Contents and Quick Links
- 1 Why you should have a financial plan
- 2 Step 1: Review your expected income for the year
- 3 Step 2: Review all your debt and your plan for paying it off
- 4 Step 3: List your known expenses for the year
- 5 Step 4: List your short and long-term financial goals
- 6 Step 7: Plan for adjustments based on your goals
- 7 Recap
Why you should have a financial plan
A personal or household financial plan provides the roadmap you need to make progress. It outlines exactly what your financial goals are (where you’re going) and then provides the steps you need to take to get there (how to get there).
Whether your goal is paying off debt, saving for a large purchase or planning for financial independence, a family financial plan is what directs you and provides the guidelines to make financial decisions throughout the year and beyond.
Step 1: Review your expected income for the year
The first step in creating a solid financial plan for the year is to calculate how much income you expect to earn. While this could be challenging if you own your own business, you should have a rough estimate based on previous years or business projections. Error on the side of being conservative if you just aren’t sure.
Step 2: Review all your debt and your plan for paying it off
Next, review all of your debt and know how you plan to attack it this year. You should have a very clear idea of how much you will pay each month to your debts and the method you will use to determine which account to pay off more aggressively.
If you aren’t sure how to do this, visit How To Payoff Debt Like a Boss.
Tip: Be sure to visit the FREE Resource Library to download all the personal finance workbooks, worksheets and pdf printables you need to get started with your financial plan. Gain exclusive access to the debt payoff workbook, monthly expense tracking and budgeting worksheets and the 5-page financial plan template to write your financial plan.
Step 3: List your known expenses for the year
After reviewing your debt and your overall payoff plan, it’s time to review your monthly and annual expenses. If you already track your finances and adhere to a monthly budget, simply review your categories and check if you can optimize anything and make some updates or adjustments.
Then, think about any unusual, one time or large expenses you will have over the next year. These can include larger car maintenance expenses, large purchases and home repair or renovation plans.
If you don’t already track your finances and follow a budget, it’s important that you start. Over 85% of wealth accumulators start out their wealth building process with these two simple steps. So, if you want to start saving more, this is your first step.
To learn how to track your expenses, visit How To Track Your Personal Finances and 150+ Expense Tracking Categories to Help You Track Your Finances.
To learn how to create your budget, visit The Beginner’s Guide to Creating a Budget You Can Stick To.
Once you have reviewed your budget, it’s a good idea to loop back to your debt plan and see if it needs minor adjusting based on how much money you actually expect to have available each month.
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Step 4: List your short and long-term financial goals
Now for the fun part, dreaming big and writing out your financial goals. This is the reason you are taking the time to write your financial plan. You will use this plan to make progress and achieve the financial future you dream of.
Long-term financial goals
Start with your long term goals, the ones you expect to take 5 years or more to accomplish. Do you want to save for something big, create a vacation fund so you can travel each year, or begin investing for wealth building? Do you dream of leaving your paycheck behind and starting your own business?
Think about when you wish to retire or reach financial independence and how much money you will need to do this. Review your retirement account and make sure that your savings plan in on track.
When you decide on the financial goals that are most important to you and your family, be sure to be specific and clearly define them. You should be able to track your progress and know exactly what it will take to accomplish it.
If this seems overwhelming, don’t worry! You’re in the right place to learn about these individual steps. Check out these posts, then come back and write out what long-term financial goal are most important to you.
Here are some great articles for further reading:
How To Calculate Your Savings Rate and Why You Need To (for help determining your necessary retirement savings)
Mid-term financial goals
Similar to what you just did in the last step, think about what you want to accomplish in the next few years.
3-Year Goal: Save $6,000 for a family trip to New Zealand
Steps to achieve this goal: Open a travel savings account and save $2,000 each year.
Short-term financial goals for the year
Next, write down any specific short-term goals you may have that are separate from your long-term goals. Then, based on your long-term goals are, think about what your financial goals need to be for the next year.
Long-term goal: Save $80,000 for a downpayment on a home
Short-term goal for this year: Payoff $5,000 in consumer debt and save $10,000 towards the down payment.
It’s okay to have separate short and mid-term goals. However, if your mid-term goal is to save $20,000 towards a new Mercedes but your 5-year goal is to have $80,000 saved for a new home, that Mercedes is hurting your progress.
Step 7: Plan for adjustments based on your goals
Just as you checked if your short and mid-terms goals are aligned with your long-term goals, consider whether your goals are compatible with your income. Now that you have your budget and plans for debt payoff and retirement savings, you know how much money you have left over for your financial goals. Do you need to adjust your time frame? Or, can you adjust your income?
What to do if you your goals are more ambitious than your income
If you find that your goals aren’t quite in line with your actual income, go back and review your budget in detail. Go through every category and find ways to cut back on your monthly expenses. You’d be surprised how much a daily latte and an occasional meal out can add up.
If you find that you’re not even close to covering your short and long-term financial goals, here are some possible solutions:
Adjust your budget
The majority of your spending occurs in only 2 or 3 main expense categories. For most people these are housing, food and transportation. Sometimes, healthcare, taxes and child care can account for much of your spending as well. By making big changes within these categories you can make a significant impact on your annual spending.
To learn more about how to cut back spending from your major expense categories, be sure to read How To Save Money On Your Biggest Household Expenses.
Add supplemental income
Review the skills you currently have and brainstorm ways to utilize them for extra income. Perhaps you can provide contract work, become a consultant, teach or create an online course that you offer through a service like Udemy.
If you don’t come up with any ideas, research what skills are in demand and easy to learn, then find an inexpensive and quick way to learn them. A great way to investigate this is to call a local job recruiter and ask them what jobs are available and what skills are needed.
Part time work
It may not sound very glamorous but even a low paying part-time job can go a long ways to helping you accomplish your financial goals.
Check if there is another role at your current company that will pay more, or, if you work part-time, check if you can add some additional hours for more pay.
Know your market value
One benefit to switching jobs frequently is that you learn exactly what your market value really is. For those that have been with the same company for many years, you may not know your true value anymore. Try networking and researching other positions that you are qualified for. Ask around with other colleagues in your field or call a recruiter and find out what you could expect to earn in a new position.
If it is more than you currently make, negotiate a raise or consider a new position.
So many people go through life with no financial plan in place. The most common reasons include:
- Feeling overwhelmed and unsure how to write a financial plan
- Believing that a personal finance plan is only necessary if you are wealthy
- Believing that you need to spend a lot of money to have a professional establish your family financial plan
However, anyone can benefit tremendously from writing and following a personal finance plan. Especially if you don’t have a lot of money now. This plan is what allows you to clearly define your financial goals and then determine your roadmap to actually get there.
Your financial plan is how you will take control of your finances, know where you are now and set the guide that will direct you to get where you want to be in the future.
By going through these steps you will have a decent understanding of:
- Your monthly and annual expenses
- Your annual income
- How to allocate your money between debt payoff, long-term savings and your financial goals
Believe it or not, this is your new financial plan. Now you just need to follow it!