assignment personal financial planning

Personalized financial planning explained step-by-step

Create a personalized financial plan, start-to-finish, for all your financial goals, with tools and resources to help you succeed, including tips on investing beyond your 401(k).

When it comes to life's biggest moments, you probably had a plan. Your family vacation, for example, followed a timeline, a budget—even if you busted it with that fancy dinner on your final evening—and involved compromise and conversation. Smart financial planning follows the same logic.

What are the basics of financial planning? Which steps should you take first in financial planning? Our information and how-to articles (linked below) can help. They take you step-by-step through what you need to know to create a personal financial plan and help get your money in order. From the groceries you need, to the retirement you want, and the car repair bill that’s looming, these ideas help you balance long-term dreams with short-term wants, plus those unexpected events that happen along the way.

This list offers a nice framework you can build on and adjust throughout your life.

It’s OK if you’ve started on some of these tasks. It’s also OK if you haven’t. Just start with one and keep going. (Or tackle the whole thing on a long, rainy weekend with a big pot of coffee and the dog at your feet.)

Let’s get started.

1. Set financial goals.

Goals are crucial to a financial plan. Before calculating how to get somewhere, you need to decide where you’re headed and why. Developing a savings plan based on specific financial goals throughout your life can help you use your money wisely. Do you want to:

• Save toward a down payment on a new home?
• Establish a college education fund for your children?
• Pay down or minimize existing debt?
• Launch a small business?
• Accelerate your retirement investing and savings?

Once you take time to envision the sort of life you want live a few years or many years from now, you can organize your financial goals into three general time horizons:

• Short-term goals (six months to five years): This phase may include many of the initial steps outlined on this list, including budgeting, paying down debt, and building an emergency fund.
• Mid-term goals (five to 10 years): Buying insurance or expanding your investment approach may be part of the mid-term goal planning.
• Long-term goals (10+ years): This is where you dig into detailed retirement planning to combine your best thinking around what you truly value in life with expertise from trusted sources of financial education and insight.

Set a more specific target date for each your financial goals. For instance, if you’re the parent of a toddler who may head to college in the 2040s, that gives you a deadline for your college savings goal .

Organize your goals between needs and wants. Layer in the current state of your savings to see how you can adjust your pace of savings to meet your target dates. Do you have money in a 401(k) ,  403(b) , Roth IRA , or  IRA (individual retirement account)? If so, log those numbers as you plan your retirement-related goals .

You can weigh all these options and your financial data at a glance by committing your plan to paper with our financial goals worksheet (PDF) .

2. Follow a budget.

Instead of thinking of a budget as way to restrict your spending, use it as a tool to organize your monthly cash flow to help you pay yourself first (savings/investing) and still have room for the fun stuff. Seeing all your sources of income and spending in detail is important to assess your financial options both now (those short-term wants) and for your distant future (long-term dreams). Your budgeting will include both fixed expenses (think housing, transportation, debt, etc.) and discretionary expenses (restaurants, entertainment, gifts, etc.).

Keep in mind the wide variety of digital apps and tools available to help you make and maintain a budget in your daily life. Depending on your preferences and comfort with mobile apps, you can link financial accounts or set alerts to help categorize and monitor your spending. (As a Principal customer you can link accounts and explore budgeting features as part of your personal financial dashboard when you log in through principal.com or our mobile app.)

For the basics, learn how to create a budget that works for you—not against you (downloadable budgeting sheet included).

3. Build an emergency fund.

All the planning in the world won’t help if life throws you a curveball and you’re not prepared financially. That’s where emergency savings comes in handy.

• First, calculate how much emergency savings you may need: The minimum recommended emergency savings tends to start at three months of living expenses—with six months or a year providing a more realistic buffer to regroup after a setback. The flexibility of your cash flow helps determine your ultimate target for an emergency fund and how quickly you can reach it. If you’re self-employed, your emergency savings should be even larger due to your generally greater financial risk (income volatility, unplanned business expenses, etc.).
• Second, pick a tactic that works for your financial habits: Do you want to automate your savings—for instance, divert a small sum from your regular paycheck so it’s deposited into a savings account instead of your checking? Or will you transfer a significant sum—say, a work bonus or tax refund—to kick-start your emergency fund?
• Choose an account: You want a liquid, accessible account for your fund, but not one that’s too tempting for impulsive withdrawals. For instance, a high-yield savings account with a minimum balance may be a good fit. ( Compare online bank savings and money market rates .)
• Set parameters for yourself and always replenish the fund: Is the expense unexpected, unavoidable, and urgent? The more your expense meets all three of those criteria, the more it’s likely suited to be covered by your fund. Once you dip into the fund, build it back up as soon as possible.

4. Manage debt.

Understanding and managing debt is a key part of creating a financial plan. Building a positive credit history can help improve your credit score and, in turn, help you qualify for lower interest rates on loans as part of a comprehensive strategy to maximize your incremental savings. It’s important to remember that not all debt is bad: A home mortgage giving you the ability to use the interest paid for a tax deduction can be beneficial. However, a revolving credit card with a high interest rate and ballooning balance doesn’t help your financial plan.

You have multiple ways to help tackle debt: The “snowball method” prioritizes paying smaller loans first to help buoy your spirits with tangible progress in shortening your debt list. Or you can focus on paying off the loans with the highest interest rates so you pay less overall, even if you maintain more loans for longer.

Learn how to pay off the debt you owe now and build a long-term debt-management strategy (worksheet and calculator included).

5. Protect with insurance.

The routines and norms of your daily life can change in an instant. People with a good financial plan hope for the best but always try to plan for the unexpected. Insurance helps with that. You may not realize the flexibility of life insurance as a financial tool to protect you and your dependents in the wake of a tragedy. Or maybe you haven’t been introduced to how short- or long-term disability insurance can help maintain your lifestyle by protecting your income. Here are two key questions to ask yourself:

• Do you have disability and life insurance at work? Your HR or benefits administrator should be able to help you determine your coverage and basic features such as an “elimination period” (how long you would wait to receive benefits if you do become disabled).
• How much coverage do you have vs. how much you may need? Long-term disability insurance typically replaces about 60% of your income—sometimes less than half after taxes. So, you may want to bundle that coverage with an additional private pay policy, depending on your budget, priorities, and risk tolerance. (Try our disability income calculator .) Your life insurance at work may be a flat rate based on your income, or you may have special benefits such as business travel insurance, advance payments for a terminal illness, or access to life insurance in retirement.

If you buy more voluntary or supplemental insurance through work, premiums often cost less through your employer and can be deducted from your paycheck. (You also may be able to avoid medical underwriting to start coverage, as well as take the policy with you if you leave your job. However, if you buy the insurance on your own, you may be able to buy more coverage and better customize it to your specific needs.)

6. Plan for taxes.

Paying taxes is part of your inevitable financial routine. First, know your tax bracket and how that may evolve throughout your life.

Integrate a more targeted and year-round tax strategy into your financial plan to better allocate your money according to your priorities. Know the difference between deductions and credits and how your plan will incorporate both. You may spot simple deductions or credits you overlooked in previous years. You can learn the importance of tax sheltering through tax-deferred accounts such as employer retirement plans, IRAs, Roth IRAs, health savings accounts (HSAs), and more. You may pursue more specialized moves such as tax-loss harvesting .

If you have access to a benefit such as a HSA and expect to use it to pay for out-of-pocket medical costs, that could help reduce your overall tax burden. If you’re age 50 or older, you may be able to make catch-up contributions with your retirement savings.

Explore ways to save on your taxes next year, using our tax planning worksheet to think through potential income tax credits and deductions. For even more resources, visit our tax center on principal.com .

7. Plan for retirement.

Even if it’s a long way off, think about what you want your money to do for you when you retire. You’ve probably heard the basic recommendation to try to save aggressively for retirement early in your career, so every dollar works harder by compounding for many more years. Or you know the general rule to aim to replace 80% of your income in retirement. But rules of thumb are no match for a direct, specific interrogation of your personal finances and life goals to build a retirement plan right for you.

There are numerous details that depend on your unique circumstances. Will you pay off your home mortgage before retiring? What will be your sources of retirement income? Have you considered the impact of inflation? Have you factored in the costs of long-term care or a nursing home ?

As you near retirement, evaluate what will be taxable when you remove money from an account such as a 401(k) vs. what could be tax-free, such as a Roth IRA after a certain number of years. Strategies such as Roth conversions are one way of managing the tax implications over time, so you have a balance of retirement income sources. If you have significant 401(k) savings you may want to consider rolling it over into an IRA to help provide more investment options. Learn how to start a rollover IRA .

In the bigger picture, get started creating your own custom retirement plan to help you take a more holistic approach to retirement . You also can consult our Retirement Wellness Planner to build a more detailed plan based on your specific finances. Even better, work on your retirement planning with a trusted financial professional.

8. Invest beyond your 401(k).

To reach your mid- and long-term goals, take your savings strategy and put an engine behind it. That’s what investing can do. Does your timeline and risk tolerance favor a more conservative approach, with options such as government bonds or certificates of deposit? Or do you prefer more aggressive investing in stocks and private equity? Regardless, diversifying your investments can help you generate more consistent returns over time to withstand volatility. A thoughtful, diversified approach—including regularly rebalancing your portfolio to account for market shifts and life stages—is within reach (especially if you take advantage of the expertise of a financial professional ).

Get started broadening your investments with these three steps.

9. Create an estate plan.

You don’t have to be wealthy, old, married, or a parent to need an estate plan, which also lays out who makes financial and health care decisions for you if you can’t make them yourself. An estate plan, ideally including a will (to avoid extra legal costs and confusion among your beneficiaries), enables you to clearly articulate your intentions for your assets after you’re gone. Who will wield power of attorney on your behalf? Will you include a living will in case you’re incapacitated and unable to communicate your wishes?

Learn the basics of estate planning and options for creating one.

Congratulations on working through the steps!

Here’s when to review your financial plan.

Take a fresh look at least once a year or after a big life change, such as:

• Significant change in income
• Change in family dynamics like having a baby or adopting, getting married, divorce, or losing a spouse/partner
• Selling or buying a home
• Inheritance
• Unexpected debt
• Change in financial goals

What’s next?

Log in to your Principal account to see how you’re doing. Don’t have an employer-sponsored retirement account or want to save even more in addition to a 401(k)? We can help you set up your own IRA or Roth IRA . If you don’t already work with a trusted financial professional, we can help find one near you .

Pay off debt with retirement savings? 3 reasons to reconsider

Using retirement savings to pay off debt can have an impact on your financial foundation now and in the future.

Annuities: Types, payments, taxes, and more

Diversity and balance in your retirement savings—from guaranteed sources of income to those with growth potential—is key. Annuities may offer a tax-advantaged source for your post-work years.

When you’ve got decades to save for retirement, how should you begin?

When you’re 10-plus years from your retirement party, time is your friend. These tips can help you get started and save more. 

Investing involves risk, including possible loss of principal.

Asset allocation and diversification do not ensure a profit or protect against a loss.

The subject matter in this communication is educational only and provided with the understanding that Principal ® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

How to Set S.M.A.R.T. Financial Goals (With Examples)

Adina Lazar is a freelance writer and blogger specializing in finance. She writes original content that helps readers make smart financial decisions.

S.M.A.R.T. financial goals can help us turn aspirations into achievements. Initially, we’re thrilled about setting our financial targets, but as soon as we hit a few bumps in the road, we get discouraged. S.M.A.R.T. financial goals help us overcome the challenges and stay committed to success.

What Are S.M.A.R.T. Financial Goals?

You’re probably already familiar with the S.M.A.R.T. formula: specific, measurable, achievable, realistic, and time-based. But did you know can use those factors to increase your chance of achieving your financial goals? Let’s look at each of those factors and how you can use it.

Examples of S.M.A.R.T. Financial Goals

Let’s look at four examples of S.M.A.R.T. financial goals that illustrate how these goals can help you achieve financial freedom.

Example #1: Paying off Your Credit Card Debt 

If you’ve accumulated credit card debt, you can pay it off using the S.M.A.R.T. formula.

Let’s break things down. Your specific goal is to pay off your credit card debt in full.  

👉 Measurable 

How much money do you owe on your credit card? This figure (for example $3,000) will make your goal measurable.

Your new goal is now paying off your $3,000 credit card debt in full.  

👉 Achievable 

To achieve this, you will need to take actionable steps that will help you track your progress. 

To successfully pay off your $3,000 debt, you will put $300 plus interest every month towards your credit card. You will also stop using it temporarily to avoid accumulating additional debt.   

👉 Realistic 

Assess the steps you plan to take to achieve your goal. If you’re willing to pick up extra shifts at work, cut your entertainment budget, and stop borrowing more, your goal is realistic. If you’re hoping to get a promotion or win the money on a betting app, then you may want to re-think your strategy. 

👉 Time-based

By applying $300/month plus interest towards your debt, you will achieve your goal in 10 months.

Your S.M.A.R.T. financial goal is: 

I will pay off my $3,000 credit card debt in 10 months by putting $300/month (plus interest) towards it. I will achieve this by cutting my entertainment budget and not using my card during this time.

Example # 2: Saving for a Down Payment on a Home

If you want to become a homeowner in the next few years, you should be saving for a down payment. Here’s how to turn that dream into a S.M.A.R.T. financial goal. 

Get as specific as possible. Your goal is to save enough to make a down payment on a home . 

👉 Measurable

Determine exactly how much you want your down payment to be. Consider what you expect to pay for a home, and aim for 20% of that. For example, your goal may be to save $20,000 for a down payment.   

$20,000 is a significant amount, so you need to set targets to make it happen. If you want to buy your home in 3 years, for example, you need to save approximately $556 monthly. 

