6 Steps for Planning Personal Finances | Discover Personal Loans

Creating a solid financial plan can be a complex task, and it's often hard to get started. That’s why we suggest following these 6 steps of financial planning to help you with the process.

Assess your current financial situation
Set clear financial goals
Choose a budgeting method
Develop your personal financial plan
Put your financial plan into action
Monitor, review, and adjust your personal financial plan

Step 1: Assess your current financial situation

Before setting goals or drafting a budget, you need a clear picture of where you stand financially. This step involves gathering and evaluating key pieces of financial information:

Income: Review your monthly take-home pay after taxes and any additional income sources.
Expenses: List your fixed (mortgage/rent, utilities) and variable expenses (food, entertainment, subscriptions).
Assets: Add the value of your savings, investments, property, and retirement accounts.
Liabilities: See how much debt you have: credit cards, student loans, mortgages, car loans, etc.
Net worth: A snapshot of your financial health calculated by looking at your assets minus your liabilities.

Assessing your current financial situation helps you identify strengths and weaknesses—such as high-interest debt or insufficient savings. Your current net worth is the starting point on the road to your financial goals.

Step 2: Set clear financial goals

Start by creating a vision for your financial future. What do you want your life to look like in five, 10, or 20 years? This vision might help you focus on the big picture when making tough decisions and may provide the motivation you need to keep going.

Establish clear objectives

Vision isn’t enough, however. You also need tactics to bring that vision to life. By following specific steps, you could work to realize your financial dreams. This is where well-defined goals come in. Concrete financial goals should form the basis of your personal financial plan. Make sure your goals are S.M.A.R.T.—this stands for “Specific, Measurable, Achievable, Relevant, and Time-bound.”

Pick targets to hit in the near future—and down the road

What makes a goal S.M.A.R.T.? It’s when you know exactly what you want to achieve, when you will achieve it, and why it’s important to you. It may be a good idea to divide goals between short term and long term.

For example, a short-term goal might be to save enough for a 20% down payment on a home within the next three years. Another example is to save $250 a month for a dream family vacation in two years.

A long-term goal might be to grow your retirement accounts or 401(k) each year (especially if you get an employer match), with the idea of retiring by age 65. You could also set a goal to pay off your mortgage early (which might mean making one extra mortgage payment each year).

Put your priorities down on paper

By deciding what matters most, you can create specific financial goals that match these priorities. Be sure to write it all down in your financial plan. You may create this plan on your own or seek help from a financial advisor to make sure you capture everything.

Either way, it’s helpful to have a written plan to help you gauge your progress.

Step 3: Choose a budgeting method

A budget serves as the foundation of your financial plan. It outlines exactly where your money goes each month and ensures your spending aligns with your goals. There are many ways to make a budget, and it’s important to choose the right one for your financial plans.

Key components of an effective budget:

Income: Confirm how much you consistently bring in each month.
Expenses: Categorize your spending into essential (needs) and discretionary (wants).
Savings and debt payments: Treat these as non-negotiable expenses.
Spending limits: Set realistic caps for categories like food, transportation, and dining out.

Common budgeting methods:

50/30/20 rule: 50% needs, 30% wants, 20% savings/debt.
Zero-based budgeting: Every dollar is assigned a job.
Envelope method: Allocate cash into envelopes for spending categories.

Step 4: Develop your personal financial plan

Your plan will be customized to your unique financial situation, fitting your goals, lifestyle, and preferences. Here are some common components of financial planning:

Manage and reduce debt

Good personal financial management also means having a debt-management plan. After all, you can’t save for your future without handling your current financial obligations. After you know your income and expenses, see what is left over to pay down debt. It is often best to deal with higher-interest debt first.

This is where a personal loan for debt consolidation may help. A personal loan can help you pay off debt sooner and save money on interest when consolidating higher-rate debt. In fact, 93% of surveyed debt consolidators said they saved money and time by taking out a Discover® personal loan.*

Many personal loans offer a range of repayment terms (the number of months you will have to pay off the loan). Typically, the longer the period of time you choose, the lower your monthly payment may be, which could give you some financial flexibility.

A fixed repayment term with a fixed rate will also give you one set regular monthly payment, which may make budgeting your money easier. With a Discover® personal loan, for example, if you get approved for a $15,000 loan at 11.99% APR for a term of 72 months, you'll pay just $293 per month.

Set a savings plan

Keeping savings like an emergency fund is a critical part of an effective personal financial plan. Financial advisors often suggest that you have a cash reserve equal to three to six months' worth of expenses in your emergency fund.

Do your best to save, with a goal of ramping up savings as you’re able. It’s okay to start small when building your emergency fund. Think about setting aside $25, $50, or $100 each month in a high-yield savings account. Automating the process may help make saving easier. Even a small emergency fund of $1,000 may help ease your mind now and your financial situation later.

Invest in the future

Your personal financial plan should include future planning for yourself and your family.

Choose your investment approach

If your budget allows you to put some money aside each month to work for you, there are a variety of investment options available. Retirement accounts like a 401(k) and IRA allow you to invest money pre-tax to build for your golden years. Other long-term investment options may have higher risk but potentially greater earnings. Consult with an investment planner to learn more.

Consider budgeting for life insurance

Life insurance may provide a valuable cushion if the unexpected happens. Term life insurance expires after a set period that generally ranges from five to 30 years. It may replace lost income in case of your death. It is generally more affordable than other policies, such as whole life insurance, which may build value over time and is permanent. There are also other types of life insurance, so be sure to consult with an insurance professional. This might help you understand what coverage you need and how it may fit your budget.

Prepare a last will and testament

It’s not fun to think about making a will, but it’s important to outline your wishes to your loved ones. By leaving a will, you can help guide your family on how to distribute your estate and make the process run more smoothly. A financial advisor or estate planning attorney may be able to offer valuable advice as you tackle this part of your financial planning.

Step 5: Put your financial plan into action

You've reviewed your finances, decided your goals, created your budget, and set your plan. Now it’s time to take consistent, realistic actions that build momentum over time.

Practical steps to implement your financial plan:

Automate: Set up automatic payroll contributions, transfers to savings, and debt payments.
Adjust spending habits: Use your budget to make informed choices about how you spend your money and whether it could go toward another goal.
Open goal-oriented accounts: Consider high-yield savings accounts, retirement accounts, and debt consolidation options.
Seek help if needed: Financial planners, debt counselors, or tax professionals can offer valuable guidance.

Making clear decisions about where you want your money to go and automating processes can help you stick to the plan.

Step 6: Monitor, review, and adjust your personal financial plan

Once you create your financial plan, don’t assume it is set in stone. Your needs and goals evolve, and your plan should too.

Some questions to ask when you review your financial plan:

Are you meeting your savings goals?
Have your expenses changed?
Are your investments performing as expected?
Has your income increased or decreased?
Have you reviewed and adjusted your budget to account for any changes?
Do major life changes—like marriage, relocation, or a new job—require adjustments?

For example, you may decide to delay buying a home or push back the date of your retirement. Whatever the change, you should adjust your financial plan to make room for these shifts.

Creating a personal financial plan now may pay off in the long run

Creating a personal financial plan takes time and effort. The upfront work, however, could pay off in peace of mind, greater financial security, and the ultimate satisfaction of achieving your goals. Keeping this in mind will help make your investments of time, effort, and money well worth it.

Want more tools for effective financial planning?

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