When we started on our quest for financial freedom, we did not know how to make a financial plan, what it was, or why we needed one. We started with the basics and as we progressed in our journey, we organized our efforts to guide us along the way.
Inspired by our journey and lessons learned, we will provide a comprehensive, step-by-step guide to achieving your goals by creating a personal financial plan for yourself.
- The first section of this guide will be an introduction to personal financial plans and why you should have one.
- The second section will talk about how to get started with creating your own personalized plan from nothing – which means we’ll cover all the basics like setting goals, knowing where your money goes each month, figuring out your net worth, etc.
- The third section includes bonus add-ons about smart money management and how to fully leverage the power of your financial plan to achieve your goals.
- The final section will cover how to regularly review and update your financial plan.
Table of Contents
Section 1 – Introduction to Personal Financial Planning
What is a financial plan?
A personal financial plan is a roadmap to help you reach your money goals. It’s made up of everything from what money goes where, to how much debt you want or need in the future, to how much risk you’re willing to take on. The goal of any good financial plan is to allow you to reach your financial goals in a structured manner.
A personal financial plan can be as simple or complicated as necessary, depending on your personal needs.
For example: if you’re a student who has never been out of school before, then it might not take more than an Excel spreadsheet with some basic formulas you enter into it to get a sense of the future.
On the other hand, if you’re at an advanced stage of your career and need assistance with managing your retirement plans, then anything less than an in-depth plan could lead to some very serious consequences down the line – which is why it’s so important that every individual creates their own personalized plan.
Types Of Financial Plans
There are two main types of financial plans: short-term and long-term. Short term is typically anything less than five years, while long-term can mean anywhere from ten to fifty or more depending on your goals – it all depends on how old someone is when they get started, what their goals are, and how long they think it will take to get there.
Feel free to adapt the steps below for both your short-term and long-term financial goals.
Section 2 – The Basics Of A Personal Financial Plan
Step 1: Set Your Goals
Identifying and clearly writing down your goals will help clarify exactly what you are striving for and drive you to stay on track. Don’t worry if you change your mind – you can always come back and refine your goals.
10 years ago, we wrote this down:
“We are financially free in our 30s. We have a $2 Million net worth and have enough money to travel and pursue our passions stress-free.”
Notice that we wrote this as if we had already achieved our goals. We believe in the power of manifestation and wording it like this helped us to really feel what it would be like to achieve our goals.
So whether you want to save $5,000 for a rainy day or want to fund $30,000 for a new car – write it down as if you have already done it. Try to make it a tangible goal so that you can measure your progress.
For example, if your goal is to retire early, calculate how much money you will need in retirement and tailor your financial plan accordingly.
If you’re engaged or a newlywed couple, don’t forget to check out these tips on Financial Planning for Newlyweds!
Step 2: Add Up Your After-Tax Income
Now that we have a clear idea of the goals you are working towards, it is time to determine your monthly income from all sources.
- In a Google Spreadsheet (you can use any spreadsheet software), create a column labeled ‘Monthly Income’.
- List all your monthly after-tax income sources
This should include all of the following:
- Income from work, self-employment, and side hustles
- Any other recurring monthly sources like financial aid, grants, child support, etc.
The goal here is to figure out how much money you have coming in each month.
For people who get paid weekly, multiply your paycheck by 4 to get the monthly amount. For people who get paid biweekly, multiply your paycheck by 2 to get the monthly amount.
Once you are done listing all the incoming amounts, total it up. Now multiply this amount by 12 to get your total yearly after-tax income.
Just being able to visually see exactly the amount of funds you have coming in will help you plan how to allocate your income to wealth-building activities (more below).
Step 3: Track Your Expenses
Time to find out where your money is going.
Create a second column and label it ‘Monthly Expenses’ – as shown below.
Next, enter all your monthly expenses in column B.
This should include all the fixed monthly expenses.
Usually, these are all the bills and expenses paid directly from your account.
- Car Payments
- Student Loans
- Other Loans
- Home Insurance
- Car Insurance
- Health Insurance
- Transit Pass
- Automatic Deposits into Investments
Do not forget about the variable expenses as well.
We usually like to take 3 months of variable expenses and average them out. To calculate the average, simply add up all the variable amounts over 3 months and divide by 3.
