Create a Financial Plan
Create a financial plan. Why? Because anything unplanned would’ve been smoother with a plan. That’s not always the case because even with a plan, things can go astray. However, it provides a central point or foundation from which you can shift, deviate or ignore completely (hehe).
A financial plan is an overview of your financial goals and the steps you need to take to achieve them. It could be as simple as planning to retire by 50 years old and having enough to live modestly.
Be aware, everyone’s financial situation is unique and every financial plan will look different. Some parts can be standardized, but the majority will be personal to your aspirations.
All plans will have the following:
- Your financial and life goals
- The current state of your finances
- Projections of your future wealth
- A road map how you’ll achieve the goals you’ve set
The main purpose of your financial plan is to ensure you’re on track to meet your financial goals. These tend to align with your life goals such as retiring, buying a new home or a new car. If your goals change, because life doesn’t always go as planned, you can always make adjustments.
But by having a financial plan in place, any of life’s curveballs can be easily mitigated. This will reduce any financial stress and allow you to seamlessly shift your goals. As John L. Beckley said, “most people don’t plan to fail, they fail to plan.”
Creating a financial plan can be stressful and if you’re already feeling overwhelmed, do not worry! Some financial advisers are certified financial planners who can assist you. I will talk about them briefly, but I will say, I am biased towards them because I am currently pursuing that career field.
1. Set your Goals
The first thing any financial planner will ask about is your goals. What do you want to do with your money, now and in the future? This is similar to career goals — what do you want your life to look like in five years? What about in 10 and 20 years?
You’ll want to make sure these goals are realistic. This can include buying a home, paying off student loans or buying a car. These goals will become the driving force of your financial plan.
And remember these are YOUR GOALS. Make them inspirational to your desires and aspirations. If you want them to be boring, be boring. It’s not about keeping up with the Joneses. No one is judging you, nor should you care.
You start with goals because they will inspire you to complete the next steps and provide a guiding light as you work to make those aims a reality. If you’ve never thought about it, now is the time. Forcing yourself to develop goals will help you to better understand what you want out of life, and how your finances can help you get there.
Make a list of your short term and long term goals and rank them accordingly. This is the foundation for creating a financial plan.
2. Start a Budget
People cringe at the word “budget.” Why? Because they’re either too afraid to see where their money goes or they see it as an arduous task. Let’s put that to rest. A budget is a critical tool and it’s not hard to start or maintain. I wrote a fantastic article How to Budget, It’s easier done than said — which highlights the use of automation to make budgeting fast, easy and free.
From my own experience helping Sailors and Marines, people are surprised when they create a budget and see where their money is going. It’s always discussed how buying your daily latte adds up. One Sailor found that out quick when I helped her create a budget. Let’s just say their family was spending more on lattes than groceries each month…
As I always say to people starting a budget – don’t be ashamed, be enlightened. Determine what are necessities and wants. From there, choose your battles and start tracking it.
3. Build an Emergency Fund
One of the central tenets to good financial planning is preparing for the future, whatever it may bring. Therefore, an essential component of creating a financial plan is an emergency fund.
An emergency fund is designed to cover a financial shortfall when an unexpected expense crops up. Because it must be reliable, it needs to be liquid (easily accessible, withdrawn immediately) and hold guaranteed investments.
I use Wealthfront for my emergency fund because they offer a high-yield savings account (HYSA) at 2.07% APY. For money just sitting there, a 2.07% annual return isn’t too shabby. Plus I know its immediately liquid and can be withdrawn whenever.
Want to know how to build an emergency fund? See my guide here.
4. Net Worth
Next, we need to determine your net worth. It’s a simple calculation of assets minus your liabilities. Or, you could make it easy and automate! I recommend Personal Capital because its free and aggregates all your financial information and spits out your net worth.
Your assets are what you own. This includes physical items like your house, car, and any collectibles. Assets also include the cash you have in your checking, savings, and retirement accounts.
Your liabilities include your debts. This includes your mortgage, student loans, auto loans, and outstanding credit card balance.
