can get a quick summary of your financial health. If your liabilities outweigh your assets, don’t get discouraged, as that is pretty common if you are just starting.
2. Budgeting and Cash Flow Planning
Your next step should be to understand your monthly cash flow. By figuring out what is coming in and going out every month, that can reveal ways to put more money into your savings and investments or pay down high-interest debt. The process will also help you identify more realistic financial goals as you develop your financial plan.
One way to do this is to use an app like Mint or Personal Capital. Once you link all your bank accounts, you can skim through your checking accounts and credit card statements to get a complete history of your spending habits. If your expenses vary drastically every month, it may be best to go through several months to a year’s worth of expenses and average out the costs in each category, such as groceries, rent, utilities, subscriptions, vacations, etc.
As you go through your expenses, document the costs in different categories and separate them between needs and wants. For example, rent or mortgage payments, groceries, and medical insurance are needs, while entertainment, dining out, and vacations are wants. If you have expensive hobbies, note that down. And, don’t forget to include cash withdrawals or Venmo payments, as those can add up over time.
Once you add up all the numbers for each month, it’s time to start thinking about how you want to spend your money by developing a budget. If you are a beginner, we recommend the 50/30/20 budget rule. You put down 50% of your income towards needs, 30% toward wants, and 20% toward savings, investing, and debt repayment. With this method, you can have a simple budget while ensuring enough room to save to reach your financial goals.
3. Set Financial Goals
You cannot make a financial plan without clearly defined goals. Whether you want to buy a house, pay down student debt, or set an early retirement age, make your financial goals intentional and inspirational. By laying out what you want to accomplish from the onset, you can provide a roadmap of what success looks like and how you can make your aims a reality.
One way to start setting goals is by organizing them into categories:
- Short-term goals are actionable and typically can get accomplished quickly. A few of my daily goals are to run, strength train, check on my investments, and blog. The benefit of setting short-term goals is that you can take action immediately, and you are in complete control.
- Medium-term goals usually take several years to accomplish. Examples include graduating from university, paying off a car loan, or saving for a home downpayment. With medium-term goals, we can regularly evaluate our progress and realign them with our long-term goals.
- Long-term goals generally take 10+ years to accomplish, making them difficult to measure on a year-to-year basis. Examples of long-term goals are saving for retirement or estate planning. However, the good news is that because of the timeframe we are working with, think of them as moving goals we can adjust as our circumstances change over time.
When setting financial goals, make sure to attach a specific dollar value and a target date to them. If you have multiple goals, you should prioritize them based on which ones are most important for you. The more specific your goals are, the easier it is to measure your progress and what success means.
You can also use online tools like spreadsheets, Mint, or Personal Capital to help you run the numbers and track your progress. I use a custom spreadsheet to track how close I am to various monetary milestones, such as reaching 100k and saving enough for retirement.
4. Build an Emergency Fund
You can plan as much as you want, but if you do not prepare for any curveballs that come your way, your plans can all topple in a blink of an eye. Under these situations, that’s when an emergency fund can be useful. For example, if you lose your job or your car breaks down, having money stashed on the side can help you avoid borrowing at high interest rates or dipping into your investments when the markets are down to make ends meet.
The consensus is to save enough to cover at least 3-6 months of your essential living expenses in a checking or savings account. That includes things like groceries, housing, and utilities. You can start small by saving $100, then $500, then a month’s living expenses, and so on. Currently, I put roughly 10% of my paychecks aside for emergencies and have saved up ~6-8 months of living expenses.
5. Manage Your Debt
Understanding and managing your debt will play a crucial role in your financial plan. While debt often gets thought of as bad news, not all debt is bad debt. For example, a mortgage can help boost your credit score and equity. Meanwhile, credit card balances you carry over month to month can negatively impact your credit score.
If you have any high-interest debt, make sure to tackle those as quickly as possible as the interest can snowball into two or three times your initial loan. Every dollar you pay towards your debt and the interest accrued is one dollar less towards your other financial goals. If you are struggling with credit card debt, consider using 0% APR credit cards or other cards with low interest rates. The goal here is to eliminate bad debt so you can free up your money towards building wealth.
6. Start Investing
If you are in a good enough financial position, it’s time to start thinking about investing your money and putting it to work. Think about your particular situation, including risk tolerance, time horizon, and financial literacy. Is your goal to grow your wealth aggressively or to maintain wealth conservatively? What types of investments are you comfortable with? What is your timeframe for your goals?
Investors have many options to choose from, including stocks, bonds, cryptocurrencies, commodities, real estate, art, etc., each with varying degrees of risk and returns. Passive investors looking to build wealth over time should consider investing in index funds like VOO or SPY. Active investors looking to grow their money as fast as possible should consider handpicking stocks or buying crypto.
Investing can be as simple or difficult as you make it. You can set aside 5-10% of your paychecks automatically into a company-sponsored 401(k) and pick 1-2 funds from the list of options, and that’s it. You can set up a Roth IRA and deposit a set amount of money each month into your retirement account in a broad market index fund like VTSAX or FZILX. Or, you can open multiple brokerage and exchange accounts and go crazy with day trading and scalping. Most platforms nowadays do not have investment minimums so you can start investing with as little as $20!
7. Track Your Progress
Now that you have a comprehensive plan in place, the last step is to track your progress and see if you are on track with your financial plans. This process can include cash flow projection, evaluating tax liabilities, adjusting your retirement age, analyzing past performance on investments, etc.
If you are not on track, find areas where you can improve. For example, if you are consistently overspending, reevaluate your budget and identify categories where you can cut back or seek ways to increase your income. If you want to start a new business or company, but cannot seem to save enough money, consider putting money aside first before spending any of your paychecks.
The Bottom Line
This sample plan is for informational purposes. In other words, feel free to make financial decisions based on your circumstances and adjust things as needed. Remember, everyone’s finances are different, so use this plan as guidance to get on a path of healthy financial habits. With patience and time, you can slowly but surely build the financial life you want.