Usually, anything that gets charged to a credit card or paid in cash will be averaged and counted here. These are items like:
- Entertainment (eating out, movies, drinks, etc.)
In general, we leave out one-time expenses or purchases.
If it is not a consistent expense, plan for it as a goal once we are done budgeting for usual expenses.
For example, you can plan and fund ‘travel’ as a goal. Infrequent items like medicines, doctor’s visits, repairs, or maintenance can be part of a contingency fund goal in your financial plan.
Finally, total up all the expenses.
Step 4: Calculate your Net Monthly Savings
To understand how much excess money you have, simply subtract the total monthly expenses from the total monthly income.
If the number is positive, congratulations! You have seed money to save, invest or utilize toward accelerating debt payments. We recommend setting the following priority order:
- Save an emergency fund in a high-interest savings account or safe, easily cashable investments: aim for 3 to 6 months of expenses for unforeseen circumstances
- Pay down high-interest loans (discussed below)
- Invest the rest to grow your savings
SAVING TIP: We recommend saving your spare change because it adds up faster than you think. Chime provides a very valuable service in automatically saving your spare change to help you build a stronger future.
Step 4: Manage Your Debts
The next step is to plan and get rid of debt that does not contribute to building wealth.
Instead of paying interest and fees on loans, each dollar you save can instead be put towards getting you closer to your goals. With a sound financial plan and some discipline, you can pay off your loans.
So let us get started.
In the step above, you totaled up the monthly expenses. Now, in the same spreadsheet, create a new section called ‘Debt Repayment Plan.’ Then copy all the loans you listed earlier. This time, create 3 more columns and list the following:
- Loan Name (Include Mortgages, Lines of Credit, Credit Card Balances, Student Loans, Car Loans, etc.)
- Total Loan Amount
- Monthly Payment Amount
- Applicable Interest Rate (APR)
Debt Repayment Techniques
There are many ways to approach debt repayment. We prefer using the Debt Avalanche Technique because we have successfully used this technique to pay off over $200,000 in debt ourselves.
The Debt Avalanche technique is simple – target high-interest loans first.
Compare all your loans and number them in order of pay-off priority. Whichever has the highest interest rate, rank that as your first priority. Similarly, tag the lowest interest loan at the bottom.
Most likely, your top priority is going to be outstanding credit card balances. If you only make minimum monthly payments on credit cards, the remaining balance can accrue interest at rates ranging from 15% to 40%.
Whichever loan you identified, save and accelerate payments for it. Keep the others at the minimum monthly amount for now. Once you are done paying the first one, then focus all your attention on the 2nd priority, while paying the minimum amount for the others.
This way, you are getting rid of the highest interest payments first. Over time, more of your money will start paying off your principal loan amount.
Identifying and regularly updating your debt repayment plan will become a motivating force as you pay more and more debt off.
Note: Unless it is your top priority, it won’t always make sense to accelerate paying off home mortgage loans. There can be penalties for early repayment & usually, the cost of borrowing is low compared to other loans. More on this later.
Step 5: Calculate Your Net Worth
Net worth is an important concept to keep a track of as part of your financial plan. It is a measure of the dollar value of your assets, after taking all your liabilities into account.
- Net Worth = $ Value of Assets – $ Value of Liabilities
Going back to your spreadsheet:
- Create a new section or page labeled ‘Net Worth’
- Create columns to list your Assets and Liabilities
- Total up each column
- Subtract Liabilities from Assets
Assets include items like the current market value of your home, car, jewelry, cash, investments, art, etc.
For liabilities, list debt like mortgage amount outstanding and other loans.
- Do not worry too much if your current net worth is low or negative. It all depends on your age and current life situation.
- The goal of this exercise is to know where you stand today and work toward your goals
Step 6: Create An Investment Plan
We encourage consulting a professional financial planner for advice on complicated scenarios like retirement planning, estate planning, or tax planning. And seeking professional advice before investing your hard-earned money in stocks or mutual funds is an absolute MUST! Our favorites are Motley Fool and Morningstar.
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But don’t stop there! You must understand the basics of your investments to truly be successful.
Start with a thorough examination of your current investments and build a robust plan for growing your net worth with strategic investments.