👉 Realistic

Use a budget calculator to determine how much you can save monthly. Consider practical ways to earn extra income or cut certain expenses from your budget to achieve your ideal amount.  

If saving $20,000 in the time frame you’ve chosen is completely unrealistic for you, consider extending your timeline or shopping for a cheaper home. 

👉 Time-based 

Based on the amount you need to save and your monthly saving target, decide on a realistic time frame for your goal.

Your S.M.A.R.T. financial goal is:

I will save $20,000 in 3 years for a down payment on my future home. I will accomplish this by putting $556 into a savings account monthly. 

Example # 3: Budgeting to Create an Emergency Fund 

You can use the S.M.A.R.T. formula to build a rainy day fund.

Determine why you want to start budgeting and how it will help you. In this case, your specific goal is to create a monthly budget so you can save money for an emergency fund.

Experts say that your emergency fund should be able to support you for three to six months. To figure out how much yours should be worth, think about how much money you currently need to support yourself every month. 

For example, your new goal will now be to fully fund a $6,000 emergency fund by creating a monthly budget.

👉 Achievable

Use a budgeting calculator to figure out where you currently stand. Next, determine the right budgeting method for you and use a budgeting tool to implement it.

Suppose after doing so, you free up $250 monthly which can go towards your emergency fund. 

Your goal may be unrealistic at the moment if you are currently over budget and struggling to make monthly payments to outstanding debts. Perhaps your focus should be on budgeting to pay off debt rather than to save for an emergency fund. 

By saving $250 a month, you will be able to reach your goal in 2 years. 

I will fully fund a $6,000 emergency fund in 2 years by using the reverse budgeting method to save $250/month. 

Example # 4: Planning for Retirement

Planning for retirement should be on everyone’s list of financial goals. But how can we make it S.M.A.R.T.?

Planning for retirement is a little too vague. Contributing a minimum monthly amount to your 401(k) to save for retirement is much more specific. 

You can measure your success each month by contributing a percentage of your paycheck. Your new goal now becomes contributing 15% of your income to your 401(k) . 

Setting up automatic deductions from your salary towards your 401(k) is an actionable step that will achieve your goal. 

To determine if this goal is realistic given your current financial situation, ask yourself if you can live on a paycheck that is 15% smaller. If not, then you can either lower your contribution amount or lower your monthly expenses. 

When it comes to planning for retirement, there is no time like the present. This is a long-term goal, but you can set intermediate goals as well. How much do you expect to have in your 401(k) after a year? After 5 years?

Starting this week, I will contribute 15% of my monthly income to my 401(k) plan and receive matching contributions. This will help me prepare for retirement. 

S.M.A.R.T. Goals Worksheet Template

Do you have any S.M.A.R.T. financial goals you want to accomplish this year? To help you get started we’ve prepared this simple printable S.M.A.R.T. goals template that you can use to define your goals.

Download PDF

By Adina Lazar

Contributing writer.

Adina Lazar is a freelance writer and blogger specializing in finance. She writes original content that helps readers make smart financial decisions. Follow her on Twitter (@AdinaILazar) or visit her at www.adinalazar.com.

This actually helped! in my financial goal ! I was doing this subject in maths, and I needed help, so yeah

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Financial Planning: A Step-by-Step Guide

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Table of Contents

What is a financial plan?

How to make a financial plan in 9 steps, how to get financial planning help, why is financial planning important.

A financial plan is a document that catalogs your current finances, your financial goals and any strategies you've set to achieve those goals. Ongoing financial planning allows you to make the most of your assets and gives you the confidence to weather any bumps along the way.

Key takeaways:

A comprehensive financial plan should include details about cash flow, savings, debt, investments, insurance and other financial life elements.

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, such as getting married, starting a new job, having a child or losing a loved one.

You can make a financial plan yourself or get help from a financial planning professional. Online services like robo-advisors have also made financial planning assistance more affordable and accessible than ever.

» Ready to get started? See our roundup of the best financial advisors

Get matched with a financial advisor in minutes through  NerdWallet  Advisors  Match 

on NerdWallet Advisors Match

1. Set financial goals

A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you — whether that's buying a house or helping you retire early — you'll make saving feel more intentional.

Make your financial goals inspirational. Ask yourself: What do I want my life to look like in five years? What about in 10 and 20 years? Do I want to own a car or a house? Do I want to be debt-free? Pay off my student loans? Are kids in the picture? How do I imagine my life in retirement?

Having concrete goals can help you identify and complete the next steps and provide a guiding light as you work to make those aims a reality.

» Need help with this step? Learn more about setting financial goals

2. Track your money

Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan and can reveal ways to direct more to savings or debt pay-down. Seeing where your money goes can help you develop immediate, medium-term and long-term plans.

For example, developing a budget is a typical immediate plan. NerdWallet recommends the 50/30/20 budget principles: 50% of your take-home pay goes toward needs (housing, utilities, transportation and other recurring payments), 30% goes toward wants (dining out, clothing, entertainment) and 20% goes toward savings and debt repayment.

Reducing credit card or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.

» Need help with this step? A step-by-step guide to budgeting

3. Budget for emergencies

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.

Building credit is another way to shockproof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.

» Need help with this step? Use our emergency fund calculator

4. Tackle high-interest debt

A crucial step in any financial plan: Pay down high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

» Need help with this step? Learn tools and tips for paying off debt

5. Plan for retirement

If you visit a financial advisor, they will be sure to ask: Do you have an employer-sponsored retirement plan such as a 401(k) , and does your employer match any part of your contribution? True, 401(k) contributions decrease your take-home pay now, but it’s worth it to consider putting in enough to get the full matching amount. That match is free money.

If you have a 401(k), 403(b) or similar plan, financial advisors also generally suggest that you gradually expand your contributions toward the IRS limit: $23,000 in 2024 ($30,500 for those age 50 or older) .

Another savings vehicle for retirement planning is an IRA , or individual retirement arrangement. These tax-advantaged investment accounts can further build retirement savings. The contribution limit is $7,000 in 2024 ($8,000 if age 50 or older) .

» Need help with this step? Use our free retirement calculator

6. Optimize your finances with tax planning

For many of us, taxes take center stage during filing season, but careful tax planning means looking beyond the Form 1040 you submit to the IRS each year.

For example, if you're routinely getting a sizable refund, that may be a sign that you're needlessly living on less throughout the year. Learning how and when to review your W-4 , the form you fill out for your employer, can help you to take control of your future. Adjust your withholdings on your W-4, and you either can keep more of your paycheck, or pay a smaller tax bill.

Getting cozy with the tax law also means looking into tax credits and deductions ahead of time to understand which tax breaks could make a difference when it comes time to file. The government offers many incentives for taxpayers who have children, invest in green home improvements or technologies, or are even pursuing higher education.

» Need help with this step? See tax planning tips for beginners and learn about the federal brackets and income tax rates

7. Invest to build your future goals

Investing might sound like something for rich people or for when you’re established in your career and family life. It’s not. Investing can be as simple as putting money in a 401(k) and as easy as opening a brokerage account (many have no minimum to get started). Financial plans use a variety of tools to invest for retirement, a house or college.

» Need help with this step? Learn how to start investing

8. Grow your financial well-being

With each of these steps, you're protecting yourself from financial setbacks. If you can afford it, decide whether you'd like to do more, such as:

Increasing contributions to your retirement accounts.

Padding your emergency fund until you have three to six months of essential living expenses.

Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.

» Need help with this step? Understand life insurance and how it works

9. Estate planning: Protect your financial well-being

Financial planning also means looking out for your future needs, as well as mapping things out for your loved ones. Creating a will can help ensure your assets are distributed according to your wishes. Other types of estate-planning documents can also provide your relatives with clarity on how you would like to be cared for, and who should manage your affairs.

» Need help with this step? View our estate planning checklist

If you're not the DIY type or simply want professional help managing some tasks and not others, you don't have to go it alone. Consider what kind of help you need:

I want complete financial planning and investment advice .

I want specialized, face-to-face guidance.

I want help managing my portfolio.

Complete financial plan and investment advice

Online financial planning services offer virtual access to human advisors. A basic service would include automated investment management (like you’d get from a robo-advisor), plus the ability to consult with a team of financial advisors when you have other financial questions.

More comprehensive providers basically mirror the level of service offered by traditional financial planners : You're matched with a dedicated human financial advisor who will manage your investments, create a comprehensive financial plan for you, and do regular check-ins to see if you're on track or need to adjust your financial plan.

» Want to work with a local advisor ? Learn how to find a financial advisor near you

Specialized guidance and/or want to meet with an advisor face-to-face

If you have a complicated financial situation or need a specialist in estate planning, tax planning or insurance, a traditional financial advisor in your area may fit the bill. To avoid conflicts of interest, consider fee-only financial advisors who are fiduciaries (meaning they've signed an oath to act in the client's best interest).

Note that some traditional financial advisors decline clients who don’t have enough to invest; the definition of “enough” varies, but many advisors require $250,000 or more. If you want to know more about how much seeing an advisor will cost, read our guide to financial advisor fees .

» Need some help? Check out our roundup of the best wealth advisors

Portfolio management only

Robo-advisors offer simplified, low-cost online investment management. Computer algorithms build an investment portfolio based on goals you set, and your answers to questions about your risk tolerance. After that, the service monitors and regularly rebalances your investment mix to ensure you stay on track. Because it's all digital, it comes at a much lower cost than hiring a human portfolio manager.

» Need help investing? See our list of the best robo-advisors

Financial planning can help you feel more confident about navigating bumps in the road — like, say, a recession or historic inflation . According to Charles Schwab's 2024 Modern Wealth Survey, Americans who have a written financial plan feel more in control of their finances compared with those without a plan [0] Charles Schwab . Charles Schwab Modern Wealth Survey 2023 . Accessed Jul 12, 2024. View all sources .

Once your basic needs and short-term goals have been addressed, a financial plan can also help you tackle big-picture goals. Thoughtful investing, for example, can help build generational wealth , and careful estate planning can ensure that wealth gets passed down to your loved ones.

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Finance Syrup

A path to Financial Independence

Personal Finance Planning Process | Step-by-step Guide

Achugamonu Uzoma · February 27, 2024 · 1 Comment

Personal finance management is key to reaching your financial goals. It involves detailed planning early on, much like choosing the ideal route for your trip.

Imagine you are traveling by road from Chicago to Los Angeles and you want to pick the fastest route. Prior to setting off on your trip, calculate the travel time from all conceivable directions, and the quantity of fuel needed.

Without careful personal financial planning, it’s highly unlikely that you’ll be able to meet your intended financial goals and objectives.

Different things might have an impact on a person’s personal goals and ambitions. For instance, some people may want to travel and buy luxury automobiles in the future, while others may only want to save enough money for retirement so they can spend the remainder of their lives worry-free.

Table of Contents

What is Personal Financial Planning?

Personal financial planning refers to the process of organizing and controlling one’s own financial actions, including earning money, spending it, saving money, making investments, and purchasing insurance.

A financial plan or budget can serve as a summary of the process of managing one’s own finances. The frequent and significant facets of personal financial management will be examined in this guide.

What are the 5 Areas of Personal Finance?

Personal finance is primarily concerned with income, spending, saving, investing, and protection.

Income is a source of money that a person receives and utilizes to provide for themselves and their family. It serves as the foundation for our financial planning procedure.

These are typical sources of income:

These revenue streams all result in money that a person can utilize for investing, saving, or spending. The first phase of our personal financial roadmap might be thought of as income.

#2. Spending

All costs incurred by a person to purchase products, services, or anything consumable are considered spending (i.e., not an investment). There are two types of expenditures: cash (paid for with cash on hand) and credit (paid for by borrowing the money). The majority of people spend the majority of their income.

Typical sources of spending include:

• Mortgage obligations
• Entertainment
• Paying with a credit card

The amount of money a person has available for saving and investing is all but eliminated by the expenses mentioned above. An individual has a deficit if their spending outweighs their income. In general, people have more control over their discretionary costs than their income, making cost control equally as crucial as income generation.

For effective personal financial management, one needs to have appropriate spending habits.

#3. Savings

Savings are surplus funds set aside for upcoming purchases or investments. If a person has more money than they need and less than they spend, the extra can go toward investments or savings. Savings management is a crucial component of personal finance.

Typical methods of saving include:

• Physical money
• Savings bank account
• Looking up a bank account
• Money market instruments

To manage their financial flow and the short-term disparity between their income and expenses, the majority of people hold at least some savings. However, as savings provide little to no return in comparison to investments, having excessive amounts of savings might actually be considered a negative.

#4. Investing

Buying assets with a projected rate of return on them is what is meant by investing. The goal is to eventually get back more money than you put in. Investments are risky, and not all investments actually end up earning a profit. Here is where the correlation between risk and return may be seen.

Typical forms of investment include:

• Mutual funds
• Real estate
• Private businesses
• Commodities

The most complex aspect of personal finance is investing. It is also one of the topics on which people seek expert assistance most frequently. The risk and rewards of various investments vary greatly, and most people look for assistance with this aspect of their financial strategy.

Personal protection refers to a broad range of items that can be utilized to prevent an unanticipated and unfavorable incident.

• Common protective gear includes:
• Life insurance 
• Health coverage
• Estate planning

Another area of personal finance that tends to attract professional counsel and can be rather complex is this one. To accurately determine a person’s insurance and estate planning needs, a variety of analyses must be performed.

Learn How To Make Money From Property 

Importance of Personal Finance Planning

By giving you the freedom to attain your financial objectives, personal finance enables you to take control of the situation. By using sound financial judgment, it enables you to maximize the use of your revenue.

