how to write a personal financial plan
Retirement Planning

How to Write a Personal Financial Plan

When it comes to navigating your personal finances, the right plan can really set you up for success. Knowing exactly what that strategy should entail, though — and how exactly to start creating said plan — can be a bit overwhelming. 

Today, let’s talk about what a personal financial plan does, how to go about building one, and what it can do to transform your finances in the years to come.

Why you need a plan

If you were to walk into any typical college classroom today, you’d come across a lot of young people with money-related “plans.” 

Some of them probably have their sights set on becoming a rich doctor or lawyer, while others intend to have a boat and a Ferrari by 30. Some are already eyeing an early retirement and others expect to be pretty comfortable throughout adulthood.

On the flip side, you probably won’t find many young people who plan to spend the next 20 years paying off their student loan debt, sacrificing things like retirement savings or home ownership as a result. And you’re unlikely to find anyone who plans to keep working until they’re 75, because they simply can’t afford to retire. 

The truth is, though, that some of them will wind up doing exactly that.

Of course, you and I both know that many of those plans aren’t really plans at all. They are dreams and hopes and wishes… but successful financial planning requires so much more. If you want a chance at reaching all of your financial goals, both in the short- and long-term, you need to create an action plan.

Below are eight steps to creating a personal financial plan that has a chance at success. Each one of these steps takes into account your hopes and dreams, but it also turns those into actionable stepping stones to help you get there.

So, let’s get started.

Step 1: Determine your goals

When trying to create a financial plan for yourself, your very first step is to determine where you even want to go. What does your future look like and which goals are most important to you?

Future financial goals can be both short-term and long-term in nature. You may have retirement goals that stretch out decades and require a patient, consistent approach. You may also have saving goals that are only a year or two down the line, such as aggressively saving for a new car or building an emergency fund. Debt reduction is another common goal, as is building up your credit score and increasing your net worth. 

Not all financial goals have a monetary value attached to them, either. One of your biggest goals may be to finally create a household spending plan that you and your family can stick to, for example.

Look at your current money situation and evaluate where you are today, compared to where you want to be down the line. Look at your current assets — property, cash and cash equivalents, assets held in an investment portfolio — in order to start setting some realistic goals for yourself.

Step 2: Set a budget

Without a roadmap, the chance of actually meeting any of your money goals is… well, pretty slim. Sure, you might get lucky. Chances are much higher, though, that life will simply get in the way and common money habits will throw you off-track. 

To avoid this, it’s important to create a solid budget that you and the rest of your household can follow. 

There are a few different ways to build a budget, such as the zero-sum method or the 50/20/30 approach. However you choose to create your personal strategy, it should account for things like:

  • Your current expenses (necessary household costs include your rent or mortgage, utilities, grocery bills, gas, car payments, minimum payments on debt balances, insurance, and the like)
  • Existing debt (monthly credit card payments, student loans, etc.)
  • Savings goals (everything from an upcoming family vacation to retirement)

Take your spending habits into account here. If you have a tendency to overspend on groceries each month, budgeting with the envelope method can help you stay on track. If you struggle to save because you spend everything by the end of the month, schedule an automatic transfer into savings on the same day that your paycheck hits your account.

A budget can be a great way to rein in frivolous spending and reduce monthly expenses. You may want to set money aside for a little fun each month, though, (regardless of your financial situation) so you don’t get burnt out. 

Also remember that financial planning isn’t a static process. You can — and should — revisit your budget over time and make adjustments as needed, such as when your income increases, you have kids, or as you pay down debt. 

Step 3: Create an emergency fund

A recent survey from Bankrate.com found that only 39% of Americans could manage an unexpected $1,000 expense with savings alone. Instead, the majority of households would need to go into debt in order to cover the expense, whether it’s for a sudden car repair or the dentist’s bill for a chipped tooth.

That’s why adequate emergency funds are an integral part of any personal financial plan. 

Creating an emergency fund may seem daunting, especially if you’re already allocating most of your income toward household expenses, retirement accounts, and/or getting out of debt. By making this a priority for just a few months, though, you can stash enough savings away to have a secure, just-in-case cushion.