- In your spreadsheet, create a page for investments
- List your current wealth-building investments and the current market value of each
- Include any employer-sponsored plans like 401(K), Roth IRA, Pension Plans, Company Stock Plans
- List all the stocks, bonds, ETFs, Mutual Funds, etc. that you own (or simply put a link to your brokerage account’s website) and list the combined portfolio value
- List the current market value of your home and any other investment property minus the outstanding mortgages
- Include the market value of your business, if any
- Create columns for the current year and the past 3 years and the next 5 years. For example, in 2023 you would list: 2020 to 2028
- List the portfolio value of each of the items you listed above for each of the past 3 years and the current year. This gives you an indication of how each item in your portfolio is performing – either it’s growing year over year, or it’s stagnant/declining in value.
Why track your investments?
Whatever your age and goals, smart investments are an essential part of a solid financial plan. By keeping track of the value and performance of your investments in your financial plan, you can:
- Adjust your portfolio for your risk tolerance
- Rebalance and allocate funds to high performing investments
- Identify areas of opportunity. For example, if you are not maximizing your work plans, you are leaving money on the table. Consider auto-deposits so you can set it and forget it.
- Save money by maximizing tax-efficient investments first
- Know your overall growth rate to plan for the future
We suggest revisiting fluctuating, high-risk investments like stocks at least once a month, while property values can be updated once a year. It is always a good idea to regularly deep dive into your investments and measure your progress toward your goals.
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Step 7: Build Credit
Whatever your financial goals are, you are likely going to need good credit for it.
We like to dedicate a section to monitor our credit score and credit reports.
- Simply create a section or a page in your spreadsheet labeled ‘credit score.’
- Record your current credit score – you can get a free credit report at sites like Credit Karma or AnnualCreditReport.com.
- Use our guide on how to build credit to improve your score
- Update and track your score once a year
- Ensure to spot-check your credit report and report any inaccuracies to credit bureaus
Step 8: Plan For Retirement
Whether you are 25 or 55, it is never too early or late for retirement planning. Retirement could mean different things to different people. For us, retirement meant financial freedom in our 30s – we still work because we choose to.
We know lots of people who saved money, invested throughout their lives, and retired at age 65+. They were good with their money, but never truly planned for retirement. As a result, they are not truly comfortable spending their savings in retirement.
This is why we started with setting goals. If you are planning for retirement, we advise you to find your retirement number. Once you know your number, you can be much more comfortable spending your hard-earned money in retirement.
What is a retirement number?
A retirement number (or a FIRE – Financial Independence Retire Early Number) is the amount of money that you would need at retirement to sustain you through the rest of your life.
How to calculate your retirement number?
First, calculate your estimated yearly expense in retirement
- Take your monthly expenses calculated earlier and multiply by 12
- Remove any expenses that you think will not apply in retirement – Paid off mortgages/loans, commuting to work, etc.
- If you want to travel or splurge in retirement, add an estimated amount for that
Next, estimate how many years of retirement you will need to fund
- If you retire at 60 and expect to live up to 90, then you have 30 years of expenses to pay for
Multiply the number of years by the yearly expense number to get your retirement number – this is how much you need to fund 30 years of retirement.
Don’t forget to adjust upwards for inflation.
We have gone through the basics of a financial plan. Step by step, we found out your income and expenses – then used that information to plan debt repayment, investments, and retirement goals.
If you have reached this far, congratulations! You are on your way to understanding where you stand financially and what goals are realistically achievable for you at this time.
Section 3 – Smart Money Management
Over the next few weeks, we will add more information to showcase how to take your personal financial plan to the next level. For now, let’s start with some critical notes on tax savings.
Step 9: Maximize Tax Savings
There are entire industries and bookshelves dedicated to tax-saving strategies. We won’t be able to cover them all here, but saving taxes on your income and investments should be a consideration in your financial plan.
The best way to reduce taxes is to reduce your taxable income. As you review your investments, ensure to maximize the tax-efficient ones where it makes sense.
Beyond the basics, if you have several sources of income, rental property, business income, foreign investments, etc., consult a tax professional for advice on how to save taxes.
Step 10: Plan Your Risk Tolerance
Step 11: Take On Good Debt
Step 12: Grow Your Income
Step 13: Tweak Your Budget
Section 4 – Review and Adapt Your Personal Financial Plan
Step 14: Plan For Life Changes
Step 15: Save For Emergencies