Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations. No matter the size or scope of your financial goals, a financial plan can help make them a reality.
Financial planning is the process of looking at the current state of your finances and making a step-by-step plan to get them to where you want them to be. That may mean devising a plan to become debt-free or figuring out how to save enough money for a down payment on a new home.
This process can include many aspects of personal finance, including investing, debt repayment, building savings, planning for retirement and even purchasing insurance.
Anyone can engage in financial planning—it’s not just for the wealthy. You can get started on making financial goals on your own, and if you choose, you can work with a financial professional to help devise the smartest plan to make those goals a reality. 5 Steps to Create a Financial Plan
A financial plan is devised of smaller goals or tasks that will help support you along your financial journey. Create a financial plan with these five steps: 1. Identify Your Financial Goals
By identifying your financial goals, you’ll have a clear idea of what you need to accomplish to make them happen. Your goals should be realistic and actionable and include a timeline of when you want to accomplish them.
Making a goal to pay off credit card debt by a certain date, for example, would be an appropriate financial goal that will set you up for success. 2. Set a Budget
Having a clear picture of your finances will make it easier to achieve any financial goals. A budget can help you understand where your money is going each month. It can also help you identify where you may be overspending, giving you opportunities to cut back and allocate that money elsewhere.
One of the easiest budgets to start with is the 50/30/20 budget . This budget plan allocates your monthly income into three buckets: mandatory expenses (50%), savings and debt repayment (20%), and discretionary spending (30%). This is just one of many types of budgeting plans out there.
A budget should be a guide to help you understand your monthly finances and devise smaller goals that will bring you closer to your long-term financial goals. You likely won’t always follow your budget down to every single penny; keeping this in mind will help you stay on track, rather than get discouraged and give up on budgeting altogether.
There are apps out there that make budgeting much easier by helping you visualize your spending and savings choices each month. Some budgeting apps even give you the option to enter your financial goals directly into their platform to help you stay on track. A fully featured budgeting app allows you to track spending, manage recurring bill payments, set savings goals and manage your monthly cash flow. 3. Build an Emergency Fund
Building an emergency fund will help make sure that a financial emergency doesn’t become a catastrophic financial event.
Experts usually recommend having six months’ worth of living expenses saved to cushion you, should the unfortunate unexpected happen, such as losing a job. But six months’ worth of money can be unattainable for those who may be struggling financially, or those living in tight financial means each month.
You can start building an emergency fund by setting a few dollars aside each paycheck. You can start with a small fund goal of $100 to $200 to establish your fund. From there, you can create other smaller goals that will add up to a larger financial cushion. Some budgeting and savings apps also give you the option of rounding up to the nearest dollar in transactions and funnel that spare change toward your savings. 4. Reduce Your Debt
Having to make debt payments each month means you’ll have less money to allocate toward your purchase goals. Plus, carrying credit card debt can be expensive; every month, you’re accruing interest on your balance, which can make it take longer to pay off.
There are a variety of debt payoff methods out there. Two of the most popular include the debt snowball and debt avalanche methods . With the snowball method, you’ll pay off your smallest balance debts first, then make your way to the ones with the higher balances. The debt avalanche, on the other hand, starts with higher interest rate debts first. 5. Invest for the Future
Although risky, investing can help […]