Building a financial plan is an essential step toward achieving financial stability and reaching your long-term goals. Whether you’re looking to save for retirement, buy a home or simply manage your day-to-day expenses more effectively, a well-thought-out financial plan can serve as your roadmap.
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Here’s a step-by-step guide to help you create a financial plan to help you build each paycheck and investment into a retirement plan you can count on.
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Step 1: Assess Your Current Financial Situation
Before you can plan for where you’ll be tomorrow, you need to get a grasp on where you stand today. Starting your financial plan can include taking inventory of some of the following pieces of your broader money picture.
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Income or passive income: List all sources of income, including your salary, side jobs, rental income, and any other streams.
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Necessary expenses and discretionary spending: Track your monthly expenses, including monthly rent, mortgage payments, utilities, groceries, transportation, insurance, entertainment, and other categories.
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Assets: List your assets, such as emergency savings, investments, retirement accounts, real estate or other personal property.
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Debts: Note down all your debts, including credit card balances, student loans, car loans and mortgages.
This general type of assessment will give you a clear picture of your net worth, which essentially is the difference between your assets and liabilities. Once you have this knowledge as a foundation, you are ready to start building from there.
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Step 2: Set Your Financial Goals — And Stick to Them
Once you understand your current situation, the next step is to set clear financial goals. While working toward achieving these goals mnemonic devices can help keep you on track. For example you can try to be SMART which stands for goals that are specific, measurable, achievable, relevant and time-bound. Some common financial goals include:
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Short-term financial goals: These goals include something you want to achieve in the next one to three years such as building an emergency fund, paying off credit card debt or saving for a vacation.
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Medium-term financial goals: These are goals that aren’t in the immediate future, but in the next three to five years seem more achievable through budgeting and saving. This type of goal can include buying a car, saving for a down payment on a house or funding a wedding.
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Long-term financial goals: Retirement savings, paying for higher education, purchasing a second home or even setting up an estate plan are considered long-term goals for which you’ll need several years to successfully complete..
Write down your goals and prioritize them based on their importance and timeframe. Now you will have not only the beginning stages of a budget but also a calendar to work within.
Step 3: Build Your Budget
A budget is the foundation of any financial plan. It helps you manage your money, ensure you’re living within your means and allocate funds toward your savings goals. One great system when you are first getting started is to break down your paycheck or monthly income into percentages.
For example, as many financial advisors recommend putting away at least 20% of your income toward savings a good system to try would be the 50/30/20 budgeting rule. This is the approximate breakdown of how that works per paycheck:
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50% is allocated to needs such as essential expenses for mortgage payments, monthly rent, utility bills and groceries.
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30% is allocated to wants or discretionary spending such as shopping, dining out, travel or entertainment.
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20% is allocated to savings whether that is in a high-yield deposit account or retirement funds.
Review your budget regularly and adjust it as your income or expenses change. This will keep your savings and cash flow on equal footing.
Step 4: Set Aside an Emergency Fund
An emergency savings is a crucial part of your financial plan, providing a safety net for unexpected expenses and cushion for any financial shocks, such as medical bills, job loss or car repairs. Money experts recommend to save at least three to six months’ worth of living expenses in a separate, easily accessible account. Start by setting aside a small amount each month, and gradually increase your contributions until you reach your goal.
Step 5: Manage Your Debt Wisely and Pay It Off Where You Can
If you have debt, managing it effectively is key to financial stability. Prioritize paying off high-interest debt, such as credit cards, before focusing on lower-interest loans like student loans or mortgages. Consider the following strategies:
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Debt Snowball Method: Focus on paying off the smallest debt first, then move on to the next smallest, gaining momentum as you go.
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Debt Avalanche Method: Pay off the debt with the highest interest rate first, then move on to the next highest, minimizing interest costs.
Paying off your debt may sound obvious but developing a strategy to do so can help you chip away at it faster. Choose the method that best suits your situation and stick to it.
Step 6: Retirement Plans, Savings and Investments
It’s never too early to start planning for retirement. Contribute to retirement accounts like a 401(k) or Roth IRA, and take advantage of any employer matching contributions. If you don’t maximize your employer-matched option, it’s essentially leaving money on the table.
Determine how much you need to save for retirement based on your desired lifestyle and expected expenses. Use retirement calculators to estimate how much you need to save each month to reach your goals. GOBankingrRates has done several studies to determine what this could look like for the average retiree or how much you will need in each state to retire comfortably.
Step 7: Invest for the Future
Investing is an essential component of wealth-building. Depending on your risk tolerance and goals, consider diversifying your investments across stocks, bonds, mutual funds and real estate. Investing, though more volatile, has much higher potential gains than that of standard saving account options.
If you’re new to investing, consider consulting a financial advisor or using robo-advisors to create a diversified portfolio. Regularly review your investments and adjust your strategy as needed to stay on track with your financial goals.
Step 8: Watch Your Assets
Insurance is an important part of not only your financial plan, but also of protecting your assets and your family in case of unexpected events. Consider the following types of insurance:
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Health Insurance: Covers medical expenses and protects against high healthcare costs.
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Life Insurance: Provides financial support to your dependents in case of your death.
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Disability Insurance: Replaces a portion of your income if you’re unable to work due to illness or injury.
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Homeowners/Renters Insurance: Protects your home and personal belongings.
Review your insurance coverage regularly and adjust as your life circumstances change. Spending a small percentage of earnings on preventative measures can keep you from spiraling into debit should the unexpected happen.
Step 9: Review Your Financial Plan Month-by-Month
Your financial plan should evolve as your life changes. Review your plan at least once a year, but a monthly evaluation can also help you gage where there is some more wiggle room for saving or cutting spending.
Whenever you experience a significant life event, such as marriage, the birth of a child, or a career change, be flexible with how you allocate your funds. Adjust your budget, savings, and investment strategies as needed to stay aligned with your goals.
Step 10: Seek Professional Advice
If you’re unsure where to start or need help navigating complex financial decisions, consider consulting a certified financial planner, tax specialist or investment advisor. A CFP can provide personalized advice, help you create a comprehensive financial plan, and guide you through the process of achieving your financial goals.
Final Take To GO
The bottom line is that creating better personal finances, whether it’s improving your credit score or setting up an estate plan, is a powerful step toward securing a future where you are well set up. By following these steps, you’ll be well on your way to managing your money effectively, reducing debt and achieving your long-term specific financial goals.
Remember, the key to success is consistency and adaptability, so regularly review and adjust your plan to ensure it continues to meet your needs as your life evolves.
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This article originally appeared on GOBankingRates.com: How To Create a Personal Financial Plan: Step-by-Step Instructions
