What Is the First Step in Financial Planning? Start Your Personal Financial Plan Today

Many people know they need a personal financial plan, but they don’t know where to start. Let the experts guide you step by step.

Whether you’re far along in your career or wondering how to manage your first salary, you need a personal financial plan.

“Money is a resource, and we are stewards of it,” says Wilson Muscadin, financial coach and founder of The Money Speakeasy, a personal finance blog. A financial plan, he says, allows you to be thoughtful and proactive about how you use that resource.

Creating a financial plan on your own can seem overwhelming, but like any big project, breaking it down into smaller parts makes it easier to tackle.

So, what is the first step in financial planning? Before we introduce you to the first step of creating a financial plan, let’s explore what a personal financial plan is. Then we’ll explore the remaining four steps to follow as you solidify your plan.

What is personal financial planning?

A personal financial plan is a written overview of your financial situation, combined with strategies to achieve short-, medium- and long-term financial goals in the future, Muscadin says.

“It’s figuring out where your money is, where it goes and where you want it to go,” says Sophia Bera, CFP®, founder of Gen Y Planning.

The process of creating a personal financial plan can be broken down into a series of steps. Let’s start with the first step of the financial planning process.

Step 1: Take an inventory of your finances

What is the first step in financial planning? It’s a fact-finding mission as you take an inventory of your finances.

Begin creating your personal financial plan by taking an inventory of your finances.

While that can feel intimidating, there are ways of organizing your financial inventory that will make the next steps in financial planning easier, the experts say. To get started, take out some paper or open a document and list out your:

  • Major assets, such as an estimate of the equity in your home, car, checking accounts, savings accounts, retirement accounts, and investment accounts
  • Recurring income from your job and any side hustles you do as ways to make money on the side
  • Debts, such as your mortgage, auto loans, personal loans, student loans, credit card debt, and medical debt
  • Recurring expenses, such as your utilities, rent, phone bill, subscription services, and any other recurring costs

Finding this information can take some digging, Bera says, but it will make your calculations easier in the following steps. You’ll likely need to log in to your various bank accounts, check your latest pay stubs, and review emails and paperwork as you work through each category.

However you decide to gather the information, being detail-oriented at the beginning can pay dividends over time.

“You don’t have to become a spreadsheet nerd,” Muscadin says. “But if you’re trying to get a handle on these things, spend more time upfront.”

As you conduct your financial inventory, Bola Sokunbi, who is an author and the founder and CEO of Clever Girl Finance, recommends documenting where you found each piece of information alongside the amounts. Don’t include sensitive information like usernames or passwords, but you can include bank names or URLs to accounts. That way, Sokunbi says, you can more easily reference and update your financial plan in the future.

Once your financial inventory is complete, Bera says you’ll likely see some things pop out right away that you can “simplify, streamline and automate.”

These housekeeping tasks—such as rolling over old 401(k)s into an IRA, automating payments, or taking care of small, lingering debts—will help you organize your finances. Bera recommends doing what you can before moving on because it will help you focus on the big picture as you progress through the next steps in financial planning.

Step 2: Create a net worth statement

Bera calls the net worth statement the foundation of financial planning because it gives you a concrete number to build from.

Figuring out your net worth boils down to a simple equation: Add up what you own (your assets) and subtract what you owe (your debts). A net worth calculator can help walk you through it, and because you already have these numbers handy (thanks to the first step in creating a personal financial plan), it should be a breeze.

It can be a little nerve-rattling to boil your financial situation down to one figure, but the experts agree that the number itself isn’t the point.

“When looking at your net worth, the trajectory from month to month is much more important than the absolute number,” Muscadin says.

Your trajectory won’t be clear to you yet, but it will reveal itself as you move through the steps in financial planning.

“Your financial plan is there to help when you have decisions to make. It’s all about giving yourself peace of mind about your finances and knowing that you have a plan for your future self.”

