A personal financial plan is a blueprint you use to organize your money to ensure economic stability throughout life. A solid plan can help you make smart decisions with your money as your financial foothold evolves.
And the best part about the personal financial planning process is that it doesn’t have to be complicated. With or without a financial planner, you can whip up your plan in five easy steps.
Step 1: Assess your financial foothold
What your finances look like now shapes your personal financial planning process moving forward. To assess your financial foothold, take stock of your income, expenses and debt.
List your assets: the value of your property and investments (if any) and the balances of your checking and savings accounts. Then, list your debts: credit card balances, mortgages and other loans.
Next, compare your income against expenses to see where your money is going and how much you’re left with at the end of the month after you pay your bills.
Knowing whether your assets can cover your debt and whether you have wiggle room at the end of the month to invest and save can help you develop financial goals.
Step 2: Define your financial goals
You set financial goals to achieve a lifestyle, and to achieve that lifestyle, your goals must consider three things:
- How much money you need to pay your bills.
- How much money you need to pay off your debts.
- How much money you’ll need to save and invest to achieve the lifestyle you want.
Pro tip! Need help figuring out how to save and invest to achieve the lifestyle you want? Check out this savings calculator!
Step 3: Research financial strategies
Second, consider opening a savings account if you haven’t already. These accounts encourage monthly contributions to build a fund for emergencies or other substantial expenses you might need to pay down the road.
Third, consider opening an investment account if you haven’t already. These help you generate wealth over time through investment returns — money earned on your investment through price appreciation. Investing has inherent risks, which you’ll need to consider.
Step 4: Put your financial plan into action
Now that you’ve formulated a plan, take time to review it. Talk to a financial planner to see whether you’ve overlooked something and to make sure your numbers add up.
If you can’t afford one, talk to someone you trust, such as a close friend or family member. Once you’re confident you’ve created a solid personal financial plan, put it in motion.
Step 5: Monitor and evolve your financial plan
Your individual financial plan is a “living” document — it’s going to evolve as your financial footing changes. Review your personal financial plan every year or so. Start at the first step to get a snapshot of how your finances are doing, and make any necessary changes to the rest of your plan.
The bottom line
Every time you review your plan, you should see you have less debt, more savings, and a return on your investments. Remember to stay the course in your goal to build a solid financial foundation.