Mar 09, 2023

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As the saying goes, if you fail to plan, you are planning to fail.

This is as true for personal finance as it is for any other goal. You can’t prepare for your financial future if you don’t have a plan. A personal financial plan serves as this roadmap. It’s a living, breathing picture of where your finances are today—and how you will reach your goals tomorrow.

Creating a solid financial plan involves a lot of moving parts, and it is often hard to get started. That’s why we’ve created a step-by-step personal finance guide to help you begin the process.

Step 1: Dream big and set measurable goals
Step 2: Understand your current finances
Step 3: Make room for financial emergencies in your plan
Step 4: Say goodbye to debt
Step 5: Protect your financial future
Step 6: Track, adjust, and revisit your personal financial plan

Step 1: Dream big and set measurable 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 will help you focus on the big picture when you have to make tough decisions and give you the motivation you need to keep going.

But a vision isn’t enough. You also need tactics. This is where well-defined goals come in. Concrete financial goals along the way will anchor your personal financial plan. A good rule of thumb is to create S.M.A.R.T. goals. This stands for “Specific, Measurable, Achievable, Relevant, and Time-Bound.”

So how do you make a goal “SMART”? By knowing exactly what you want to accomplish, when you will accomplish it, and why it’s important to you. It’s also a good idea to set goals based on what you want to achieve in the short term and long term.

A short-term goal might be to save enough for a 20% down payment on a home in the next few years. It also could be saving $250 a month for a dream family vacation you want to take in two years.

A long-term financial goal might be to contribute the maximum allowed amount to your retirement accounts or 401(k) every year (especially if you get an employer match) with the idea of retiring by age 60. You also could set a long-term goal to pay off your mortgage in less than 30 years. This might mean you will pay one extra mortgage payment every year.

Decide what matters most to you and create specific financial goals that match these priorities. Then write everything down in your financial plan. You can create this plan on your own or get help from a financial professional to make sure you capture everything.

Either way, it is helpful to have a written plan to look back on so you can gauge your progress.

Step 2: Understand your current finances

Once you visualize your ideal financial future, the next step is to look at your current finances.  This exercise will allow you to compare where you are now to where you want to be, so you can see what you need to do to achieve your goals.

And if the gap seems huge, try not to get discouraged. That just means you need to break up your goals into smaller, achievable steps.

“To develop your financial plans for the future, you must first understand your current situation. This means gathering pertinent financial documents, including paystubs, account statements, employee plan benefits, insurance policies, estate documents, Social Security statements, and tax returns,” said Jay Abolofia, Ph.D. economist, Certified Financial Planner™ professional and founder of Lyon Financial Planning in Boston.

These documents will help you determine your current income and expenses. You likely have fixed expenses like rent or a mortgage and variable expenses like utilities and groceries. You also might have discretionary expenses like a gym membership, video streaming subscriptions, and dining out. Add everything together to see how much money goes out every month and how much comes in.

Once you have an accurate picture of your finances, you can move on to the next step of your financial plan and build an emergency fund.

Step 3: Make room for financial emergencies in your plan

An emergency fund is a critical part of an effective personal financial plan. According to a recent report from the Federal Reserve, nearly one-third of adults don’t have enough cash to cover a $400 emergency.1 The report also found 22% of adults are either just getting by or find it difficult to get by financially.

These figures show just how important it is to plan for the unexpected. An emergency fund can help you weather financial storms. Consider saving 3-6 months of expenses to start. Then you can work your way up to a full year. But even a small emergency fund of $1,000 can provide some financial cushion. Do your best to save, with a goal of ramping up savings as you can.

You can start small to build your emergency fund. Think about setting aside $25, $50, or $100 a month in a high-yield savings account. You can even automate the process to make saving easier.

Step 4: Say goodbye to debt

Good personal financial management also involves an effective debt management plan. After all, you can’t save for your future without handling your current financial obligations.

Once you know your income and expenses, you can see what is left over to pay down debt. It is often best to tackle higher-interest rate debt first. This is where a personal loan can help. You might be able to consolidate existing debt into a personal loan at a lower interest rate. 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. Lower interest and more time to pay off debt could reduce your monthly payment and give you more financial flexibility.

Step 5: Protect your financial future

Your personal financial plan should also include how you will protect yourself and your family for the future.

It’s not fun to think about making a will, but it can outline your wishes for your loved ones. A financial advisor or estate planning attorney can offer valuable advice as you tackle this part of your financial planning.

Life insurance can also provide a welcome cushion if the unexpected happens. Term life insurance expires after a set period that typically ranges from five to 30 years. It can replace lost income in case of your death. It is generally more affordable than other policies, so consider including it in your financial plan. Be sure to consult with an insurance professional to determine your needs and talk about how to fit it into your budget.

Step 6: Track, adjust, and revisit your personal financial plan

Once you create your financial plan, don’t just set it and forget it. You likely will need to make changes along the way.

“In reality, your financial plan is obsolete the minute you finish putting it together. Life is just too unpredictable,” said Abolofia. “What’s most important is ultimately the process of planning itself.”

He added that it’s best to regularly revisit your financial plan and expectations for the future. For example, you may decide to delay buying a home or push back your retirement date. Whatever the case, your financial plan should make room for these shifts.

“For most people, it’s important to review their plan when a major life event occurs or if your financial goals change materially around work, family, health or housing,” added Abolofia. “Otherwise, planning to revisit the plan every few years is good financial hygiene.”

Creating a personal financial plan takes time and effort, but this upfront work will pay off in the form of peace of mind, greater financial security, and the ultimate satisfaction of accomplishing your goals.

Every dream requires a bit of work to make it reality, and achieving your financial dreams is no different. Just remember that what you do today will pave the way for a bright future tomorrow. Keeping this in mind will make your investments—of time, effort, and money—well worth it.

Want more tools for effective financial planning?

Read About Budgeting Wisely

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