Start with an immediate goal of putting $500 in an emergency fund; then, work your way up to $1,000 as soon as possible. Once you have that tucked away, continue contributing to your emergency fund as often as you can, ideally building up three to six months’ worth of expenses. 

This might seem like a lot, but that money could protect your family from an unexpected disaster, or keep you afloat for a few months if you were to, say, lose your job.

You should keep your emergency fund in a high-yield savings account, money market account (MMA), or even a certificate of deposit (CD). That way, your emergency savings can earn interest while also being readily accessible if and when a situation arises.

Step 4: Tackle your debt

When it comes to carrying around debt, there’s one rule of thumb that applies to pretty much everyone: get out of it.

One of your primary financial goals should be to eliminate as much of your debt as possible, especially if you are walking around with high-interest balances. Depending on your debt situation and budget, there are a number of different ways to address this in your financial plan.

Debt is a bad thing for two reasons: it costs you extra money. and your debt repayments eat up your monthly cash flow. This leaves less available funds that you could otherwise earmark for savings or other money goals. 

Interest rates on credit cards are easily one of the biggest reasons to get out of debt as soon as possible. Credit card debt can easily cost you hundreds (if not thousands) of dollars a year in finance charges, in addition to impacting your credit score. There are many different approaches to tackling this debt, including balance transfers, personal loans, debt consolidation, and either the debt snowball or debt avalanche methods, depending on your situation.

Some balances aren’t as much of a priority as high-interest debt, though. For instance, home loans are a necessary part of buying a home for many people, but often have very low interest rates. And if you can get an auto loan for 1% to 3% APR (or better yet, snag a 0% APR offer), this balance may not be as pressing.

Evaluate the debt you are carrying and which balances are most important to tackle first. Getting out of debt is an important step toward freeing up your cash flow, building your net worth, and securing the health of your financial future.

Step 5: Start saving for retirement

Whether you are 25 or 52, retirement will one day be at your doorstep. And if you haven’t adequately prepared with a solid retirement plan, those years might be a very uncomfortable ride for your future self.

Make planning and saving for retirement a primary step in your financial planning process. This includes looking at your current expenses to determine how much you may need in retirement, as well as considering how certain assets — like rental property or an investment portfolio — will contribute to those goals.

Contributing to workplace retirement plans, like a 401(k) or IRA, is a great place to start. These can be convenient, allowing you to automatically divert a percentage of your income each pay period, and even provide certain tax advantages. Plus, if you are offered an employer match, that’s “free” money that you don’t have to save out of your own pocket, but still goes toward your retirement goals.

Also note that as you near retirement, your targets will likely change according to your household expenses and certain assets. So this step will need to be revisited on occasion.

Step 6: Protect your loved ones

Creating a personal financial plan is one way of securing your financial future, as well as supporting your (and your family’s) goals. Even the best laid plans can be interrupted by life, though, which is why it’s imperative that you also protect your loved ones in other ways.

Buying insurance is probably the most popular — and effective — way of offering financial protection to those who are important to you. If you pass away, life insurance proceeds can replace your income for a specific number of years, pay off the mortgage on the family home, and even protect certain assets. Disability insurance offers peace of mind to your family if you were suddenly unable to earn your usual income, due to an injury or illness.

You probably need to consider buying insurance if you:

  • Have someone who relies on your income (a spouse, children, parents, etc.)
  • Are still paying off student loans that someone else co-signed for (such as Parent PLUS loans)
  • Have shared liabilities with someone else (like a home mortgage or credit card debts)
  • Want to provide for certain life events (such as covering your kids’ college tuition, paying for their wedding, or providing a down payment for their first home)
  • Need to protect assets within your estate

How much life and/or disability insurance you need depends on your income, health, current savings, and existing assets. You may only want to buy a term life insurance policy that covers you for a certain number of years — until your children reach adulthood, for example — or you may want a permanent policy that protects you (and your loved ones) for life. You may also choose to buy life insurance that also includes disability coverage through a rider, for example, if you want complete protection with just one product.

