A financial plan is a way for individuals and families to more effectively use their income to meet both short-term needs and long-term goals. It’s a guiding light for your money, whether you’re considering a personal loan for a home renovation or dreaming of a European vacation. You’re never too young or too old to make a financial plan, so if you haven’t created one yet, it’s not too late.
How to create a financial plan
Everybody is different. Your financial plan should be based on your individual lifestyle, priorities, age, income and other factors. But the basic steps for creating a financial plan don’t change. Even if you’re not in a financial position to start everything on the list below right away, these steps should be on your mind so you can circle back later.
1. Start with your goals
Your financial plan should lead with your goals for you and your family. Some goals you might plan for include:
- Retiring early
- Buying a car
- Buying a home
- Starting a business
- Providing for a family
- Paying for college
- Building a comfortable lifestyle
According to a 2024 Bankrate survey, 56% of people associate financial success with living comfortably above all else.
Everyone has different ideas about how to reach “financial comfort.” You may view entrepreneurship as an important path toward prosperity, for example, so you must plan for both the short-term (starting a business) and the long-term (a financially secure retirement). Having concrete goals will help you create a financial plan that supports the life you envision for yourself.
2. Build a budget
Your income and expenses are the foundation of any financial plan. These numbers represent your monthly budget, and it’s important to keep it balanced if you’re going to stay on track.
When you’re starting out, it can be helpful to itemize your spending into needs, wants and savings to simplify your spending each month. An effective budget will help you plan regular expenses like rent and a car payment while protecting your savings.
Remember, your budget should suit your lifestyle. If you prioritize dining out a lot, you need to build those costs into the budget. Just ensure you’re not dining out so much that it’s impossible to meet your other goals.
3. Create an emergency fund
An emergency fund is an important way to plan for unexpected expenses. It can be difficult to prioritize the unknown but building that money into your monthly budget can make it easier. Even a few dollars each month can make a big difference if you have an unexpected medical bill or lose a source of income.
Ideally, an emergency fund should be enough to cover all of your expenses for three to six months, but the longer the better. You probably can’t get there overnight, but a financial plan can help set you on your way.
4. Pay down high-interest debt
Debt with high interest can make it very hard to save towards future goals. Credit card balances, payday loans and title loans are a few examples of high-interest debt that you should try to pay off as soon as possible.
If you’re struggling with high-interest debt, you might consider a debt consolidation loan. That can streamline your payments, potentially lower your interest costs and make it easier to pay down debt faster.
The faster you can eliminate debt, the sooner you can start saving towards other goals. Plus, paying down debt is one way to improve your credit score, giving you more flexibility to apply for loans later.
5. Invest for your future
Short-term goals are important, but don’t overlook the future. While high-yield savings accounts and certificates of deposit (CDs) can be good ways to earn extra money on your savings, it’s helpful to have a long-term investment strategy, too. Since the market tends to rise over time, investing can help your money grow faster.
The earlier you start contributing to a retirement account, like a 401(k) or individual retirement account (IRA), the better. If you’re saving for a child’s education, a 529 plan can allow you to invest over time for their college education.
For many, investing is the most challenging and confusing part of a financial plan. There’s always a risk that you could lose money, or your investments don’t perform as well as you expect, leaving you short of savings goals. If you’re not sure where to start, speak with a financial advisor to help you build this part of your plan.
7. Monitor and adjust
Life is filled with changes and your financial plan should adapt to those changes. Check in on your plan at least once a year or whenever a change in circumstances impacts your finances.
The bottom line
Creating a financial plan that fits your lifestyle takes work, but it can be a very useful tool for meeting your financial goals. Start with your goals and develop a budget that supports them, but remember that your goals may be different from other people’s. Keep your lifestyle in mind when working on your financial plan to ensure you’re working toward your goals and supporting the quality of life you want.
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