A financial plan provides a detailed picture of your current financial situation, your financial objectives, and any plans you have made to reach those objectives. Details on your cash flow, savings, debt, investments, insurance, and any other aspects of your financial life should be included in good financial planning.
In order to develop strategies for accomplishing your short- and long-term objectives, financial planning is an ongoing activity that considers your whole financial situation. It can ease your financial stress, meet your immediate needs, and assist you in creating a nest egg for objectives like retirement.
Creating a financial plan is important because it allows you to make the most of your assets and gives you the confidence to weather any bumps along the way. You can make a financial plan yourself or get help from a financial planning professional. Online services like robo-advisors have also made getting assistance with financial planning more affordable and accessible than ever.
1. Set financial goals
A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you — whether that’s buying a house or helping you retire early — you’ll make saving feel more intentional.
Make your financial goals inspirational. Ask yourself: What do I want my life to look like in five years? What about in 10 and 20 years? Do I want to own a car, or a house? Do I want to be debt-free? Pay off my student loans? Are kids in the picture? How do I imagine my life in retirement?
Having concrete goals can make it easier to identify and complete the next steps, and provide a guiding light as you work to make those aims a reality.
2. Track your money
Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan and can reveal ways to direct more to savings or debt pay-down. Seeing where your money goes can help you develop immediate, medium-term and long-term plans.
For example, developing a budget is a typical immediate plan. NerdWallet recommends the 50/30/20 budget principles: Put 50% of your take-home pay toward needs (housing, utilities, transportation and other recurring payments), 30% toward wants (dining out, clothing, entertainment) and 20% toward savings and debt repayment. Reducing credit card or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.
3. Budget for emergencies
The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.
Building credit is another way to shockproof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.
4. Tackle high-interest debt
A crucial step in any financial plan: Pay down high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.
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If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.
5. Plan for retirement
If you visit a financial advisor, they will be sure to ask: Do you have an employer-sponsored retirement plan like a 401(k), and does your employer match any part of your contribution? True, 401(k) contributions decrease your take-home pay now, but it’s worth it to put in enough to get the full matching amount because that match is free money.
- If you have a 401(k), 403(b) or similar plan, financial advisors also generally suggest that you gradually expand your contributions toward the IRS limit. In 2023, that’s $22,500, or $30,000 for those ages 50 or older.
- Another savings vehicle for retirement planning is an IRA, or individual retirement arrangement. These tax-advantaged investment accounts can further build retirement savings by up to $6,500 a year in 2023 (or $7,500, if you are over 50).
6. Optimize your finances with tax planning
For many of us, taxes take center stage during filing season, but careful tax planning means looking beyond the Form 1040 you submit to the IRS each year.
For example, if you’re netting a sizable refund each year, you may be needlessly living on less throughout the year. Learning how and when to review your W-4 can help you to take control of your future tax bill by setting you up for fewer surprises.
Getting cozy with the tax law also means looking into tax credits and deductions ahead of time to understand which tax breaks could make a difference when it comes time to file. The government offers many incentives for taxpayers who have children, invest in green home improvements or technologies, or are even pursuing higher education.
7. Invest to build your future goals
Investing sounds like something for rich people or for when you’re established in your career and family life. It’s not. Investing can be as simple as putting money in a 401(k) and as frictionless as opening a brokerage account (many have no minimum to get started). Financial plans use a variety of tools to invest for retirement, a house or college.
8. Grow your financial well-being
With each of these steps, you’re building a moat to protect yourself and your family from financial setbacks. As your career progresses, continue to improve your financial moat by:
- Increasing contributions to your retirement accounts.
- Padding your emergency fund until you have three to six months of essential living expenses.
- Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.
Financial planning can provide you more assurance when negotiating roadblocks, such as a recession or historically high inflation. According to Charles Schwab’s 2021 Modern Wealth Survey, Americans with written financial plans have better investing and saving practices. A higher proportion of individuals with plans have emergency funds of three months as compared to those without plans.
After you’ve taken care of your immediate requirements and short-term objectives, a financial plan can also assist you in achieving your long-term objectives. Considerable estate planning and intelligent investing, for instance, can guarantee that wealth is passed on to your loved ones.