Be sure to keep insurance policy information and other estate planning documents in a filing system of some kind, where they can be found in the event of your injury or death. Tell the trusted people in your life (like your significant other, a best friend, or a parent) where these policy documents are and what’s covered. 

Step 7: Save for life

We talked about setting aside money for emergencies as well as building your retirement fund for the distant future. But what about all of your other goals between now and then?

Once you have a debt payment plan in place and institute a solid budget, you can begin tucking cash away for your shorter-term goals. This might include things like the down payment on a new home, college tuition for your kids, a big family vacation, money for a new family car in the coming years, or other future life plans. 

Anything that you’d consider a notable expense can fall into this category, especially if you think it’ll take you a few years to reach your goal.

Money for these big, but shorter-term, goals can be set aside in various interest-bearing savings accounts or even invested, depending on your risk tolerance and when you plan to use the money. Your family’s unique financial plan and goals will determine how much you need to save and where, of course, so talk to your loved ones about your personal financial goals, and where you each hope life will take you in the next five to 10 years.

Step 8: Invest and grow your net worth

One of the best ways to grow your net worth and amplify your financial efforts is through investments.

Investing provides you with a way of building assets and growing wealth, as opposed to simply tucking away a portion of your earnings each month. While investing does come with a certain level of risk, it can be the key to creating the financial future you want most.

There are many different forms of investing to choose from, depending on your goals and what you’re comfortable with. For example, you could save money in a brokerage account, opting for safer investment vehicles such as mutual funds. Or you could amplify your returns by taking on a bit more risk, such as investing in real estate or trying to time the stock market.

Ideally, your investment assets should be diversified: don’t put all of your eggs in one basket! However you choose to approach it, though, investing should be part of both your estate planning and personal finance plans.

How to write a personal financial plan that actually works

If you’ve never had a personal financial plan — or followed any form of financial planning — creating a new strategy can feel daunting. It can be easy to jump in headfirst, too, taking on too many changes at once and setting yourself up for failure.

So, how do you create a financial plan that sticks, and actually works?

The first step is to identify your weaknesses, and then work around them. Maybe you have poor spending habits; if that’s the case, create small financial goals and strategies that are manageable and set you up for success. 

One of the steps toward a successful plan is to build a bit of wiggle room into your finances. While you can probably bear an all-work-and-no-play approach for a few months, you could set yourself up for burnout in the long term. Be sure to account for things like date night or the occasional vacation, no matter how tight your plan may be.

You’ll also want to revisit your plan and make changes over time, as life changes and your future goals shift. 

Have your assets and/ or budget shifted? Then you may want to adjust your life insurance policy. Perhaps you need a greater cash flow to accommodate new expenses. Sit down and find ways to pull money from another area of your budget. Or maybe you got married, had kids, or started a small business, and need an entirely different financial plan altogether.

Creating a financial plan is really just the first step toward your future finances. You should plan to monitor your progress, track your net worth, watch your assets, and reevaluate your finances regularly as time goes on.

Lastly, don’t be afraid to call a professional if you need one. A good financial planner can be invaluable when it comes to helping you create a financial plan that works. Depending on the financial planner you choose, they may be able to guide you in creating a long-term estate plan as well as offer advice in terms of tax planning and other future liabilities.

Bottom line

Personal finances are just that: personal. The financial plan that works for me and my family probably isn’t the one that would work for you and yours. There is no set framework here.

That’s why it’s so important to spend the time plotting out your goals and creating a personal financial plan that sets you up for decades of success.

A good financial strategy involves many steps, helping you plan for money goals that are five months down the road as well as those that are fifty years in the future. Your plan may center around strategies for getting you out of debt, supporting your retirement, or building up your net worth. 

And in a few years, the whole plan could need to shift.

The most important part about financial planning is to simply spend the time creating a plan in the first place. Even if the plan is unpolished, even if it changes dramatically a couple of years down the line, and even if you adjust your goals as you go, writing a personal financial plan gives you and your family a foundation to build upon for the future.

In the end, even an imperfect plan is better than having no plan at all!