What is a Financial Plan and How do You Start One?

Everyone’s personal situation is unique, therefore our financial plans will look a bit different. In general, though, there are five main steps that a well-designed financial plan should follow.

Step #1: Determine your financial goals

The first thing you should ask yourself when putting together a financial plan is what you want your money to accomplish. What are your short and long-term needs? Where do you want to be in five to 10 years? How do you imagine your life in retirement? Identifying and prioritizing your goals will act as a motivator as you plan out your financial future.

When you’re setting goals for your finances, there are a few rules to follow. For example, it helps to make sure your goals are S.M.A.R.T. 

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

The idea is that when you’re setting financial goals, or any other kind of goal, you have a specific target you’re working toward that’s measurable. From there, you can reasonably achieve your goals within a set time frame. Look at your financial future as a whole when outlining these goals. All of your finances are connected, so don’t just focus on one aspect. For example, when it comes to family planning, you may want to think about not only starting a college savings fund, but also putting a down payment on a house.

Step #2: Calculate your current financial situation

In order to get where you want to go, it’s important to know where you are—consider your net worth (how much you have in assets minus your total liabilities) and your cash flow. Analyzing all of this information provides a more accurate understanding of your current financial standing.

To calculate your net worth, list all of the following:

• Your assets: This may include a home and a car, some cash in the bank, money invested in a 401(k) plan, and anything else you own of value.
• Your liabilities: These may include credit card debt, student loans, an outstanding mortgage, and a car loan.

🤓 Here’s how to calculate your net worth

Your assets − your liabilities = your net worth

• Your income: This will include your paycheck and any investments and money you have coming in, month-to-month.
• Your expenses: Document how much you’ve paid over a year in basic life expenses (i.e., rent or mortgage payments, utilities, credit cards,etc.) and document your day-to-day spending on things like food, clothing, and transportation, as well as any extra expenditures on things like travel, entertainment, and dining out. Add up all these numbers for a year and then divide by 12, to get an average monthly estimate of your spending.

Step #3: Create a comprehensive financial plan

With your financial standing and goals defined, you can start developing the actionable steps of your financial plan. Whether you need to reduce spending and debt, up your savings, or just refine the details, creating a comprehensive financial plan will set you up for future success.

Most likely, your financial plan will include saving money for retirement, an emergency fund or a big purchase. Investing will also likely play a prominent role in your financial plan, as will building up your credit. If your credit score isn’t where it should be, part of your plan should be to focus on paying credit card bills and student loans on time and utilizing other methods for building up credit. Debt consolidation may also be a big focus of your financial plan. How exactly you go about it — if you get a consolidation loan or not, if you increase your monthly payment or leave it unchanged, etc. — will be dependent on your situation.

Step #4: Put your plan into action

Now that you’ve mapped out your financial plan, it’s time to take the necessary action steps and commit to moving forward. Changes to your financial lifestyle do not have to be drastic and happen all at once, in fact it’ll probably be easier and more sustainable to start off small. For example, instead of saving half your paycheck at once, start saving in small increments. The timeline of your financial plan can stretch for years, so there may not be any immediate results. But stick to the steps outlined in your plan and you will reach those milestones in no time.

Step #5: Adjust accordingly

It’s important to follow the steps you set in your financial plan. However, it’s just as important to recognize that unexpected things do happen. A financial plan isn’t a static document — it’s a tool to track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting married, starting a new job, having a child or losing a loved one. Any situation that arises that you didn’t expect can impact your finances, so you should make changes to your plan accordingly. That way, it can better reflect your financial standing.