Here are a few of the advantages that make personal finance an important part of daily life. There are many advantages to personal finance, and listing the endless list would be exhausting.

Helps in Budgeting – The Balance of Expenditure and Savings from Income

Even if you may be earning an amount each month that is more than enough to sustain your quality of living, you still might run into financial difficulties before the month is out. Someone making less money than you might be leading a financially stable existence, and the reason for this would be budgeting. 

You may save more money and attain long-term financial stability by managing your spending according to your needs, saving money according to your financial objectives, staying within your budget, and organizing your taxes.

Helps build financial security – Save your money and your money will save you

Planning your finances allows you to maximize the amount you can save to create a financial security net for your requirements in the future.

Building on your financial stability and acting as a safety net for you and your family, risk management through insurance, having the correct investment strategy based on financial objectives, and providing liquidity as part of emergency reserves.

Helps in avoiding unmanageable debt – Adjusting your lifestyle

Spending more than you make might result from overspending, impulsive purchases, and spending money on things that are unneeded. Your financial security may also be affected if your way of life involves borrowing money and using all of your credit card limits. If this is the case, you run the risk of getting into massive debt.

By keeping an eye on your income and expenses and adjusting your lifestyle in accordance with your income, personal finance can help you avoid this.

Helps in raising Standard of Living – Cushion for tough times

Having a financial plan in place encourages you to save more, which leaves you with more money to invest. Increased savings and the growth of those savings boost your net worth and improve your ability to handle financial hardships and demands.

Allows to manage to achieve financial goals – Measure of your progress

The purpose of saving is to develop it for attaining your financial goals in a disciplined way, and budgeting, establishing financial security, and controlling debts allow you to do this to the fullest extent possible.

Monitor your discipline and progress by regularly comparing your actual saves to your intended amount, paying off debt, building up surplus reserves, and other similar actions.

Multiple pots of savings

Personal finance can be compared to how you organize your clothes in different stacks so that it is easier for you to find a piece of clothing whenever you need one. For example, if you have a lot of clothes but a small closet, your financial goal can be compared to getting all of your clothes neatly organized in the closet.

We kept a piggy bank for money savings even when we were little. The only thing that has changed is that we now have multiple goals, and trying to save money for all of them in one location can make it difficult to keep track of them all.

The Jam Jar approach, which divides your money into many pots for different expenses, might be utilized as an alternative. By using this approach, you can be sure that your costs are paid for and that your money is going in the direction you intended.

The pot of saves has less to do with crunching numbers on a spreadsheet and more to do with keeping money separate, having a clear image of where it is going, and reaping the rewards of following the rules.

Track and measure your progress  

The ability to track your progress and plan future contributions based on the time needed to complete each goal is made possible by having numerous goal-based investments or savings accounts for each objective. Setting priorities for your goals makes them more manageable, and contributions can be rearranged in response to evolving needs and conditions.

A disciplined and systematic approach

Keeping all of your money in one area can make it easier to succumb to temptation and spend more money than necessary. Having multiple savings accounts enables you to withstand these temptations and adopt a disciplined and organized approach to saving for a goal. 

Creating multiple pots of savings easily 

With the advent of internet banking and investment platforms, it is now simple to set up multiple pots for investments in mutual funds, fixed deposits, provident funds, savings accounts, and other types of investments depending on the purpose.

Personal Finance Planning Process: Step-by-step Guide

Your current and future standard of living will be influenced by the right investment strategy and wise financial counsel. The process of creating a financial strategy and implementing personal money management has six steps.

A licensed financial planner professional walks you through the entire financial planning process while taking into account your present financial condition and economic history.

• Identify your financial situation
• Determine financial goals
• Identify alternatives to Investment
• Evaluate alternatives
• Put together a financial plan and implement
• Review, re-evaluate and monitor the plan

#1. Identify your financial situation

The evaluation of your current circumstances and options for improving your financial condition is the first stage in the personal financial planning process. The main areas to consider are:

Household budgeting

This is crucial because it allows you to determine how much money you have left over after subtracting your monthly housing expenses to save or invest.

Family commitment and living expenses

Do you have a spouse? Do you have any kids? What are the costs of their lifestyle and way of life?

Tax standing and strategies

How do you handle filing taxes? Do you work or reside abroad?

Current investments or saving reserves 

How much debt or savings do you currently have?

Other financial obligations

These can include some ancillary expenses you’re budgeting for in the future, like:

• Getting married or buying a house
• Reserves for unexpected expenses such as household disasters
• A reserve of money for your family in case something happens to you or your career
• Are you about to enter retirement?

This step provides a solid foundation for creating your plan and a useful starting point for achieving both your short- and long-term financial objectives.

#2. Determine financial goals

According to experts, your chances of success are highest when you have identified your goals. Financial planning includes highlighting the financial objectives as a key component. The following objectives might be included, depending on the stage of life you are in:

• To start a family, get married.
• Invest in real estate or pay it off
• Ensure that your kids receive a top-notch education.
• Prepare your investments and reserves for taxes.
• The ability to enjoy life after retirement by retiring with adequate money.

Distinguishing between your necessities and wants is the only goal of this step. Other than this, the goals or objectives could be anything from investing your entire income to creating a long-term investment strategy for future financial security. Choosing which objectives to pursue, though, is a necessity.

#3. Identify alternatives to investment

The next step is the investment choices or specific recommendations from your financial advisor, which comes after a full assessment of your financial circumstances and the establishment of the necessary financial goals.

An integrated investment strategy would be created based on your predetermined criteria by carefully considering your short, medium, and long term goals. Additionally, the goals will be reviewed once again, and your progress toward meeting your short- and long-term financial objectives will be evaluated.

A variety of concepts and financial planning options would be provided to you so that you can choose the one that best meets your timeframe, cash flow, risk tolerance, current insurance coverage, tax strategies, and investment goals. This will enable you to make more sensible judgments that you are happy with.

#4. Evaluate alternatives

The suggested changes are then evaluated once more. This is your chance to directly debate the possibilities and take the appropriate steps while keeping in mind your current circumstances, financial status, and personal interests.

You can change and update your financial planner’s advice if you have any reservations about it. Depending on your choices, alternatives may be eliminated. Consider this:

Continued schooling is a sign that you are unable to work a full-time job. Decreased opportunities as a result of your decisions should always be kept in mind while weighing your options because decision-making is a continuous process that interacts with both your personal and financial condition.

Risk evaluation

You can develop unsure ideas when weighing your possibilities. Consider the risk involved in choosing your career over your studies. How can you be sure it will be profitable in the long run?

Other financial choices carry a relatively low risk, such as putting your money in a savings account or using it to buy something priceless. In such circumstances, the likelihood of losing the object is low.

Therefore, it might be difficult to identify risks and assess them when making financial decisions. You must gather information based on both your own and other people’s experiences. You will need to regularly update your knowledge of politics, economics, and society in order to make educated decisions.

#5. Put together a financial plan and implement

The strategy would be implemented after you were satisfied with the suggestions and felt confident moving forward. This stage of financial planning can be thought of as an action plan where you choose how to reach your short-term, immediate, or long-term objectives. is frequently regarded as the hardest step for some, but it has a significant long-term impact.

The most important thing to remember in this situation is to act as soon as you can. The longer it is neglected, the longer it will take you to build wealth, which will ultimately result in a significant shortfall in your retirement funds.

#6. Review, re-evaluate and monitor the plan

It’s improbable that your financial situation will remain the same throughout your life because financial planning is a continuous and dynamic activity. You must periodically evaluate your financial choices because they will need to be adjusted to match your new circumstances as a result of shifting personal, economic, and social factors.

Your financial needs will change as you move through the many stages of life, and the financial process will be a tool to help you adapt. You can prioritize your choices and make the necessary corrections by keeping an eye on your plans. This will help you align your financial needs and goals with your current situation.

Personal Finance Plan Template

Using a template is always simpler and more efficient than starting from scratch when creating a financial plan.

To assist you in creating a financial plan, there are numerous personal financial planning template options accessible. Simply input the information in the appropriate fields. Depending on the data you have, you can also add, amend, or remove fields.

These financial plan examples are a wonderful place to start even if you don’t want to utilize templates because they show you what actual plans look like and what particular funds you need to put in the document.

Here are some sample templates for personal financial planning:

A straightforward form is provided by Daily Successful Living so you may figure out your net worth.

To do this, sum up all of your assets, then deduct all of your liabilities.

You can then move on to creating some personal goals after estimating your net worth.

You can construct a brief personal finance plan using the free financial plan template provided by Smartsheet.

Use it to determine your present financial condition, develop a plan to achieve your objectives, and monitor your progress.

If necessary, you might also include information on life insurance or estate planning.

Financial Planning for Beginners

For those who are just beginning their personal financial planning, keep the following items in mind:

You must first comprehend the significance and necessity of a budget. As without making a statement, you would not be able to track where your money is going. No of how much money you make, you absolutely must create a budget.

A spending plan acts as a guide for how and where to use your money. The benefit of creating a budget is that it allows you to see how much money is coming in and going out each month. You’ll be able to handle your money more wisely if you’ve created a thorough and accurate budget.

With a spending plan, you can more accurately assess your financial situation because it forces you to consider your other expenditures if you find that you have overspent in one area.

A spreadsheet or other budgeting program can be used to establish a budget; you can also create one on paper or on your laptop. As a beginner, you can try a few of the apps or methods and pick the ideal one for you.

Get paid what you are worth and spend less than you earn

Although many individuals are aware of it, it can be challenging to put into practice. By assessing your abilities, work duties, productivity, market rate, and value to the organization, you should always be aware of the market value of your position.

Your budget and savings could be significantly improved by even $1500 annually. Make sure you are being paid the appropriate amount before joining any organization. The second thing you need to watch out for is never overspending because it can result in debt or overburdening in the months to come.

Don’t forget to make a small cost-cutting effort each month and save some money because doing so will enable you to spend when necessary and grow your savings.

Planning for retirement

Compared to a few years ago, retirement preparation is now much more crucial. Many factors have contributed to people’s increased interest in it. To start, life expectancy has increased and people are living longer than in previous generations.

Second, due to their sedentary lifestyles, people today are more susceptible to conditions like diabetes, hypertension, and heart attacks. Since healthcare is very expensive, you need money to treat any kind of illness.

Thirdly, you need money to deal with any other problems that may arise after retirement. Instead of being a last-minute decision, retirement planning should become your preference.

A 401(K) plan is actually something that many businesses offer; under this, your employer would contribute the same amount to your retirement account as you do, up to a point.

As a result, now is the perfect moment to begin planning for your retirement because the earlier you begin, the wealthier you will be when you do.

Getting out of debt

If you don’t handle your debts well, they may consume a sizable portion of your income. Even after creating a sensible budget and reducing your spending, you would still have an outstanding debt that you needed to pay off.

A vicious debt trap could result from improper planning if you find yourself having to take out new loans in order to pay off your existing debt.

Spend more than the minimum amount due each month as your first course of action. Make a schedule for paying off your debts and keep track of who you owe and how much to.

The most expensive debt should always be paid off first, and you should always strive to use debt as a last resort.

Borrowing money on credit is not always a terrible thing, but if you borrow more than you can afford to pay back, it becomes a problem. Therefore, if you arrange your debt payments carefully, it might prevent you from experiencing these problems.

Have a savings plan

Pay yourself first is the first thing you should do after receiving your paycheck. It is never boring to handle your own finances. You should start your financial planning by setting aside money. One of the most effective paths to financial freedom is through it.

By the end of the month, there are significantly fewer possibilities that you will have anything left in your account if you wait to pay all of your expenses and other debts. Decide to save at least 5 to 10 percent of your income before you begin paying your debts.

Saving money enables you to avoid debt traps. For instance, if you wanted to buy a new car, it would be ideal if you already had some savings rather than borrowing it from a friend or taking out a loan for the full cost.

In fact, it’s critical that you understand as a start that disciplined saving can make you wealthy by enabling you to meet your financial objectives on schedule. The easiest approach to saving is to divide up your finances into many categories, such as costs, EMIs, pay for employees you supervise, savings, etc.

Buy insurance

You should be aware that both life and property are subject to risk. It is crucial to insure it as a result. After you’ve made a budget, examined your spending, and stopped making EMI payments, you should consider one crucial factor: insurance.

Everyone works incredibly hard to build a solid financial foundation for their family, so it needs to be safeguarded. These dangers can result in income loss, putting your family’s financial stability at risk.

If you have the appropriate insurance, you will be protected from any potential financial hardship brought on by accidents and mishaps, which occur and can happen.

Because the return on a life insurance policy is so low, you might choose a term insurance plan that provides high-risk coverage for a low cost. Insurance acts as a protective roof over your head, shielding you from all weather conditions.

Make sure to evaluate pricing and pick the finest option based on your needs before purchasing any policy, like health care, lifetime, for any items, etc.

Invest cash wisely

The first thing you should do when considering investing is to put together a portfolio of investments because this might be the start of your journey to financial security. Investments come after retirement plans and savings, so if you still have money after those two considerations, you should think about investing it.

Asset allocation is the process of dividing up your investments among several asset types, including cash, debt, and equities. Although investing in equity is advised because it offers a strong return, it is not advisable to put all of your money into it.

To reap the highest earnings and returns, make sure your investments are long-term. The investment you make should last for at least 10 years. You should be careful not to take on more risky endeavors as a beginning in this sector. If you want to ensure a profit, always strive to choose investments that have relatively fewer dangers.

Plan your estate

We all have various assets, like a car, a house, gold, money, and other things of the sort. Have you ever considered who would take it on after you pass away? Accept the duty now and give it some thought beforehand. Everyone must be sure to properly transfer these assets to the appropriate person.

