Three Steps to Creating Your First Financial Plan
No matter your age, I know there are things you want to accomplish in your career, you may desire a family and of course, a unique purpose to be fulfilled. This life plan you dream about isn’t that much different than a financial plan. In fact, a financial plan is a unique component of your life plan. It’s a tool you can use to help bridge the gap between where you want to go and where you are today.
A financial plan is important because it guides you to know how to best use your resources – your time and money – to make things happen. A financial plan is not a quick fix and it’s not a set it and forget it. Successful financial results come over time, through small, manageable action steps. Just like healthy eating or exercise, results come with consistent effort.
It’s easy to put off financial planning. “I don’t know where to start so I’ll just worry about it later,” or “I don’t have any money so what is there to plan for?” The truth is, anyone can benefit from having a financial plan. Sure, someone is their 20’s may have different needs than someone in their 50’s, but that doesn’t mean there aren’t ways you can start working towards a financially secure future.
So, how do you create one of these financial plans? There are three steps to creating a financial plan.
Setting Financial Goals
The best way to start this process is to think about all the possibilities for what you’d love to have happen in your life. Think about your life dreams without a scarcity mindset.
Don’t think things like, “I’d love to do this but I could never afford that.” When setting goals, it’s about envisioning the ideal and writing your dreams down. After you’ve thought about all the possibilities, pick the three things that are the most important to you right now.
Once you’ve picked the goals that are most important, add two components to those goals – a dollar amount and a timeframe. For example, if your goal is to pay off debt, reframe that to: I want to pay off $10,000 of debt in two years.
If your goal is too big for right now, break it down into even smaller steps. You may not accomplish the big goal right now, but you can still make meaningful progress towards it.
Now that you have goals set for where you’d like to go, it’s time to see where you are today. Two things you can do to start getting organized is to calculate your net worth and determine your free cash flow.
Net worth = assets – liabilities
Assets are things you own: bank accounts, investment accounts, a home
Liabilities are things you owe: student loan, car loan, credit card, mortgage
Free cash flow = income – expenses
Start tracking your expenses. This is something you can do in excel, a Google drive on in Mint, a great online resource for money management. List out all of your fixed expenses. A fixed expense is something that is the same amount every month. For example, rent.
Next, add in your variable expenses. Variable expenses are things like eating out, fun and entertainment and buying clothes.
Add up both your fixed and variable expenses. Once you have an expense total, you can find your free cash flow by subtracting what you spend from what you make. This is an amount that you can save for the future!
Now you know where you want to go and where you are today, it’s time to start taking action.
The action phase of planning is based specifically on your goals and where you are today. If you have three goals, start with one. This phase is done over a lifetime by taking small, manageable action steps on a regular basis. Depending on your goals, here are three areas you could start with:
- Pay down debt: Maybe after you’ve calculated your net worth, you notice that it is negative. This is common among college graduates who leave school with a degree and a massive student loan balance. If you have a negative net worth, paying down debt is a great place to start taking action. Start with your highest interest rate debt; typically, this is a credit card. It may be a student loan or a car loan. If you can pay more than the minimum then you will be able to pay off the debt faster. Once that debt is paid off, you can redirect your debt payment to savings!
- Create a budget: We talked about tracking your expenses. After you’ve done this for a few months, you can start to see patterns and make adjustments. Often, changes in spending habits may relate to lifestyle changes. For example, if you’re spending a lot on eating out, you may decide to make a lifestyle change to buy and cook healthier foods – saving money and being healthier! Think about spending in terms of your values. Are you putting money towards things that you value? If not, consider how you can change spending habits to reflect what’s most important.
- Saving: Figuring out how much you can save can be determined by knowing your free cash flow. To get started, take your free cash flow amount and commit to saving that into a savings account or investment account. Make saving automatic and systematic, just like a bill. It’s much easier to stop automatic savings then it is to go into your bank account every month and transfer money to savings. If you don’t make it automatic, systematic and have it going into a separate account, the chances are much greater that you will spend that money.
The most important part of financial planning is being consistent. Commit to a monthly or weekly money date with yourself. This should be a reoccurring meeting with yourself in your calendar. Maybe it’s every Friday morning. During this time, you are committed to taking action. It could be updating your spending, figuring out what type of investment account you want to set up or checking your progress on savings into your travel fund. Find a friend, family member or financial professional that can hold you accountable. Everyone can be successful with financial planning, as long as you’re willing to put in the time and effort it takes to gain that confidence and control over your money.
Now go, take some action!
Kristy Runzer started her financial planning practice in 2013 after graduating from Penn State. She went on to earn her CERTIFIED FINANCIAL PLANNER™ designation and started OnRoute Financial, LLC. Kristy combines comprehensive financial planning, money mindset and financial education to help Millennials create better money habits and make smarter financial decisions.