Write a Personal Financial Plan in 7 Easy Steps

Financial plans are written, organized strategies for maintaining financial health and accomplishing financial goals. It is centered on your unique circumstances, desires and objectives. Writing a plan is easy, making some personal sacrifices and having the discipline to stick to your plan is the hard part.

STEP ONE – Define your goals – both short-term & long-term

Some common short-term goals are:

• Debt reduction/elimination
• Vacation planning
• Planning a wedding
• Home ownership – Saving for a down payment
• Family planning
• Post graduate degree
• Job retraining programs

The most common long-term goals are:

• Saving for your children’s education
• Paying off your mortgage
• Saving for retirement

 

Step Two – Organize your financial records

Create a filing system of your tax returns, bank account statements, insurance policy information, contracts, receipts, wills, deeds, titles, bills, investment accounts statements, retirement account statements, pay stubs, employee benefits statements, mortgages and any other type of document that is related to your financial life.

Step Three – Create a preliminary budget

Your budget is a starting point for determining how you will reach your financial goals, as it allows you to identify and evaluate your spending habits. Write out all of your current monthly expenses, as well as your current monthly income. Separate your budget into three categories.

What you need; food, shelter, utilities, clothing, transportation etc. What you want; mobile devices, fast foods & dining out, gym membership, beauty products, holidays & gifts, hobbies & sports etc. Savings & debt payments; credit cards, student loans, lines of credit, car payments and mortgage.

Step Four – Analyze your spending habits

Take a good look at where your hard-earned money goes. Are there any easy places that you can cut some spending? Are you willing to sacrifice your morning coffee at Starbucks or your gym membership? How about hosting a pot luck dinner instead of eating out with friends? You alone can determine between what you really need and what you want.

Try to allocate 20% of your after tax income to the saving & debt payments portion of your budget. A bare minimum of 10% in savings if you graduated with a large student debt load. If not, then you may not have enough income, have a spending problem or have too much debt.

Step Five – Set a time frame and finalize the budget

Separate your goals into different time frames, one year, five years and longer. Take a look at your savings, determine how much you need to save each month in order to achieve each goal. (Use on-line calculators for savings goals, mortgage and debt repayments)

Step Six – Devise an income strategy that will help reach your goals

Savings accounts are fine for short-term goals. Medium to long-term goals may require extra income. You could consider upgrading your skills to qualify for a higher paying job. Take on a temporary part-time job or start your own small business. You could also invest your savings to generate additional income in the form of interest, dividends and capital gains.

Step Seven – Re-evaluate your plan as necessary

It’s helpful to take a look at your plan every few months to ensure you’re on track. Is the goal still realistic or attainable? If not, what adjustments can you make?

 

Helpful Tips

1. Avoid pitfalls – Peer pressure and “Keeping up with the Jones,” make it difficult to stay on track. Comparing your life style to your family & friends is a big mistake. A common expression used for people who spend money that they don’t have is “They have champagne tastes on a beer budget.”
2. Stay focused – Keeping your focus on long-term goals can be difficult. The benefits are so far in the future, it’s easy to take a detour like putting off saving for your child’s education. It is much more fun to take the whole family to Disneyland.
3. Seek professional help – It is worth paying a lawyer for legal advice regarding wills, power of attorneys and for buying real estate. For tax saving strategies, an accountant is your best bet in navigating through a very complicated tax system. A good, low-cost financial advisor is worthwhile only if you have investable assets in excess of $150,000.
4. Keep score – Make out a net worth statement every year as a way to measure your success. Paying down debt may not be an exciting goal but seeing that debt go down each year and your net worth go up, may keep you motived.
5. Celebrate your achievements – Select an indulgence to reward yourself for achieving a goal. I wouldn’t recommend a mortgage burning party. Some friends or relatives may feel uncomfortable or inadequate about their own financial situation.