It’s incorrect for the majority of financial advisers to believe that this is solely for the wealthy. Every person who does not want to risk leaving their possessions in the wrong hands should engage in estate planning.

Plan ahead of time wherever possible rather than putting it off. Making a list of your assets and the beneficiaries you want to grant this too is extremely simple. You may draft a will that is ideal for the people you love.

This would have the advantage of making it easy for your beneficiaries to inherit your property. If you don’t know how to accomplish this, you can also get in touch with a reputable attorney.

Maintain a personal balance sheet

As this sheet explains your income and expenses clearly, it’s an excellent approach to managing your finances. One of the finest approaches to advance your financial situation is to create two columns for assets and liabilities in this statement. Your net worth can be easily determined by looking at your balance sheet.

Since you are a new employee, it is crucial that you obtain bank statements and other forms of identification before creating the balance sheet. The main items you should list as assets are all of your investments, your bank account balance, the worth of your home, gold, and other priceless possessions.

Add up the price of all your possessions to determine their value. Once you have finished listing your assets, add any outstanding loans, credit card debt, EMIs, and other borrowings to the liabilities column. If the result is positive after deducting obligations from assets, it signifies that you have more money than you owe to other people.

If the result is negative, be sure to make progress toward it by paying off your obligations each month. As a result, the Net value would progressively rise, turning the negative-sum positive.

Plan your taxes  

If you don’t keep meticulous records on a regular basis, you might not be claiming all of your tax credits and deductions. Planning your taxes is crucial since it enables you to take advantage of several tax breaks, advantages, and deductions. You could pay less tax in a legal way with its assistance.

But watch out that you don’t engage in tax evasion or avoidance. You can learn about a variety of tax exemptions from Section 80C to 80U of the Income Tax Act.

Making a system and using it continuously throughout the year is one of the finest ways to go about it. It becomes simpler for you because you won’t have to look for everything when filing your taxes; this way, you won’t overlook anything that may have provided you with financial savings.

Expert financial advisors frequently employ equity since it has a short lock-in time compared to other investments and offers tax exemptions.

Best Personal Financial Planners

Sofi automated investing.

• No minimum account balance is required, and no administrative costs.
• Setting goals and adjusting your portfolio automatically.
• Other account options are available across the SoFi website.
• For every account, SoFi provides free CFP access.
• No capturing of tax losses.
• No alternatives for a socially conscious portfolio.

Betterment automated investing

• For a regular investment account, there is no minimum.
• Goal-based planning, tax loss harvesting, charity giving, and socially conscious investing are all possibilities.
• Financial planners who are certified to practice.
• App for mobile devices that allows synchronization of external accounts.
• If you don’t have the premium plan, you’ll need to pay to talk to a live advisor.
• A restricted selection of investments.

Wealthfront

• Low annual fees for investment accounts; you can invest in cryptocurrency trusts.
• There are options for tax loss harvesting, portfolio lines of credit, and 529 college savings schemes.
• Cash on hand.
• Investing and retirement tools in a mobile app.
• To use other investment techniques, you must have at least $100,000.
• No access to a human advisor.
• Automatic investing advice that is personalized and has no minimum investment.
• Discounted access to qualified financial advisers and career counselors is included in monthly plans.
• Rollovers for 401(k)/403(b) and IRA funds are automated.
• Private wealth management for anyone with at least $1 million to invest, including individuals, families, and institutions.
• There are no active trading opportunities; the majority of the money is placed in stock and bond ETFs.
• Only individual investment accounts may be opened; joint or custody accounts are not permitted.

Blooom Automated Investing

• 401(k)s and other employer-sponsored plans can be managed automatically and with a personal touch.
• IRA or 401(k) study without cost.
• No minimum balance is required.
• Pricing plans Standard and Unlimited include access to human financial advisors.
• Only employer-sponsored plans and IRAs are eligible for account management.
• No customer help by phone.

People also search for “ What is management in business? “

Not only those with high incomes need financial plans. Anyone can use them to clarify their objectives and develop a strategy for accomplishing them.

You might work strategically toward reaching your life’s objectives if you made a financial plan today.

Where you stand is irrelevant. It’s crucial that you achieve your goals while bolstering your financial stability.

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10.1 Personal Financial Planning

Questions to Consider:

• What simple steps do I take to create a financial plan?
• How do I use financial planning in everyday life?
• How is the financial planning process implemented for every purchase?

If you fail to plan, you are planning to fail.

Honestly, practicing money management isn’t that hard to figure out. In many ways it’s similar to playing a video game. The first time you play a game, you may feel awkward or have the lowest score. Playing for a while can make you OK at the game. But if you learn the rules of the game, figure out how to best use each tool in the game, read strategy guides from experts, and practice, you can get really good at it.

Money management is the same. It’s not enough to “figure it out as you go.” If you want to get good at managing your money, you must treat money like you treat your favorite game. You have to come at it with a well-researched plan. Research has shown that people with stronger finances are healthier 1 and happier, 2 have better marriages, 3 and even have better cognitive functioning. 4

What Students Say

• Minimizing debt
• Get a better job
• Pay for college
• Move out on my own
• Increase my savings or money on hand
• The amount of debt I have or will have
• Getting a job that will pay well enough
• Being financially independent
• Supporting my family
• Planning/saving for the future
• Scholarships
• Work-study programs

You can also take the anonymous What Students Say surveys to add your voice to this textbook. Your responses will be included in updates.

Students offered their views on these questions, and the results are displayed in the graphs below.

What is your top immediate financial priority?

Which aspect of your finances concerns you the most?

When considering how to pay for college, which of the following do you know least about?

Financial Planning Process

Personal goals and behaviors have a financial component or consequence. To make the most of your financial resources, you need to do some financial planning. The financial planning process consists of five distinct steps: goal setting, evaluating, planning, implementing, and monitoring. You can read in more depth about SMART goals in Chapter 3 .

Financial Planning in Five Steps

• What do I want my life to look like?
• What do my savings, debt, income, and expenses look like?
• What creative ways are available to get the life I want?
• What small steps can I take to start working toward my goals?
• Begin taking those steps, even if I can only do a few small things each week.
• Make sure I don’t get distracted by life. Keep taking those small steps each week. Make adjustments when needed.

How to Use Financial Planning in Everyday Life

The financial planning process isn’t only about creating one big financial plan. You can also use it to get a better deal when you buy a car or computer or rent an apartment. In fact, anytime you are thinking about spending a lot of money, you can use the financial planning process to pay less and get more.

To explore financial planning in depth, we’ll use the example of buying a car.

1. Develop Goals

First, what do you really need? If you’re looking for a car, you probably need transportation. Before you decide to buy a car, consider alternatives to buying a car. Could you take a bus, walk, or bike instead? Often one goal can impact another goal. Cars are typically not good financial investments. We have cars for convenience and necessity, to earn an income and to enjoy life. Financially, they are an expense. They lose value, or depreciate, rather than increasing in value, like savings. So buying a car may slow your savings or retirement plan goals. Cars continually use up cash for gas, repairs, taxes, parking, and so on. Keep this in mind throughout the planning process.

2. Identify and Evaluate Alternatives for Achieving Goals in Your Current Situation.

For this example, let’s assume that you have determined the best alternative is to buy a car. Do you need a new car? Will your current car last with some upkeep? Consider a used car over a new one. On average, a new car will lose one-fifth of its value during its first year. 5 Buying a one-year-old car is like getting a practically new car for a 20 percent discount. So in many cases, the best deal may be to buy a five- or six-year-old car. Sites such as the Kelley Blue Book website (KBB.com) and Edmunds.com can show you depreciation tables for the cars you are considering. Perhaps someone in your family has a car they will sell you at a discount.

Do you know how much it will cost in total to own the car? It will help to check out the total cost of ownership tools (also on KBB.com and Edmunds.com) to estimate how much each car will cost you in maintenance, repairs, gas, and insurance. A cheap car that gets poor gas mileage and breaks down all the time will actually cost you more in the long run.

3. Write Down Your Financial Plan

4. Implement Your Plan

Once you’ve narrowed down which car you are looking for, do more online research with resources such as Kelley Blue Book to see what is for sale in your area. You can also begin contacting dealerships and asking them if they have the car you are looking for with the features you want. Ask the dealerships with the car you want to give you their best offer, then compare their price to your researched price. You may have to spend more time looking at other dealerships to compare offers, but one goal of online research is to save time and avoid driving from place to place if possible.

When you do go to buy the car, bring a copy of your written plan into the dealership and stick to it. If a dealership tries to switch you to a more expensive option, just say no, or you can leave to go to another dealership. Remember Elan in our opening scenario? He went shopping alone and caved to the pressure and persuasion of the salesperson. If you feel it is helpful, take a responsible friend or family member with you for support.

5. Monitor and Adjust the Plan to Changing Circumstances and New Life Goals

Life changes, and things wear out. Keep up the recommended maintenance on the car (or any other purchase). Keep saving money for your emergency fund, then for your next car. The worst time to buy a car is when your current car breaks down, because you are easier to take advantage of when you are desperate. When your car starts giving you trouble or your life circumstances start to change, you will be ready to shop smart again.

A good practice is to keep making car payments once the car loan is paid off. If you are paying $300 per month for a car loan, when the loan is paid off, put $300 per month into a savings account for a new car instead. Do it long enough and you can buy your next car using your own money!

Use the Financial Planning Process for Everything

The same process can be used to make every major purchase in your life. When you rent an apartment, begin with the same assessment of your current financial situation, what you need in an apartment, and what goals it will impact or fulfill. Then look for an apartment using a written plan to avoid being sold on a more expensive place than you want.

You can even use the process of assessing and planning for small things such as buying textbooks or weekly groceries. While saving a few bucks each week may seem like a small deal, you will gain practice using the financial planning process, so it will become automatic for when you make the big decisions in life. Stick to your plan.

• 1 https://www.sciencedirect.com/science/article/pii/S0277953613002839
• 2 https://academic.oup.com/geronj/article-abstract/38/5/626/578092
• 3 https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1741-3729.2012.00715.x and http://onlinelibrary.wiley.com/doi/10.1111/j.1741-3729.2012.00715.x/abstract
• 4 https://science.sciencemag.org/content/341/6149/976%20
• 5 Krome, Charles. “Car Depreciation.” 2018, Carfax. https://www.carfax.com/blog/car-depreciation

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Access for free at https://openstax.org/books/college-success/pages/1-introduction

• Authors: Amy Baldwin
• Publisher/website: OpenStax
• Book title: College Success
• Publication date: Mar 27, 2020
• Location: Houston, Texas
• Book URL: https://openstax.org/books/college-success/pages/1-introduction
• Section URL: https://openstax.org/books/college-success/pages/10-1-personal-financial-planning

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8 Keys to Good Financial Plans

While there are many ways to go about developing a financial plan—do it yourself, use a robo-advisor, work with a financial planner, or a combination thereof—Schwab has identified eight critical components every plan should include, regardless of the method used to create it. So, what does a good financial plan look like?

1. Setting financial goals

You can't make a financial plan until you know what you want to accomplish with your money—so whether you're creating it yourself or working with a professional, your plan should start with a list of your goals, both big and small, and the time horizons to accomplish them. Doing so can help to organize each objective by how soon you'll need the money:

• Short-term goals are those you hope to achieve in the next five years, such as paying off debt or building an emergency fund.
• Medium-term goals are those you hope to achieve in the next five to 10 years, such as the down payment on a home or starting your own business.
• Long-term goals are those that are 10 or more years away, including saving for college and, of course, retirement.

For each goal, specify a dollar figure and a target date. "The more specific your goals, the easier it is to measure your progress toward them," said Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.

A host of online tools can help you run the numbers, weigh competing priorities, and determine the best course of action for you. Also, if you have multiple goals to work toward, a robo-advisor, or automated investing platform, can help you weigh the importance of each goal, ranking them by needs, wants, and wishes.

Any time is a good time to establish a financial plan.

Ideally, you start investing for financial goals early in life, but any time is a good time to check in on your current financial situation and assess how you're doing. Are you still on track? Do you have other goals you hadn't previously considered? Having a financial plan helps you assess where you are today and where you want to go next.

2. Net worth statement

Knowing your net worth today can serve as a baseline for framing your financial goals and setting a target for your net worth at some point in the future, like in retirement. To determine your net worth, make a list of all your assets (bank and investment accounts, real estate, valuable personal property) and another one of all your debt (credit cards, mortgages, or student loans). Your assets minus your liabilities equals your net worth.

"Don't be discouraged if your liabilities outweigh your assets," Rob said. "That's not uncommon when you're just starting out—especially if you have a mortgage and student loans."

3. Budget and cash flow planning

Your budget is really where the rubber meets the road, planning-wise. It can help you determine where your money is going each month and where you can cut back to meet your goals.

A budget calculator can help ensure you don't overlook irregular but important expenses, such as car repairs, out-of-pocket health care costs, and real estate taxes. As you're compiling your list, separate your expenses into two buckets: must-have items like groceries and rent, and nice-to-haves like eating out and gym memberships.

When considering how your goals fit into your budget, you may want to pressure-test it using "what if" scenarios: What if you want or need to retire earlier? What if you downsized your mortgage? Some robo-advisors offer tools that allow you to adjust certain assumptions to see how they could affect your savings strategy.

4. Debt management plan

Debt is sometimes treated like a four-letter word, but not all debt is bad debt. A mortgage, for example, can help build equity—and boost your credit score in the bargain. High-interest consumer debt like credit cards, on the other hand, can weigh heavily on your credit score. Plus, every dollar you pay in finance charges and interest is one you can't put toward other goals.

