Creating a financial plan is an important and wise idea for anybody looking to get a handle on their finances. While there are many ways to approach the creation of a financial plan, check out the following steps. You may decide to use each of these steps or maybe pick the ones that are applicable to you. Remember, finances are personal and your situation is unique. Your financial plan might look very different from mine.
Step 1: Assess your finances
Starting out, I recommend taking a complete inventory of your financial life. Get out your bank statements, your credit card statements, your investment account statements and anything else you think might be applicable. Determine where you stand with regards to debt, retirement planning, saving and income.
Make sure you can answer the following questions:
- How much am I taking home after taxes each month?
- How much am I spending each month?
- How secure is my income?
- What is my outstanding debt?
- How much savings do we have?
- How much do we have saved for retirement?
Step 2: Create goals
Now, it’s time to define some places you want to be. Take the following time horizons: 5 years, 10 years, 30 years. Where do you want to be financially in each of those time spans?
What kind of lifestyle do you want to attain? When do you want to retire? How much emergency savings do you want to have in case you are hit with an emergency or unexpected loss of income?
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When creating your targets or goals, it is important to be both aggressive and realistic. You want to aim high, but make sure it’s something attainable (don’t make becoming a billionaire your goal).
Step 3: Create steps and milestones
Now, that you have mapped out where you want to be in the future, I encourage you to break down these long term goals into smaller steps or milestones. Make sure each step is well defined and specific. You want to be able to track your progress.
As you move forward, you will want to do repeated check ups and examinations to see where you stand and to see if you’re on track with your goals and smaller milestones.
Step 4: Tweak and modify your plan
Your financial plan is a living document. It is meant to be modified and tweaked. My only warning in this regard is to make sure you are tweaking it according to sound financial principles, not according to laziness (for example, don’t change your savings goals because you’re struggling to save – instead, figure out how to save more).
Each year or every six months, sit down with your spouse and go over your plan. Where are you? Are you making incremental progress? Even if it’s slow progress, that is acceptable. The key is progress.
