As it turns out, there’s a whole lot you can do with your money to generate wealth.
Individual financial planning is the process of creating a lifelong personal financial plan to secure a stable financial future for yourself and your loved ones, and the earlier you get started, the better. Here’s what you need to know:
What is a personal financial plan?
You can think of a personal financial plan as a living financial blueprint that is designed to evolve alongside personal finances.
In short, you use a personal financial plan to generate lifelong wealth by spreading out your money and continually contributing to the best financial products available to you.
What is a financial product?
There’s no singular definition for financial product; however, it usually refers to something that helps you invest, save, protect you from loss, and plan for retirement.
There are tons of financial products, each with a specific purpose. (The following list is far from exhaustive.)
Financial products for saving
- basic savings accounts
- high-yield savings accounts
- money market accounts
Financial products for investing
- stocks
- bonds
- mutual funds
- exchange-traded funds (ETFs)
- options
- annuities
- cryptocurrencies
Financial products for loss protection
- life insurance
- disability insurance
- homeowners insurance
- auto insurance
- health insurance
Financial products for retirement savings
- basic 401(k)s
- traditional and Roth 401(k)s
- individual retirement accounts (IRAs)
Want more retirement-planning tips? Check out our helpful collection of articles on types of retirement plans!
Why is a personal financial plan important?
The short answer is that life’s expensive, and you don’t know what’s going to happen. Personal financial plans help you keep your finances on track so that you’re never left without a safety net in the event of financial hardship or outright catastrophe.
In addition, they help you prepare for a comfortable retirement, reach your lifestyle goals, and provide for your family after you pass on.
What are the five steps in the financial planning process?
1. Assess finances
Remember that your personal financial plan is intended to help you grow your net worth. Net worth is the difference between the value of your assets and the value of your liabilities, so you want the value of your assets to exceed the value of your liabilities. Using a personal financial statement (see below), you can get a snapshot of your finances to see how your assets stack up against your liabilities.
2. Set goals
With your financial assessment completed, it’s much easier to come up with a set of reasonable financial goals to help you decrease the value of your liabilities and increase the value of your assets, thereby increasing your net worth! Remember to write your goals down.
3. Do your homework
Once you have a set of reasonable financial goals, you’re ready to research the financial products you’ll need to reach them. It’s helpful to talk to a financial planner. Or talk to a friend or family member who knows their way around (you’ll save yourself more than just a handful of dollars) to help you come up with a list of financial products that appeal to you.
4. Get started
After you’ve created your list, you’re ready to start distributing your money across your chosen financial products. Give yourself a couple of weeks to put your money in place to start saving and investing.
5. Track progress
With your money steadily growing, you’ll want to check in every once in a while to see how your plan is doing. Make sure you record any changes to your plan. Moreover, if you can, keep past iterations of your plan to help you track your progress. Many financial planning individuals find motivation in keeping past ledgers showing financial growth over the years.
Check out this article for more on the five steps of the financial planning process.
What should you include in your financial plan?
Most individual financial plans contain the same three elements:
1. A personal budget
The most basic personal finance tool you’ll need to plan personal finance is a personal budget sheet listing income, expenses, bills, and debts. These help you micromanage your cash flow each month, and you can create one in five minutes using the nearest piece of paper and a pen.
Pro tip! Though all you need is paper and pen, a personal budget on a spreadsheet is much easier to customize. Check out this Excel template, for example.
2. A diverse portfolio of investments and savings
Generating wealth requires a diversified portfolio, which helps mitigate inherent market risks.
3. A contingency plan
Unexpected financial surprises can leave you in the dust with little money left over. Common examples of unforeseen financial circumstances include auto accidents, emergency surgeries, and sudden disability. Without a contingency plan, you might struggle to recover from such financial disasters.
What else should you include in your financial plan? Use these other tips to fill it out.
Should you hire a financial planner?
Financial planners are specially trained to help you create an individual financial plan, and they sit with you throughout the entire financial planning process. Is it worth it to have one? Yes, always. But hiring one isn’t always necessary. That said, some individuals have more to gain than others from hiring certified financial planners.
When should you hire a financial planner?
First, if you’re really stuck on putting together a sound plan, you can save yourself a headache by hiring one, if you have the money.
Second, if you’re starting a family, a financial planner can help you devise a specialized plan to help tackle the unique financial needs of raising one, such as college savings, life insurance, and estate planning.
Finally, if you’re a business owner, especially one with employees to look after, a financial planner can help you navigate special tax considerations.
On the whole, if you have special money considerations, you’ll benefit from hiring a financial planner. If you’re still not sure whether a hiring one is right for you, head over to this article to help you decide.
How to find the right financial planner
Always look for a certified financial planner. A great first place to look is the Certified Financial Planner Board of Standards Inc.
How do you write a financial plan yourself?
Though you’d be making a smart choice by hiring a financial planner to help you create your financial plan, you don’t have to.
By following the five steps outlined above and by using tools such as a personal financial statement and personal budget sheet, you can create a personal financial plan by yourself fairly quickly.
Research some or all the financial products listed above to find out which ones interest you and align with your financial goals.
Before investing, ask yourself what your tolerance to risk is—you don’t want to find your invested money vanished in a single volatile stock portfolio.
Once you’ve drafted your DIY financial plan, ask someone you trust to look it over with you. A second opinion may save you money. If you’re a dedicated DIYer, this guide may help you start writing your financial plan as early as today.
What financial planning mistakes should you avoid?
Unfortunately, it’s not uncommon to make mistakes in personal finance. With so much to consider, such as how much to contribute to your 401(k) each month, it’s easy to overlook something in your individual financial plan. Check out this article for more about financial planning mistakes to avoid.
The cardinal mistake—not having a plan
Without one, you’ll likely fail to take advantage of the many wealth-generating opportunities available to you. Worse yet, you probably won’t know what your finances will even look like at any given time, denying you the basis you need to set clear financial goals.
Starting your plan late
Your money needs time to grow, so it goes without saying that the more time you give your money to grow, the more money you end up with. Having a reliable nest egg set aside in time for retirement is one of the biggest reasons why individual financial planning is so important.
Putting off your plan will force you to work longer to afford your retirement and other lifestyle goals. According to CNN Money, the best time to start saving for retirement is in your 20s.
Ignoring credit card debt
Credit card debt can be crippling. TheStreet reports that in 2019, the average individual credit card debt in America sits at over $5,300, and more than half of us don’t pay our balances in full each month. Credit card debt can skyrocket if you don’t come up with a plan to take care of it early on.
As your credit card debt grows, you can end up paying thousands of dollars in interest, which is money you could have saved or invested. Not only that, but the longer you stay in debt from credit cards, the lower your credit score becomes.
Having a bad credit score can have serious financial consequences: You’ll end up paying higher insurance premiums and interest rates on credit cards and loans. In addition, applying for a mortgage or even a rental may prove a challenge.
Sample personal financial statement
A personal financial statement is one of your most valuable financial tools in planning personal finance, and they don’t have to be complicated. As with a personal budget sheet, you can create a personal financial statement with a nearby piece of paper and pen. Typically, they list assets on the right and liabilities on the left, with net worth listed underneath. To find out more about personal financial statements and to view a sample, check out this post.
The bottom line
Get to know your finances. Do the research to make educated decisions and consider hiring a financial planner, if you can. Finally, practice common sense above all. Your path to wealth could start today—so grab that pen and paper, and best of luck!