If you have high-interest debt, make sure you create a plan that can help you pay it off as quickly as possible. If you're not sure where to start, a financial advisor can help you prioritize, then determine how much of your budget should go toward your debt each month.

5. Retirement plan

An old guideline says you'll need approximately 80% of your present income in retirement. However, this assumes that retiring will free you from any work-related expenses, that you've paid off your mortgage, that any children will be financially independent, and you'll likely fall into a lower tax bracket.

It's also important to keep in mind that Medicare doesn't cover everything, and health care expenses that Medicare doesn't cover—such as long-term care—can add up quickly. You also might spend more on other things in retirement, like travel, dining out, gifts, or financial support to a relative or friend.

Plugging in different scenarios into a retirement savings calculator can help you figure out what you may need in retirement. 

Don't count on the 80% rule 

If you're saving 20% – 30% of your pre-retirement income, then the 80% income-replacement rule is a good place to start. Otherwise, it's safer to aim at covering 100% of your pre-retirement income, minus whatever you're saving for retirement . As with any general rule, there are plenty of exceptions. So be sure to sit down and fine-tune your retirement budget as the time draws near. This should be your top priority because you can borrow for most other goals but not for retirement.

6. Emergency funds

When something unexpected happens—say you lose your job or get hit with an unexpected medical bill—an emergency fund can help you avoid tapping your long-term savings to make ends meet.

It's generally a good idea to save enough to cover at least three months'—but ideally six months'—worth of essential living expenses (for example, groceries, housing, transportation, and utilities). Save this money in a checking or savings account so you can access it in a hurry should the need arise.

7. Insurance coverage

Insurance is an important part of protecting your financial downside—but try to ensure you're not overpaying for coverage you don't need and make sure to cover all your bases:

• Health insurance : Without it, even routine care can cost a pretty penny, while a serious injury or hospital stay could set you back tens of thousands of dollars. As you get older, you may want to consider long-term care insurance , as well.
• Disability insurance : This coverage protects you and your family in case you're unable to work. Employer-provided disability insurance typically replaces about 60% of your salary.
• Auto and homeowners'/renters' insurance : If you own a car or home—or rent and can't afford to replace possessions out of pocket—make sure you're adequately protected.
• Life insurance : This is generally a good idea for those with dependents. Work with an insurance agent to understand what type of—and how much—coverage makes the most sense for you.

8. Estate plan

At a minimum, most people want a will in place, which states your final wishes with regards to your assets, dependents, and who you want to administer your estate. You should also keep the beneficiaries of your insurance policies and retirement accounts up to date. Also consider establishing powers of attorney for financial and health care decisions, in case you become incapacitated.

For help getting started or tackling more complex estate-planning tasks, consider working with an estate attorney or a qualified financial planner.

Learn more about financial planning

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How to Create a Personal Financial Plan (And Reach Your Goals Faster)

We all have goals in life – things like starting a business , buying a house, getting married – but money problems often sneak in and prevent us from achieving these objectives.

And so we are left wishing we had done some financial planning to pay for the necessities and to cover any of life’s unexpected events … and we’d still have enough left to put towards our goals.

If any of this sounds familiar to you, then you probably don’t have a financial plan in place.

At its most basic, a financial plan helps you meet your current financial needs and offers a strategy to achieve future financial stability, so you’re able to move forward with your goals.

In this post, you’ll learn everything you need to know about financial plans. We’ll also share an eight-step process to help you create your own personal financial plan, plus a few templates that can help you save money and time.

Post Contents

What is a Financial Plan?

What is a personal financial plan, step 1: review your current situation, step 2: set short-term and long-term goals, step 3: create a plan for your debts, step 4: establish your emergency fund, step 5: start estate planning, step 6: begin investing in your future, step 7: get protected, step 8: keep track of your plan, daily successful living’s financial plan template, smartsheet’s one-page financial plan template, simply stacie’s printable financial planner, financial plan app options, want to learn more.

A financial plan is a roadmap for an individual or a company to reach its goals. 

It takes into your account your existing financial situation and goals, then creates a detailed strategy based on your prioritized objectives, telling you exactly where to spend your money, and when to save. 

Additionally, financial plans help you prepare for the unanticipated by having you set aside a pot of money. When an unexpected job loss , illness or economic downturn occurs, you can rely on these funds to cover your day-to-day expenses. 

Essentially, you can use a financial plan to take control of your money such that you can achieve your goals and ease worries you may have about your wellbeing.

In the past, people had to hire a professional to create a financial planner for them. But with the advancements in technology, you should be able to create one on your own. 

It’s pretty easy with a financial plan template, which you can modify to reflect your own goals, cash flow, etc. You’ll find some handy templates you can use, later in the article. 

A personal financial plan is a documented analysis of your personal finances, including your earnings, liabilities, assets, and investments.

Its purpose is to help you assess the feasibility of your personal goals and to understand the steps that you will need to take – money-wise – to accomplish them. 

Your personal financial plan can stretch over weeks, months or years, based on the estimated completion time of your goals.And you can adjust it at any time to reflect new or changing priorities.

How to Create a Personal Financial Plan in 8 Easy Steps 

Making a financial plan could give you more confidence with your cash. Plus, it means fewer nights worrying about those pesky bills. 

The trouble is many people don’t know where to get started. They worry about things like “how much does a financial plan cost?” and assume they need endless professional support.

The good news? It’s never too late (or too early) to start working on your financial plan. Even better – creating a financial plan isn’t as complicated as you’d think. You can even break it down into 8 easy steps, like this:

Before you start the actual “planning” part of the process, you need to know where your journey is going to start. That means checking out what your financial situation is like right now. 

Honestly, everyone could benefit from investing in more frequent financial checkups, but it’s easy to put off looking at your bank statements.

Think about it – when’s the last time you actually looked at all of your payments for gas, electricity, broadband, and Netflix, and figured out what they add up to?

Grab your last 6 to 12 months of bank statements and highlight every regular outgoing expense in one color, then highlight your irregular expenses in another. 

It might be helpful to categorize these costs into personal and “crucial” expenses. Once you’ve got all the right info in front of you, ask yourself:

• Where can I cut down on spending?
• How much could I save by switching to a different service?
• Do I really need all of my “optional” expenses?

Now you have a starting point for your journey to financial freedom. 

The next step is figuring out where you’re going. This is an important component in your “financial plan for dummies” journey. 

Setting solid goals gives you direction and clarity when making decisions about your finances. Your goals will show you if you’re moving in the right direction. 

Ideally, you’ll need your goals to be S.M.A.R.T. This means they’re:

Don’t just say you want to have more money in your savings. Write down a statement that explains exactly what you want to accomplish, such as:

“I want to have at least $2,000 in my savings account by the end of next year.”

Short-term financial goals, like “I’ll put $100 in my savings next month”, keep you motivated by showing constant progress. Long-term goals give you a more consistent direction to move in.

No-one likes thinking about debts – but these are issues that you just can’t ignore if you want to be financially savvy. Personal financial plans can help. 

You can’t make huge progress with your short and long-term goals if your interest and repayments are weighing you down. So figure out how to pay what you owe first. 

Start by creating a plan to get rid of your most problematic debts. These are the expenses that cost the most due to excessive interest rates and fees. Get rid of those as fast as you can. 

If you’re struggling to handle several debts at once, it might help to see whether you can consolidate everything into one, cheaper loan. 

The bottom line is you need to take action and start working towards being debt-free. Remember, debts include everything from immediate issues, like credit cards, to long-term expenses, like student debt . 

An emergency fund is like a financial safety blanket. 

No matter how “prepared” you think you are, there’s always a chance that some unexpected cost will come and sweep you off your feet. 

Emergency funds protect you against things like unexpected illness, suddenly losing your job, or even just a bill that you forgot to pay. 

While the exact amount of emergency funding you have depends on you, it should generally cover about 3 to 6 months’ worth of your fixed expenses. You can also save enough to cover variable expenses like entertainment and food too. 

Emergency funds are beneficial for anyone. However, they’re particularly important if you’re a freelancer , someone with a poor credit score, or someone with variable income. 

When setting up your personal financial plans, make sure you have an emergency fund in place. 

Estate planning is one of those complicated terms that most people ignore – assuming it only applies to wealthy people, or people approaching retirement . 

However, it’s essential that you think about protecting your family when you’re not around. A proper estate plan gives you total peace of mind. 

Estate plans include:

• Last will and testament
• Healthcare directives
• Power of attorney
• Trust information

This document might also include other clauses for things like final disposition instructions and guardianship nominations. 

Estate planning might not be the best thing you can do with your Friday evening fun-wise, but it will ensure that you’re protected for anything. 

The next step is building whatever wealth you already have, so you’re prepared for the future. You can begin focusing on your savings and making investments. 

You might have different plans to suit your short-term and long-term goals. For instance, your short-term financial plan might cover the steps you’re going to take to build wealth now. Your 5-year financial plan might look at things like retirement. 

Investing for retirement is one of the best ways to ensure that you’re ready to tackle the future. When you begin planning for retirement, you’ll need to consider a few variables like:

• Desired retirement age: When would you like to stop working (be realistic here)
• Desired lifestyle: What kind of lifestyle do you want? Do you want enough cash to do whatever you like? Then plan for that!
• Current health: Health is definitely a big contributor to wealth. If you know health problems are likely for you, make sure you’re ready to tackle the issue. 
• Savings rate: How much are you saving towards the future right now?

If you’re brand-new to investing, seek out some extra support. There are wealth advisors out there that can introduce you to different kinds of investment accounts and vehicles. 

Just as emergency funds protect you from unexpected surprises in life, insurance defends your cash from any unforeseen risks. 

Having the right insurance means that you won’t need to constantly break into your savings every time something goes wrong. For instance, home insurance means that you’re properly protected from things like natural disasters and break-ins. 

Car insurance ensures that if anything goes wrong with your car, you’re ready to jump in and fix the issue – without massive payments. 

Having an emergency fund and making sure you’re insured properly means that you can stay on top of all your savings goals – even when the going gets tough. 

Make a list of all the insurance you might need when planning financial plan components. 

The importance of a financial plan is something you can’t afford to underestimate. 

The more you know about your current financial situation and where you’re headed, the more confident you’ll be in your spending. 

However, getting a financial plan example template and building your own strategy is just the first leg of the journey. You also need to commit to actively tracking your progress. 

Check in every three months or so, and make sure you’re moving in the right direction. A lot can change in your financial situation within just a few weeks. 

Remember to update your plan when significant events occur in your life too. Having a child, getting married, or purchasing a new home will all create new considerations for you to deal with. 

Actively reviewing and updating your plan means that you can enjoy a bullet-proof strategy for reaching your financial goals.

Financial Plan Example [Templates]

While you can create a financial plan from scratch, it’s always easier and quicker with a template. 

Many financial plan template options are available to help you set up a financial plan. All you need to do is enter the details in their fields. You can also edit or remove fields based on the information you have available. 

Even if you don’t want to use templates, these financial plan examples are a good starting point to learn what real-world plans look like and the specific finances you have to include in the document. 

Here are a few templates:

Daily Successful Living offers a simple template you can use to calculate your net worth. 

You can do this by adding up your assets and then subtracting all of your liabilities. 

Once you have estimated your net worth, you can move onto setting some personal goals. 

Smartsheet’s free financial plan template lets you create a concise personal finance plan. 

Use it to assess your current financial situation, create a strategy to reach your goals, and use the plan to track progress. 

You can also include details for estate planning or life insurance if needed.

Simply Stacie’s financial planner allows you to lay it all out – month-to-month – to analyze your monthly spending habits compared to what you budgeted. 

If you’re working towards a goal like, say, saving for retirement, it’ll help you find opportunities to cut back and put the money towards your objective.

Keeping track of your money is difficult, especially when you’re unsure of your spending. 

Fortunately, there are budget apps you can use to stay on top of your finances. 

• Mint : Mint, besides its pleasingly minimal UI, offers a good range of money management tools. These are set around a few different areas, namely expense tracking, credit health, and saving advice tailored to your goals. 
• Pocketnest : Pocketnest teams up with your bank to take you through different themes of financial planning. After you answer a few questions about your financial hitch, the app walks you through each stage of your plan, giving you to-dos along the way to help address any gaps.
• YNAB : YNAB offers bank syncing, transaction matching, goal tracking, and more. It can help you prepare for the future by breaking up larger expenses into more manageable, bite-sized amounts. The best expenses are ones you can easily manage.

Each of these apps make creating a financial plan a lot more convenient. Being able to view your income, expenditures, investments, etc. at a glance helps you jot down details much faster than gathering information from individual accounts.

Financial plans aren’t just for people with high income. Anyone can utilize them to identify their goals and create a plan for achieving them. 

If you create a financial plan today, you would be able to work on achieving your life’s goals strategically. 

It doesn’t matter where you stand. The important thing is that you get to fulfill your ambitions while improving your financial stability.

Do you want to start a side hustle , go on a holiday, retire by 40? You decide and then create a personal financial plan for achieving your purpose.

P.S. Life’s going to throw you curveballs that can affect your financial situation. Rather than accepting them as your fate, battle through them. You have the most powerful weapon of them all – your financial plan!

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Creating a Personal Financial Plan: Step-by-Step Guide

Last Updated: December 22, 2023 Approved

Determine Your Current Financial Situation

Develop your financial goals, identify alternative courses of action, evaluate your alternatives, create and implement your financial action plan, review and revise your financial plan, expert q&a.

