If you’re like most Americans, you don’t have a long-term personal finance plan. Without one, you’ll spend more money, save less and earn less every year.
Not only will you cramp your lifestyle and miss out on many opportunities throughout your life, you’ll have much less for retirement and need more public assistance.
The good news is, creating a basic personal financial plan is much easier today with the many websites and free online tools available.
You can create an annual budget, improve your credit, reduce your debt, plan savings goals, learn about life insurance, re-evaluate your mortgage, manage your investments, and make sure you have enough for retirement.
Once you have the basics of your plan figured out, you can talk to a Certified Financial Planner and really nail down the best options for creating stability and security for you and your family.
Following the steps in this article will help you begin to take control of your personal finances in 60 minutes or less.
Step 1: Re-evaluate What Money Is
If you think money is simply something you earn and spend, you can get into trouble in the long term
Money is also something you can lose, invest, multiply and lend. Start thinking of “finances” instead of “money” and look at things like your:
- credit score
- credit reports
- credit worthiness
- student debt
- vehicle loan or lease
- health insurance
- life insurance
- mortgage down payment
- mortgage
- kids tuition
- emergency fund
- salary
- bonus
- benefits
- perks
- retirement plan
- investments
Instead of being scared by financial planning, make a game out of it. Look at it as a puzzle you are trying to solve, with a comfortable lifestyle and a secure retirement the goal of winning the game.
Your biggest goal will be to build confidence in yourself and your ability to take control of and manage your own finances.
Step 2: Set your Finish Line
Planning your financial future is like getting ready to take a vacation
Ever go on vacation? Did you start your plan by mapping out your first stop for gas, then your next stop to eat, then your next stop for a fill-up?
No, you started with your final destination and created a plan and route to get there.
That’s the same thing you should do when you create a personal financial plan. It’s easier to identify your final destination and then begin working backwards from there.
Start your personal financial plan by listing some of the goals you think you want in life right now. Those goals will change as you date, marry, divorce, have kids, move to another state, start your own business or stay with your company and rise to the top.
Start by thinking about your retirement. This will help you determine your retirement “number.” That’s the amount of money you’ll need to have on your the day you retire to live the lifestyle you want during your senior years.
You’ll want to confirm your number with a certified financial planner, but you can get a general idea in less than 10 minutes using a free online retirement planning calculator.
Now, on the way to your retirement, you’ll have other financial and life goals. Some will be serious and important, others will be fun. These can include:
- Funding one or more college degree(s) or professional certificates
- Paying off student loans
- Paying for a wedding
- Buying a house
- Creating investment income
- Building an $X emergency fund
- Saving for an annual vacation
- Saving for holiday gift giving
- Retire early
- Starting a small business
Create a Three-Tier Plan
Rank your goals in order of importance. Determine which are short-term goals (12-18 months), mid-range goals (three to five years) and long-term goals.
Write an action plan for achieving each goal. If you’re just creating your first draft of your financial plan using an hour or so, list the resources you’ll need to find your answers.
For example, you won’t be able to research and choose the different life insurance policies you’ll want to have throughout your life in a few minutes. Just list this as a goal and write down where you will go to get this information, which could be your vehicle or health insurance company.
Step 3: Time for a reality check
Where you stand now, financially, will have a big impact on your plan
Create an honest assessment of your current financial situation. List your take-home income streams, which might include salary, bonus, commission or even a yard sale you’re planning this year.
List your expenses. You’ll be more honest if you look at last year’s credit card and bank statements. If you don’t, you might not admit how much you’re spending on coffee, hair and nails, gym membership dining out and other discretionary spending.
Now look at your debt and the interest your paying each year. Look at how much of your debt you can realistically expect to pay off this year.
Calculate your net worth. This includes what you would get if you sold or cashed in all of your assets today. Subtract your debt from this number. You debt will include student loan, vehicle loan or lease termination, mortgage payoff, credit card debt and any other amounts you owed.
If you don’t have an annual budget, you’ll need to create one. This will not only help you manage your money better, it will let you see what your potential is for saving money and eliminating debt.
This isn’t something you can do in a few minutes, but should be part of your 60-minute financial plan to-do list. Calculate your savings rate. Here’s a calculator to help you.
Step 4: What are your top three financial goals?
Now that you have your basic research done and goals set, it’s time to start working on the first part of your plan
List the top three financial goals you have in order of importance. These don’t have to be short-term goals. They might be long-time goals you feel you’re late on starting.
Getting a few of your important goals on track can have a snowball effect on the rest of your financial plan.
Once you’ve taken care of meeting these goals, you’ll see how easy it was and will be motivated to work on the rest of your plan.
When you prioritize goals in order of importance, you avoid bouncing from one idea to the next. Important first goals usually include:
- Creating an annual budget
- Reducing your debt
- Improving your credit
- Creating an emergency fund
- Raising your income
- Starting a retirement savings plan
While it might not make sense that funding your retirement should be an early goal, it’s very important. You don’t create a solid nest egg by saving and adding to it. You create a large retirement fund by earning compound interest. The sooner you start your retirement fund, the sooner you start earning interest, and the sooner that interest starts earning interest.
Step 5: Make your goals bite-size
Once you’ve chosen your three most important, it’s time to create plans to reach them
Let’s say your main goal is to reduce your debt.
You’ll need to pull your credit reports and fix any errors. You’ll need to review your credit card interest rates and balance transfer offers. You’ll need to decide which cards you want to pay off first.
You’ll need to reduce your discretionary spending and use those savings to pay down debt.
If you want to create an annual budget, you’ll need to collect last year’s financial documents. You’ll want to set up a document such as an Excel spreadsheet or purchase a program like Quicken.
You’ll then need to decide where you can cut your spending, increase your savings, and/or increase your income.