Bola Sokunbi, author and founder/CEO, Clever Girl Finance

Step 3: Get a handle on your cashflow

Your cashflow is the money that flows in and out of your accounts over a given period of time. To understand your cashflow situation, you’ll need to look at your recurring income and expenses (which you already calculated in the first step of the financial planning process). In this step, you’ll also need to factor in your discretionary expenses—what you spend on things like food, entertainment, and clothes.

Most of these types of purchases are made with debit cards, credit cards, and cash. So, to see what your discretionary spending amounts to month over month, you’ll want to consult your debit and credit statements.

Once you subtract the money you’re spending on recurring fixed expenses and discretionary expenses from your total monthly income, you’ll see if you’re cashflow positive or cashflow negative. If you have money left over after all your expenses, you’re cashflow positive. If you’re spending more than you’re bringing in, then you’re cashflow negative.

If you’re cashflow negative each month, then Muscadin suggests it’s time to implement a budget. (He prefers the term “cashflow management plan.”) But even if you’re cashflow positive, there’s likely still room for improvement.

Take a close look at where your money is going and reflect on what you can change to come out more cashflow positive each month. Living frugally doesn’t have to cramp your style, Muscadin says, if you’re strategic and intentional about the way you spend. Maybe you’re paying for a subscription you don’t use anymore. Or perhaps you could eat healthier and save money by cooking more meals at home.

As you make adjustments and start generating more extra cash each month, you’ll need to decide what to do with it. To do that, you’ll need a clear sense of your financial goals.

Step 4: Set your financial goals

Muscadin likens setting your financial goals to determining your North Star.

“Ultimately, money is not the goal,” he says. “Saving more, investing more, all that is nice, but to what end?”

Wondering how to set financial goals? To define your goals and why they matter to you, Muscadin offers a simple exercise to help.

Ask yourself: “What is my biggest financial goal?” Write down your answer. Then ask yourself why that goal is so important to you. Write that down, too, and keep asking yourself that question until you’re crystal clear about the underlying motivation behind the goal.

Muscadin says that this exercise not only helps you define your goals, but it also makes it easier to stick to your financial plan. “When the shiny, new object comes along, you can ask yourself, ‘Does this take me in the direction of my deepest ‘why’?’”

It’s not enough to have goals, however. You need an action plan to achieve them.

Step 5: Make a plan to achieve your goals

“Planning is how you meet goals,” Sokunbi says. “It’s how you build wealth. It’s how you weather a life crisis.”

She emphasizes that while it’s important, it doesn’t have to be complicated. The work you did in the first steps of the financial planning process should reveal many of the actions you need to take to reach your goals. (Working with a certified financial advisor is recommended when creating a financial plan.) 

When creating a financial plan, put together a budget to build savings and increase your 401(k) contributions.

Sokunbi offers these examples of action items that can go into your personal financial plan:

  • Create a budget to generate more savings
  • Schedule percentage increases to your 401(k) contributions
  • Contribute to a Roth IRA or Traditional IRA to maximize your retirement savings and tax benefits
  • Speak to a licensed insurance agent to review your insurance policies and ensure adequate coverage
  • Find opportunities to increase your income
  • Work with an expert to create a will and estate plan

And if you identified any ways to streamline your finances in the first step but tabled them for later, add those to your list, too.

“Your financial plan is there to help when you have decisions to make,” Sokunbi says. “It’s all about giving yourself peace of mind about your finances and knowing that you have a plan for your future self.”

Make time to regularly revisit your personal financial plan

The personal finance experts agree that for your financial plan to be effective, you need to carve out time to review it. That’s because as life changes, your goals will change, too, Sokunbi says.

“Life really sneaks up on people, especially in their 30s,” Bera adds. “All of a sudden, things are more complicated—you’ve got a house, a kid and you’ve changed jobs.”

Bera notes that monthly check-ins can work for some people, but not everyone will see significant progress on a month-to-month basis. If that’s the case for you, schedule a meeting with yourself once a quarter to keep your personal financial plan on track.

So, what is the first step in financial planning? It’s taking an inventory of your finances—but you shouldn’t stop there. Try using this financial checklist for your quarterly reviews as you go through all the steps in financial planning and make progress toward your financial goals.

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