This article was co-authored by Ara Oghoorian, CPA . Ara Oghoorian is a Certified Financial Accountant (CFA), Certified Financial Planner (CFP), a Certified Public Accountant (CPA), and the Founder of ACap Advisors & Accountants, a boutique wealth management and full-service accounting firm based in Los Angeles, California. With over 26 years of experience in the financial industry, Ara founded ACap Asset Management in 2009. He has previously worked with the Federal Reserve Bank of San Francisco, the U.S. Department of the Treasury, and the Ministry of Finance and Economy in the Republic of Armenia. Ara has a BS in Accounting and Finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst designation, is a Certified Financial Planner™ practitioner, has a Certified Public Accountant license, is an Enrolled Agent, and holds the Series 65 license. wikiHow marks an article as reader-approved once it receives enough positive feedback. This article received 12 testimonials and 100% of readers who voted found it helpful, earning it our reader-approved status. This article has been viewed 353,814 times.

Financial plans are written, organized strategies for maintaining financial health and accomplishing financial goals. Developing a personal financial plan will not only allow you to control your financial situation but can enhance your quality of life by reducing the uncertainty you feel about money-related issues and future needs. While you may opt to employ a professional financial planner, developing your financial plan is a perfectly feasible practice. Most financial planning experts recommend following a six-part process to develop a robust plan for the future of your finances.

• Assets may include cash or cash equivalents, such as checking and savings accounts; personal property, including equity in a home and/or a car; and invested assets, including stocks, bonds, and pensions.
• Liabilities might include current bills and debts such as car loans, home loans, medical debt, credit card debt, or student loans. See How to Get Out of Debt .

• A positive net worth means that you have more assets than liabilities, a negative net worth means the opposite.

• You may find that your short-, intermediate-, and long-term goals build upon each other — saving $100 a month, for example, toward a house fund may lead toward your long-term goal of purchasing a home.

• Specific goals can be clearly articulated. A vague goal like "be financially independent" makes it impossible to succeed or fail. Have a concise and precise goal that you can turn into a short statement.
• Measurable goals have some quantitative dimension to them, such as "Get my credit score to 750" or "Have $12,000 in emergency savings". Without assigning a value to a goal, it's also difficult to know if you're making progress.
• Attainable goals are reality-based. Don't make a goal that you cannot realistically attain: this will only discourage you from having a plan at all.
• Rewarding (also known as Relevant ) goals feel good once you achieve them. There should be a positive feedback loop where you finish a goal and then want to finish more.
• Time-based goals are not open-ended but have deadlines and milestones that you can fail or succeed at. Remember that plans are not set in stone and they can change as you have new information: if you fail at a certain milestone on the way to a goal, adjust that expectation and give it a new deadline.

• You may find that your priorities differ. Engage in careful discussion to reach an agreement on compromises that will help you both feel comfortable with your financial future.
• Recognize that some people are more financially minded than others. Determine who will be in charge of a household budget, or consider ways to provide for each partner's need to feel some degree of control.

• Intellectual goals might include furthering your education, participating in leadership retreats, sending your children to college, and attending seminars.
• Think carefully about how you plan to produce income, whether this involves continuing or advancing in your current line of work or switching careers altogether.
• Lifestyle goals encompass the things you do for fun and entertainment, as well as the things you feel, are necessary to the quality of life for which you aim.
• Residence goals might include renting, purchasing a home, or relocation.
• Consider the lifestyle you want when you retire and set personal financial planning goals that will provide for a retirement that meets your standards.

• Continue the same course of action.
• Expand your current situation.
• Change your current situation.
• Take a new course of action.

• Consider how you feel about where you're currently positioned financially versus where your goals would take you in each of the categories you've considered. Do you see particular deficiencies in one area? Perhaps you should give this area special consideration.
• Remain practical. Step-by-step plans will move you toward your goals without leaving you feeling frustrated or defeated by the scope of your agenda.

Ara Oghoorian, CPA

Our Expert Agrees: Evaluating risk is very important for financial planning. Ask yourself if a risky purchase's potential benefits are greater than the costs. You should do this for all financial decisions, from going out to eat for dinner to investing in the stock market.

• Take your current net worth into account. If your liabilities approach or outweigh your current net assets, you'll want to take steps to change that ratio.
• While you may opt to focus on developing your net assets, don't forget that paying off debt can be a great investment. Interest charges mean that even paltry debts can become overwhelming over time. Allocating some resources toward debt reduction now may prevent serious problems from developing later. [8] X Research source

• Focus upon incremental growth. By doing so you will create a road map that will take you toward your goals.
• Be realistic. You won't be able to adopt all the great strategies you've evaluated at once, but selecting a balanced range of goals will help you meet the goals you do choose and grow toward a point when you can take on additional projects.

• Goals such as obtaining a new job may not fit neatly into a budget but should be listed in an easy-to-reference location as part of your working financial plan.

• Purchase personal financial planning software for automated help with organizing and writing your financial plan. Thanks Helpful 0 Not Helpful 0
• Ask for advice from a professional financial planner if you need help deciding among different investment vehicles. Thanks Helpful 0 Not Helpful 0
• Educate yourself. Read books, newspaper articles, financial magazines, and web journals that focus on finance and economics. Watch the news and speak to people who are experienced in personal financial planning. The more you know about financial matters, the better able you will be to plan for your future financial well-being. Thanks Helpful 0 Not Helpful 0

• Don't forget to account for 3 percent yearly inflation when calculating figures for your budget and projected expenses. [10] X Research source Thanks Helpful 1 Not Helpful 0

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• ↑ https://www.missouristate.edu/FinancialAid/RealLIFE/_Files/Creating_a_Personal_Financial_Plan.pdf
• ↑ http://www.cga-pdnet.org/non_verifiableproducts/articlepublication/overviewpfp/overviewpfp.pdf
• ↑ http://www.forbes.com/sites/laurashin/2015/03/31/the-1-page-financial-plan-10-tips-for-getting-what-you-want-from-life/
• ↑ http://inflationdata.com/Inflation/Inflation/DecadeInflation.asp

About This Article

To write a personal financial plan, start by making a list of your assets, such as money in the bank or real estate. Then, write a list of any liabilities you have, such as credit card debt or a student loan. Next, subtract your liabilities from your total assets to calculate your net worth. Once you know your net worth, create specific goals for your money, such as the ability to buy a house or take a European vacation. Then, decide how you'll set aside money towards these goals, like spending $80 less per month and putting that money in a savings account. For advice on how to know if your current financial plan is working well for you, read on! Did this summary help you? Yes No

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Financial Guides

May 10, 2024

How to Create a Financial Plan in 12 Steps

Financial planning can save your life. According to a 2023 study from the University of Colorado, those who lack a financial plan have an increased risk of death . That’s because knowing how to create a financial plan will help you make better financial and lifestyle choices as you prepare for the future. Here’s a helpful guide for managing your money. And keep reading to see how MoneyLion can help with your finances.

What is a financial plan?

A financial plan is a formal strategy that takes inventory of your current financial situation, sets goals for the future, and creates action steps to achieve those goals. You can create a financial plan on your own, although you can also enlist the services of a financial planner. 

Having a person to guide can be important if you’re just starting the process. However, their services can also be valuable as your strategy becomes more complex because of life insurance needs, retirement planning, and other factors.

Why is financial planning important?

Everyone needs a financial plan. Having one in place will help you take greater control of your finances. A well-developed financial plan can help you by:

• Improving the understanding of your finances
• Allowing you to set measurable and attainable future goals
• Growing your wealth through investments

Whether your dream is to pay off your student loans or retire poolside, you need a financial plan.

How to create a financial plan in 12 steps

It’s never too late or too early to start planning for your future. Here’s how to create a financial plan.

1. Assess your current financial situation

How much debt do you currently have? How much equity do you have in your home? Do you know your credit score? A quick checkup can help you understand where you currently stand, which can assist you as you chart a course for the future.

2. Set financial goals

Set a clear financial goal for yourself. Common examples include:

• Saving for retirement
• Eliminating debt
• Launching a business
• Planning a vacation

Make sure that your goals are realistic and measurable and that you have a general timeline for when you would like to achieve them.

3. Create a budget

On one side of a sheet of paper, write down all your monthly expenses. Then, on the other side, write down your monthly income. Now, take an honest look at how much you’re actually spending each month. 

Many financial experts recommend the 50-30-20 rule. This involves spending 50% of your income on your needs, spending 30% on your wants, and saving or investing the remaining 20%.

4. Track your money

Keep track of what you spend. A banking app will help you track your expenses. If you have an investment or retirement account, make sure to keep tabs on how your money is growing and be prepared to make adjustments accordingly.

5. Save for emergencies

In the U.S., nearly a quarter of people have no emergency savings . If you have no emergency fund, you’ll be forced to dip into your primary savings account or take out a loan if you experience an unexpected car repair or medical bill or other emergency.

Aim to save for three to six months’ worth of expenses. Putting your money into a high-yield savings account will also help you grow your wealth while saving for short-term emergencies.

MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.

6. Settle outstanding debts

Debt can hold you back in your financial planning — especially if you’re paying high interest rates on things like credit cards or auto loans. By working to eliminate debt , you’ll have more money to invest in your future goals. 

In the avalanche method of resolving debt, you pay off your largest debt first, then your second largest, and so on. Alternatively, you can use the snowball method where you pay your smallest debt before using the extra money to pay off your next debt. 

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

7. Invest for the future

Investing allows you to help grow your wealth through things like stocks, bonds, real estate, and more. The stock market has historically delivered an average rate of return of around 10%, although past performance is not a guarantee of future success. Investing is subject to risk of loss, including loss of principal. Investing in the stock market comes with risk, which investors can reduce — but not eliminate.

MoneyLion offers a fully managed portfolio that requires no management fees or minimums.

8. Plan for your retirement

Your employer may allow you to divert some of your paycheck to a retirement plan such as a 401(k). Alternatively, you can invest in an individual retirement account (IRA). 

In a traditional IRA, you can deduct your contributions from your annual income taxes, though your future withdrawals are taxed as ordinary income. In a Roth IRA, you’ll pay tax on your current contributions but not your future withdrawals. 

9. Protect your assets

You may already have homeowners insurance or auto insurance to protect your house and vehicle. Personal insurance can also protect your finances in the event of a lawsuit. Covering yourself with an insurance policy ensures that you keep your hard-earned wealth and that your family’s needs are cared for.

10. Plan for taxes

Financial planning also allows you to strategically prepare for tax season. Make sure to keep track of all your sources of income to meet your tax obligations. You may be able to reduce your tax liabilities by deducting things like charitable contributions and business expenses as well as by taking advantage of certain tax credits. These strategies can reduce your tax burden, leaving you more money to save, invest, or lower your debts.

11. Start your estate planning

Estate planning starts with creating a will so that your assets are distributed according to your wishes. You can also work with an estate planner to plan for things like business succession or a final charitable contribution. 

12. Monitor and adjust the plan as needed

Monitor your progress toward your goals by determining how much debt you have left, how much you’ve saved toward retirement, and how your investment portfolio is performing. If you’re not on track toward your goals, it’s time to repeat some of the planning steps to continue progressing.

Map your future

Creating a financial plan can help clarify your goals and create a strategy for reaching them. It may seem overwhelming, but following the above guide will help you tackle your finances one step at a time. Before you know it, you’ll be on track for a brighter financial future.

What does a good financial plan look like?

A financial plan is unique to each person. Most plans will include an assessment of your current financial state, a clear description of your financial goals, and a set of action steps for reaching your goals.

What is the first step in creating a financial plan?

Start by assessing your finances. Determining your current assets, debts, and financial health will help create goals that match your lifestyle and address challenges in reaching these goals.

What is the difference between a financial planner and a financial advisor?

A financial planner will provide comprehensive financial guidance and can be valuable in crafting a financial plan. A financial advisor focuses on individual transactions, and they can be a valuable asset when making investment decisions.

Should I use a financial planner or do it myself when creating a financial plan?

If you’re just starting, a financial planner can guide you through the process. However, you might use the guide above to get started before relying on the planner.

Is it worth paying for a financial plan?

You can create a financial plan on your own for free. However, paying for expert advice can help you refine your strategy based on your goals or identify situations and needs that you had not previously considered.

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What Is Personal Finance?

The importance of personal finance, areas of personal finance, personal finance services, personal finance strategies, personal finance skills, personal finance education.

• What Classes Can't Teach

Breaking Personal Finance Rules

Frequently asked questions, the bottom line.

• Personal Finance

What Is Personal Finance, and Why Is It Important?

Investopedia / Sydney Saporito

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items. To make the most of your income and savings, it’s essential to become financially savvy—it will help you distinguish between good and bad advice and make intelligent financial decisions.

Key Takeaways

• Few schools have courses on managing your money, so it is important to learn how through free online articles, courses, blogs, podcasts, or books.
• The core areas of managing personal finance include income, spending, savings, investments, and protection.
• Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more.
• Being disciplined is important, but it’s also good to know when you shouldn't adhere to the guidelines.

Personal finance is about meeting your personal financial goals. These goals could be anything—having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In February 2024, the Federal Reserve Bank reported household debt had increased by $3.4 trillion since December 2019, prior to the recession. In addition, the following balances increased from the third quarter of 2023 to the fourth:

• Credit card balances : Up by $50 billion
• Auto loans : Up by $12 billion
• Consumer loans and store cards : Up by $25 billion
• Total non-housing : Up by $89 billion
• Mortgages : Up by $112 billion

Student loans remained unchanged, at about $1.6 trillion.

Americans are taking on an ever-increasing amount of debt to finance purchases, making managing personal finances more critical than ever, especially when inflation is eating away at purchasing power and prices are rising.

The five areas of personal finance are income, saving, spending, investing, and protection.

Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.

Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage spending is a critical aspect of personal finance. Individuals must ensure their spending is less than their income; otherwise, they won't have enough money to cover their expenses or will fall into debt. Debt can be devastating financially, particularly with the high-interest rates credit cards charge.