Once you have your net worth, it’s time to look at your cash flow. This is how much you spend versus how much you earn. Go through your bank account and credit card statements with a spreadsheet or an app like Mint and compare your monthly outlay to your net income (aka as a budget – psst.. it’s #2).
If you’re spending less than you earn, great. You’re on your way to saving money and creating a stable financial plan. I wrote a worthwhile in-depth article about Net Worth.
5. Create an Investing Plan
When you create a financial plan, an investing plan is an essential component. When you do start investing, don’t start buying random stocks. First maximize your tax advantage investments such as 401k plans, TSP, Roth IRA, 529 Plans, etc.
- Employer-sponsored retirement plans. If you have a 401(k), 403(b) or similar plan, gradually expand your contributions toward the IRS limit of $19,000 per year. If you’re 50 or older, the limit goes up to $25,000. Always maximize employee match tax advantage accounts first.
- Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings by up to $6,000 a year (or $7,000, if you are over 50). This investing guide will help you choose the right type of broker and show you how to open an account.
- 529 college savings plans. These state-sponsored plans provide tax-free investment growth and withdrawals for qualified education expenses.
Whatever you do, I recommend a robo-advisor such as M1 Finance. These online brokers have made it easy and free to build an investment portfolio. You can automate contributions and open an IRA or a taxable brokerage account with a few clicks.
Once you max out your eligibility on your retirement accounts you can use other tools such as mutual funds, annuities, or real estate to increase your investment portfolio. It is important to diversify your types of investments. If you are consistent and careful with your investments, you will reach a point when your investments generate more income than you do. That is the ultimate goal!
As you draw closer to retiring, you will want to change the way you invest. It is important to have safer investments that will not be as affected by the market swings. Target funds, such as the Thrift Savings Plan Target Funds, are a great choice for this because they automatically adjust your holdings for less risk.
Implement the Plan
Once you’ve created your financial plan, it’s time to put it in action. It may be easier to start small, rather than immediately jumping into the deep end. For example, instead of saving half your paycheck at once, start saving in small increments. Same with investing. Don’t stress out about “catching up” because you haven’t ever invested and now you’re 34 years old. Breathe. Start small with automatic contributions and build from there.
The timeline of your financial plan can stretch for years, so don’t expect immediate results. But stick to the steps outlined in your plan and you will reach those milestones in no time.
Revise the Plan if Needed
It’s important to follow the steps you set in your financial plan. However, it’s just as important to recognize that unexpected things do happen. This could be starting a new job or having a medical emergency. Any situation that arises that you didn’t expect can impact your finances, so you should make changes to your plan accordingly.
Also, your goals might change. What?! It’s understandable that life changes and with it your goals. Don’t stress yourself feeling like you’re locked into your plan. Be flexible and adjust accordingly.
Find a Financial Planner
While it’s certainly possible to create a financial plan all by yourself, it can get overwhelming. Or, you might have a very unique situation and want professional help. Financial Planners are Financial Advisors who have expertise in financial planning. They provide an accurate gauge of your overall financial situation plus advice on achieving your financial goals. They help you create the most tax-friendly plan that benefits you.
Some advisors will have either a certified financial planner (CFP) designation or a chartered financial consultant (ChFC) designation. These certifications ensure that the advisor has received the proper education and experience in the financial planning field. However, just because an advisor doesn’t have these certifications doesn’t mean they’re not qualified to help you. There are many designations but all require registration with their respective State to provide financial advice.
Advisors have an overall understanding of financial planning, but a majority specialize in specific financial fields. For example, an advisor may work only with those close to retirement, while others might work with X or Y generation clients. You want to make sure that your advisor understands your future aspirations and knows how to work toward them. Don’t be afraid to meet with a few financial advisors before choosing one that fits best with your situation and goals.
Create a financial plan. It helps you manage your finances and plan for the future. Though making a plan may take some time and dedication, it will pay off in the long run. You’ll have a clearer path for reaching big milestones and will be better prepared for the future. Financial planning can be overwhelming, but with some professional help, you’ll end up rewarding yourself by achieving your goals.
Don’t be afraid to start. And remember when you create a financial plan, make it your own.