Savings is the income left over after spending. Everyone should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses.

Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.

Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.

Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an understanding through readings and studying. If you don't have time, you might benefit from hiring a professional to help you invest your money.

Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

Several financial planning services fall under one or more of the five areas. You're likely to find many businesses that provide these services to clients to help them plan and manage their finances. These services include:

• Wealth Management
• Loans and Debt
• Risk Management
• Estate Planning
• Investments
• Credit Cards
• Home and Mortgage

The sooner you start financial planning , the better, but it’s never too late to create financial goals to give yourself and your family financial security and freedom. Here are the best practices and tips for personal finance.

The 2022 Investopedia Financial Literacy Survey surveyed 4,000 adults and found that most Americans are concerned about personal finance basics, retirement funding, and investing in crypto.

1. Know Your income

It's all for nothing if you don't know how much you bring home after taxes and withholding. So before deciding anything, ensure you know exactly how much take-home pay you receive.

2. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

• Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities , groceries, and transport.
• Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes. Giving to charity can go here as well.
• Twenty percent goes toward the future—paying down debt and saving for retirement and emergencies.

It’s never been easier to manage money, thanks to a growing number of smartphone personal budgeting apps that put day-to-day finances in the palm of your hand. Here are just two examples:

• YNAB (You Need a Budget) helps you track and adjust your spending to control every dollar you spend.
• PocketGuard is available in both free and paid versions. It uses an algorithm to help you avoid overspending by analyzing your income, bills, goals, and budget.

3. Pay Yourself First

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

Financial experts generally recommend putting away 20% of each paycheck every month. Once you’ve filled up your emergency fund , don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on a home .

4. Limit and Reduce Debt

It sounds simple enough: Don't spend more than you earn to keep debt from getting out of hand. But, of course, most people have to borrow from time to time, and sometimes going into debt can be advantageous—for example, if it leads to acquiring an asset . Taking out a mortgage to buy a house might be one such case. Still, leasing sometimes can be more economical than buying outright, whether renting a property, leasing a car, or even getting a subscription to computer software.

On the other hand, minimizing repayments (to interest only, for instance) can free up income to invest elsewhere or put into retirement savings while you’re young when your nest egg gets the maximum benefit from compounding interest . Some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay.

Student loans account for $1.59 trillion of consumer debt—if you have an outstanding student loan, you should prioritize it. There are myriad loan repayment plans and payment reduction strategies available. If you’re stuck with a high interest rate, paying off the principal faster can make sense.

Flexible federal repayment programs worth checking out include:

• Graduated repayment—progressively increases the monthly payment over 10 years
• Extended repayment—stretches out the loan over a period that can be as long as 25 years
• Income-driven repayment—limits payments to 10% to 15% of your income (based on your income and family size)

5. Only Borrow What You Can Repay

Credit cards can be major debt traps, but it’s unrealistic not to own any in the contemporary world. Furthermore, they have applications beyond buying things. They are crucial to establishing your credit rating and a great way to track spending, which can be a considerable budgeting aid.

Credit needs to be managed correctly , meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum (that is, keep your account balances below 30% of your total available credit).

Given the extraordinary reward and incentives offered these days (such as cashback), it makes sense to charge as many purchases as possible—if you can pay your bills in full.

Avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments.

Using a debit card , which takes money directly from your bank account, is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest.

6. Monitor Your Credit Score

Credit cards are the primary vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll need a solid credit report . There are a variety of credit scores available, but the most popular one is the FICO score .

Factors that determine your FICO score include:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

FICO scores are calculated from 300 to 850. Here’s how your credit is rated:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 579 and below

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. In addition, you can detect and address mistakes or fraudulent activity by monitoring your credit report. Federal law allows you to obtain free credit reports once a year from the “Big Three” major credit bureaus : Equifax, Experian, and TransUnion.

Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, a federally authorized site sponsored by the Big Three.

Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. Instead, Capital One's CreditWise program offers your VantageScore .

Due to the COVID-19 pandemic, the three major credit bureaus are providing free credit reports weekly. The program was extended twice in 2022 and it is now permanent.

7. Plan for Your Future

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts . You also should look into insurance and find ways to reduce your premiums, if possible: auto , home , life , disability , and long-term care (LTC) . Periodically review your policy to ensure it meets your family’s needs through life’s major milestones.

Other critical documents include a living will and a healthcare power of attorney . While not all of these documents directly affect you, all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated.

Retirement may seem like a lifetime away, but it arrives much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors call the magic of compounding interest—how small amounts grow over time.

Setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax-advantaged plan, such as an individual retirement account (IRA) , a 401(k) , or a 403(b) .

While your children are young, take the time to teach them about the value of money and how to save, invest, and spend wisely.

If your employer offers a 401(k) or 403(b) plan , start paying into it immediately, especially if your employer matches your contribution. By not doing so, you’re giving up free money. Take time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people) and converting a term life insurance policy to permanent life .

8. Buy Insurance

As you age, it's natural for you to accumulate many of the same things your parents did—a family, home or apartment, belongings, and health issues. Insurance can be expensive if you wait too long to get it. Health care, long-term care insurance, life insurance; it all increases in cost the older you get. Additionally, you never know what life will send your way. If you're the sole breadwinner for the family, or you and your partner both work to make ends meet, a lot depends on your ability to work.

Insurance can cover most of the hospital bills as you age, leaving your hard-earned savings in your family's hands; medical expenses are one of the leading reasons for debt. If something happens to you, life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially.

9. Maximize Tax Breaks

Due to an overly complex tax code , many people leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in your reduction of past debts, enjoyment of the present, and plans for the future.

You should start saving receipts and tracking expenditures for all possible tax deductions and tax credits . Many office supply stores sell helpful “tax organizers” that have the main categories already labeled.

After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income on which you are taxed, whereas a tax credit reduces the amount of tax that you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself a Break

Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, a purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.

Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or a financial planner —at least once—might be a good way to jump-start your planning.

The key to getting your finances on the right track is using skills you likely already have. It’s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management. Three key skills are finance prioritization, assessing the costs and benefits, and restraining your spending.

• Finance Prioritization : This means that you can look at your finances, discern what keeps the money flowing in, and make sure that you stay focused on those efforts.
• Assessing the Costs and Benefits : This key skill keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways that they can hit it big, whether it is a side business or an investment idea. While there is a place and time for taking a flier, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
• Restraining Your Spending : This is the final big-picture skill of successful business management that must be applied to personal finances. Time and again, financial planners sit down with successful people who still manage to spend more than they make. Earning $250,000 a year won’t do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt reduction goals is crucial in building net worth .

Personal money management isn't one of the most popular topics in educational systems. Many college degrees require some financial education, but it isn't geared toward individuals, which means that most of us will need to get our personal finance education from our parents (if we’re lucky) or learn it ourselves.

Fortunately, you don’t have to spend much money to find out how to manage it better. You can learn everything you need to know for free online and in library books. Almost all media publications regularly dole out personal finance advice, too.

Online Blogs

Reading personal finance blogs is a great way to start learning about personal finance. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly which challenges real people face and how they address them.

Mr. Money Mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices. CentSai helps you navigate myriad financial decisions via first-person accounts. Million Mile Secrets and The Points Guy each teach you how to travel for a fraction of the retail price using credit card rewards. These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help tooting our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our special sections on budgeting , buying a home , and planning for retirement —or the thousands of other articles in our personal finance section.

At the Library

You may need to visit your library in person to get a library card if you don’t already have one, but after that, you can check out personal finance audiobooks and e-books online without leaving home. Some of the following best sellers may be available from your local library: I Will Teach You to Be Rich , The Millionaire Next Door, Your Money or Your Life , and Rich Dad Poor Dad . Personal finance classics such as Personal Finance for Dummies , The Total Money Makeover , The Little Book of Common Sense Investing , and Think and Grow Rich are also available as audiobooks.

Free Online Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses:

• Morningstar Investing Classroom offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds, and portfolios. Some of the courses you’ll find include “Stocks Versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix,” and “Introduction to Government Bonds.” Each course takes about 10 minutes and is followed by a quiz to help you make sure that you understood the lesson.
• EdX is an online learning platform created by Harvard University and the Massachusetts Institute of Technology. It offers at least three courses that cover personal finance: 'Personal Finance, Part 1: Investing in Yourself" from Wellesley College, “Personal Finance” from Purdue University, and “Finance for Everyone: Smart Tools for Decision-Making” from the University of Michigan. These courses will teach you how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report, and what the time value of money is.
• “Planning for a Secure Retirement” is an online course from Purdue University. It’s broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You’ll learn about your risk tolerance , think about what kind of retirement lifestyle you want, and estimate your retirement expenses.

Personal finance podcasts are a great way to learn how to manage your money if you’re short on free time. While you’re getting ready in the morning, exercising, driving to work, running errands, or preparing for bed, you can listen to expert advice on becoming more financially secure. In addition to “The Investopedia Express with Caleb Silver,” you may find these valuable:

• Freakonomics Radio and NPR’s Planet Money both make economics enjoyable by using it to explain real-world phenomena such as “how we got from mealy, nasty apples to apples that actually taste delicious,” the Wells Fargo fake-accounts scandal, and whether we should still be using cash.
• American Public Media’s Marketplace helps make sense of what’s happening in the business world and the economy.
• So Money with Farnoosh Torabi combines interviews with successful business people, expert advice, and listeners’ personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course, or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Education shouldn’t stop once you learn the basics. The economy changes, and new financial tools like the budgeting apps mentioned earlier are always being developed. Find resources you enjoy and trust, and keep refining your money skills through retirement and beyond.

What Personal Finance Classes Can’t Teach You

Personal finance education is a great idea for consumers, especially people starting out who want to learn investing basics or about credit management; however, understanding the basic concepts is not a guaranteed path to financial sense. Human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg. These three key character traits can help you stay on track:

One of the most important tenets of personal finance is systematic saving. For example, say your net earnings are $60,000 per year, and your monthly living expenses—housing, food, transportation, and the like—amount to $3,200 per month.

There are choices to make surrounding your remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged health savings account (HSA) .

To be eligible for a health savings account, your health insurance must be a high-deductible health plan (HDHP) .

Establishing an emergency fund takes financial discipline—without it, giving in to the temptation to spend rather than save can have dire consequences. In the event of an emergency, you may not have the money to pay the expenses—leading you to finance them through debt.

Once you have your emergency stash, you'll need to develop investing discipline—it’s not just for institutional money managers who make their living buying and selling stocks. Average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market.

A Sense of Timing

Timing can be crucial. For instance, imagine you're three years out of college, have established your emergency fund, and want to reward yourself. A Jet Ski costs $3,000, but you want to start investing also. "Investing in growth stocks can wait another year," you say. "I have plenty of time to launch an investment portfolio."

However, putting off investing for one year can have significant consequences. The opportunity cost of buying a personal watercraft can be illustrated through the time value of money.

The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65.

Doing tomorrow what you could do today also extends to debt payment. If you were to put the Jet Ski on your credit card, the $3,000 credit card balance would take 222 months (18.5 years) to pay off if you only made minimum payments of $75 each month. And don’t forget the interest you’re paying: at an 18% annual percentage rate (APR) , it comes to $3,923 over those months. So, if you were to plunk down the $3,000 to pay the balance rather than let it compound, you'd see substantial savings—nearly $1,000.

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult but necessary facet of sound financial decision-making involves removing emotions from a transaction.

Making impulsive purchases feels good but can significantly impact long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either. The smart thing to do is decline his requests for help—you're trying to make ends meet also.

The key to prudent personal financial management is to separate feelings from reason. However, when loved ones are experiencing real trouble, it pays to help if you can—just try not to take it out of your investments and retirement.

Many people have loved ones who always seem to need financial help—it is difficult to refuse to help them. If you include planning to assist them in real emergencies using your emergency fund, it can make the burden easier.

The personal finance realm may have more guidelines and tips to follow than any other. Although these rules are good to know, everyone has their own circumstances. Here are some rules prudent people, especially young adults, are never supposed to break—but can break if necessary.

Saving or Investing a Set Portion of Your Income

An ideal budget includes saving a portion of your paycheck every month for retirement—usually around 10% to 20%. However, while being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a given amount for retirement may not always be the best choice, especially for young people just getting started.

For one thing, many young adults and students need to consider paying for their biggest expenses, such as a new car, home, or postsecondary education. Taking away 10% to 20% of available funds would be a definite setback in making those purchases.

Additionally, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over.

Finally, saving money to travel and experience new places and cultures can be especially rewarding for a young person who’s still unsure about their life path.

Long-term Investing/Investing in Riskier Assets

The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age.

Common investing logic suggests that because young investors have such a long investment time horizon, they should be investing in higher-risk ventures; after all, they have the rest of their lives to recover from any losses that they may suffer; however, you don’t have to take on undue risk in your short- to medium-term investments if you don’t want to.

The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon .

At the other end of the age spectrum, investors near and at retirement are encouraged to cut back to the safest investments—even though these may yield less than inflation —to preserve capital . Taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles, but at age 60 or 65, you could have 20, 30, or even more years to go. Some growth investments could still make sense for you .

Personal finance is the knowledge, instruments, and techniques used to manage your finances. When you understand the principles and concepts behind personal finance, you can manage debt, savings, living expenses, and retirement savings.

What Are the 5 Main Components of Personal Finance?

The five main components are income, spending, savings, investing, and protection.

What Is an Example of Personal Finance?

One of the key ideas behind personal finance is not to spend more than you make. For instance, if you make $50,000 a year but spend $65,000, you'll end up with debt that continues to compound because you'll be spending more than you make to pay for past expenses.

Why Is Personal Finance So Important?

The concepts behind managing your personal finances can guide you in making intelligent financial decisions. In addition, the decisions you make throughout your life on what to buy, sell, hold, or own can affect how you live when you can no longer work.

Personal finance is managing your money to cover expenses and save for the future. It is a topic that covers a broad array of areas, including managing expenses and debt, how to save and invest, and how to plan for retirement. In addition, it can include ways to protect yourself with insurance, build wealth , and ensure wealth is passed on to the people you want it to pass to.

Understanding how to manage your finances is an important life-planning tool that can help set you up for a life without debt; you gain control of financial stresses and have a way to manage the expensive surprises that life can throw at you.

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Learn Personal Finance Financial Planning: Definition, Importance, And Benefits

Financial Planning: Definition, Importance, And Benefits

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Our life is like a rollercoaster ride, with many ups and downs, and financial planning is a tool that can help you smoothen your ride. Whether you have started your job or are in your 30s or 40s, financial uncertainties can come from anywhere, so it is important to have a good financial plan to secure your future.  Financial planning helps you build a roadmap for your financial journey to achieve your financial goals.

This blog will explain key financial planning details, importance, and benefits. We will also explain the steps to go about financial planning and create your own financial plan to achieve all your goals.

What Is Financial Planning?

Financial planning is the process that helps in managing your financial resources to achieve your long-term or short-term goals. It entails assessing your current financial situation, establishing financial goals and risk appetite, and devising a strategy to achieve those goals. It helps you in making informed decisions to allocate your funds.

Simply put, financial planning helps you keep your finances in control to achieve all your goals and desires. To understand more about financial planning, let’s take a closer look at its types, objective, importance, and benefits.

Financial Planning Types

Financial planning is done to achieve your future goals, including investment, tax saving, retirement, education, etc. The basis on these, some of the common types of financial planning are: 

• Investment Planning: Under investment planning, strategies are made for future investments. You can plan for the type of investment and the proportion of investment you want. You can allocate your funds to various investment vehicles such as mutual funds , NPS, ELSS , etc. 
• Tax Planning: Financial planning also helps in solving your tax issues. Under tax planning, financial strategies are made to decrease tax liability. For maximum tax savings, you can plan to invest in fixed deposits, NPS, PPF, ELSS, etc.
• Retirement Planning: Under retirement planning, strategies are made to ensure you retire rich. At the time of retirement, you need a huge corpus to fund your lifestyle for 20-30 years, and retirement planning helps achieve it. It will help you estimate the amount you would need to retire and how much you should invest in making it possible. 
• Budgeting : Under budgeting, your income and expenses are analyzed, and on the basis of that, financial plans are made. It is focused on minimizing costs and debts and increasing your disposable income.
• Insurance Planning: Insurance provides financial assistance in times of emergency. Insurance planning helps you identify the type of insurance you require and how much your insurance should cover.

Education funding planning: Financial Planning for education has become increasingly important as the expense of higher education in India has skyrocketed over the years. Financial Planning in advance for education expenses ensures that you don’t compromise on your goals.

Whether it’s for a child’s college education or your own academic aspirations, education funding planning helps you to accumulate funds for future education.

Estate planning: Estate planning is basically a financial plan that helps you pass on your assets smoothly to your loved ones after your death. It helps to avoid family feuds and disagreements about who gets what. 

Making a will is an important part of estate planning, as it helps in avoiding family feuds regarding the property or assets. It gives the roadmap regarding the distribution of assets among the family members after your death. 

Wealth creation: Financial planning also helps in wealth creation through effective budgeting. It helps you to track your income and expenses. By keeping track of your spending and controlling unnecessary expenses, you can have more surplus for the investment.

You can invest this surplus in various investment instruments, such as equity, mutual fund, NPS, etc., to generate more wealth in the long term.

Objectives of Financial Planning

• Preparing a budget: Financial planning helps you prepare the personal budget that fits your financial plan. It enables you to track your income and expenditure and minimizes your expenses. 
• Determine current financial position: Financial planning helps determine your current financial position by analyzing your current income, expenses, and liabilities. It considers your future goals and helps you create an investment plan to achieve them.
• Setting up financial goals: It helps you identify your financial goals. These goals may include retirement savings, buying or constructing of home, children’s education or marriage, etc. 
• Setting up financial plans: Financial planning allows you to take action to achieve your short- or long-term goals. It lays down the various investing strategies you can use to achieve your financial goals.
• Review financial plans: It is mandatory to monitor your financial plans regularly so that it is aligned to achieve your goals. Financial planning helps you in reviewing your portfolio performance. 

Financial Planning: Importance And Benefits

All of us have a long list of things that we want to do with our money. This could include saving tax, buying the latest smartphone, laptop, car, and properties, saving for children’s education, retirement planning, and so on.

However, more often than not the money we have with us is inadequate to fulfill all our goals. So, it becomes crucial to be clear about our priorities. And to that end, financial planning can come in handy.

The importance of financial planning is that it provides direction to our goals. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances. Moreover, financial planning also brings benefits like a smoother transition into different life stages, staying prepared for emergencies, better tax planning, etc.

Let’s look at the benefits of financial planning in detail.

Smoother Transition Into Different Life Stages

Our priorities and responsibilities keep changing when we move from one life stage to the other. Financial planning helps us figure out how we can manage our finances at different stages of life such as bachelor days, married life, post-retirement life, etc.

Helps Stay Prepared For Emergency

Creating an emergency fund is a critical aspect of financial planning. With an emergency fund, you ensure that you have enough corpus that can help you survive for at least 9-12 months of your monthly expenses. This way, you don’t have to worry about money in case of any family emergencies, pay cuts, or job loss.

Helps In Calculating The Right Insurance Cover

Term insurance and health insurance are extremely useful in the case of an unfortunate demise and a health emergency, respectively. But what is important is to take the right insurance cover. A financial plan will take into consideration multiple factors like your income, expenses, loans, responsibilities, etc., and help you decide on the right insurance cover.

Better Tax Planning

Many of us pay a substantial amount of our salary as tax. But there are legal ways to lower the tax outgo. In fact, the Indian Income Tax Act provides various investment options to build wealth with the saved tax. But most of the time people make the mistake of making tax-saving investments that are not in line with their goals. It happens because they do not consider tax planning to be a part of a financial plan. By planning your taxes in advance, you can identify suitable tax-saving products, reduce your taxable income and build wealth for the long term.

Attain Peace Of Mind

Financial planning takes care of many moving pieces of your finances. You have adequate funds to manage your money. There is insurance to deal with unfortunate events. And you have a plan in hand to achieve long-term and medium-term goals. All these things give you much-required peace of mind as you are managing your money efficiently.

Now that we know the importance and benefits of financial planning, let’s understand the steps of financial planning with examples.

4 Key Steps Of Successful Financial Planning

To help you get started with financial planning, let’s take a look at the key steps involved in the process. We will describe in brief what these steps are and then explain them with an example.

Step 1 – Set SMART Goals

This step in financial planning involves defining your financial goals. And while you do it, you have to be SMART (Specific, Measurable, Attainable, Relevant, and Timebound). For example, just saying that you will retire rich is not a SMART goal. But accumulating Rs. 5 crores for post-retirement life by the age of 60 is a SMART goal.

When you write down goals this way, it helps you prioritize the most important goals in your life. You also become realistic about your goals and work vigorously to achieve them.

Take for example the above goal of accumulating Rs. 5 crores by the age of 60. Say, the person is 35 years old. So he has 25 years to achieve this target. Now, all he needs to find out is how much he has to invest and what kind of returns he needs to earn.

Here is a table that explores various possibilities to reach the target of Rs. 5 crore in 25 years:

Step 2 – Budget Your Expenses

To ensure that you get to your goals securely, you have to invest as much as possible. It will be possible only when you cut down on discretionary spending or avoidable expenses and use those savings to invest more.

Step 3 – Find Out Where To Invest 

This step involves figuring out where to invest. For instance, if you are investing for long-term goals you can invest in equities, whereas for short-term goals, you can invest in low-risk products like fixed deposits or Debt Funds .

Overall, your investment plan will have a mix of different assets like Indian equity, international equity, debt, and gold. The mix of this asset allocation will depend on your risk profile, which involves assessing how much risk you can take. For instance, you need to find out if you are comfortable with a 20-30% decline in your portfolio . If the answer is yes, you can invest in equity. But if the answer is no, you have to minimize your allocation to equities.

This assessment of how much risk you can take is done by factoring in multiple variables such as your age, income, lifestyle, loans, responsibilities, etc. Determining your risk profile also involves assessing your personality based and how you react to adverse events.

The old-school way of risk profiling an investor has been labeling them as Conservative, Moderate, or Aggressive. At ET Money, we never understood that. Nor we do now. We looked at this deeper and came up with a dynamic risk score. You can find out your risk score and unique personality here .

Step 4 – Monitoring And Rebalancing

An investment plan is not a one-time thing that you create and forget. After making the investment plan, you will have to keep tracking your progress toward different goals. From time to time, you will need to weed out the underperforming investments and include emerging investment opportunities. You will also need to rebalance your asset allocation  from time to time. Otherwise, your investments may digress from the original asset allocation and consequently lead to counterproductive outcomes.

Reasons for Financial Planning

Financial planning is a very important part of every individual, as it helps to achieve financial goals, secure their financial future and provide financial stability. Here are some of the reasons for making a financial plan:

• It helps you to set up your financial goals, such as buying a house, car, savings for children, etc, and work toward specific financial goals. 
• It helps you create a budget that enables you to cut unnecessary expenses, reduce debts, and increase disposable income. 
• It encourages regular saving and investment, through which you can accumulate a good corpus in future by investing regularly. 
• At retirement, you require a regular flow of income. With you can build a good retirement corpus, through which you can have regular income to fund your daily expenses.
• It helps you to minimise your tax liabilities by allocating your money to various tax-saving investments. 

Financial Planning Tips for Different Sections

Financial planning enhances financial stability and helps you achieve long-term financial goals.

So, irrespective of whether you are a salaried individual planning for retirement or self-employed, it is important for everyone to have an effective financial plan to secure your future. 

Let’s understand how the different types of individuals can build an effective

Financial Planning for Salaried Employees

For salaried employees, having a robust financial plan is crucial to achieving financial goals. Here are some tips for having a good financial plan: 

• You can create a budget to track or manage your savings, expenses, and investments. 
• Consider investing in mutual funds, which offer you a diversified portfolio of investments. 
• Ensure you have health insurance coverage for yourself and your family to avoid future unexpected expenses. 

Financial Planning for Retirement

If you are planning for retirement, you should have perfect financial planning that ensures you receive regular cash flow after retirement. Here are some tips for retirement planning: 

• You can consider investing in NPS (National Pension System). It is a market-linked investment offering a diversified portfolio of various asset classes. It comes with the dual benefit of taxation and a regular pension after retirement. 
• If you don’t want to take higher risks, then you can consider PPF (Public Provident Fund). It is a government-backed tax saving scheme that offers you a guaranteed investment return.

Also Read: Retirement Strategies to Have Regular Income

Financial Planning for Self-Employed Individuals

If you are self-employed, it is also important to have your financial plan to remain protected from any financial insecurity in future. Here are some tips for self-employed individuals: 

• You can create your own budget and track your income and expenses.
• You should explore investment options like mutual funds to have a decent corpus for your future. 
• You should have adequate health insurance coverage for yourself and your family members. 

Difference Between Financial Planning and Wealth Management

Financial planning is the process of making a comprehensive plan for managing day-to-day expenses and income to achieve your financial goals. While wealth management is concerned with managing your existing wealth and making changes in your portfolio to grow your wealth.

Let’s understand how financial planning and wealth management are different from each other by the following table:

Financial planning is all about designing a trip that gets you safely to your destination. In this blog, we have explained the importance of financial planning. We have also explained how can you go about financial planning with examples. But a financial plan on paper is of no use unless you start acting on it. The earlier you start acting on your financial planning, the less complicated and the higher the chances of achieving your financial goals. So why the delay?

We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what we have written in this blog, do ask us in the comment section below, and we will respond.

FAQs for Financial Planning

Some of the key elements of the financial plan are budgeting, insurance coverage, tax planning, debt management, long-term savings, etc.

The objective of a financial plan is to provide a roadmap to manage your financial resources to achieve your financial goals in future.

The comprehensive financial plan is a detailed plan that encompasses all components required in the individual’s financial journey. It goes beyond merely setting goals and creating budgets. It includes planning for financial goals, tax planning, estate planning, retirement planning, insurance coverage, and short and long-term investment strategies, etc.

It is important to create a financial plan, as it provides you with the roadmap to manage your finances, which helps you to achieve your financial goals in the long term. It helps you prioritise your expenses and save for the future to have financial stability.  

Personal financial planning is the same as normal financial planning, wherein you make a roadmap about managing your income and expenses to achieve your financial goals.

Budgeting refers to the financial process in which you track your income and expenses, and based on these, you allocate your money. Here, the primary objective is to minimise expenses, eliminate unnecessary expenses, and increase disposable income.

Financial planning in financial management is the strategic process of aligning your financial resources and decisions with your financial goals. It includes aspects like setting financial objectives, risk assessment, investment planning, and considering tax implications. It’s about creating a holistic strategy to maximise the efficiency and growth of your financial assets.

Long-term financial planning refers to making a financial strategy for a longer tenure, typically five years or more. It may include making plans for long-term goals such as buying a home, funds for children’s education or marriage, etc.

Short-term financial planning refers to making a financial strategy for a shorter term, typically 1 to 3 years. It can be done for various short-term goals such as savings for vacation, debt payment, paying bills, etc.

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