I know where my money comes from but I don’t know where it all goes! Does it sound familiar to you? Well, we all struggle immensely when it comes to the matter of money management.
A lot of people feel anxious about their current financial situation and don’t know how to manage it.
To get out of this unhealthy mental situation of worrying all the time about your money, what you will need is a financial plan that will cater to your needs and help you accomplish your future goals.
A financial plan is a way of organizing your financial situation and the goals that you want to achieve in a course of time. Your financial plan should include a clear outline of your current financial situation and a roadmap that will indicate how you will achieve your long-term and short-term financial goals.
When you make a financial plan you will be able to have a smooth plan for meeting your fundamental needs, your risk management funding, and a proper debt reduction strategy.
In this article, we will let you know how to make a financial plan, how to set financial goals and what is personal financial planning.
So let’s dive in.
What is Personal Financial Planning and why it is Important?
When you think of managing your money properly that includes a plan that will cater all your financial needs and will have money allocation for all of your future goals.
Personal financial planning is the process of managing your money to cover expenses that you have to fulfill now and save for the future.
Let’s say you want to buy a house in the future or you are thinking of getting a home loan. But is it feasible for you with your current income pattern? A personal financial plan will let you set measurable financial goals and help you make decisions that align with your needs.
Making a personal financial plan is important in many ways. We can have a look at some of them.
- It makes you feel confident about your financial state.
- It gives you full control over your money.
- It can ensure you a mentally stable lifestyle and a better standard of living
- You can prepare yourself for any kind of financial emergency.
- Financial plan can help you to grow your wealth by suggesting investments while you have some extra money.
- You can plan for a secure retirement
- It will give you a chance to make the most of your earnings
Financial planning would help you achieve confidence, security, and a better quality of life, and also you can grow a sound money habit that will help you to manage your money properly.
How to Create a Personal Financial Plan
Now we will discuss how to create a financial plan that will help you to make your personal financial plan with ease. You need to follow some steps to create a financial plan of your own.
Step 1:Assess Your Current Financial Situation
The first step of planning is to find out where you are standing right now. You need to know what your current financial situation is like the amount you make from your job or any other sources, your fixed and variable expenses, your spending on things other than your fundamentals, your assets and investments, your debts, etc.
Checking up on all this will give a clear idea of your financial state which can help you get an insight into your current situation. And by knowing all the details you can actually put some action toward your big plan.
Step 2: Set short-term and long-term goals
After you have assessed your current financial situation now you have solid ground to start from. Your next step in this process would be figuring out your short-term and long-term goals.
Setting your goal can give you clarity about when and where you need to put money of what amount.
You need to list your goals according to your priority. Short-term goals are those which you need to fulfill in the next five years. It could be buying a car or paying off one or two debts. Long-term goals can have a timeline of 10 or more years. This can include your retirement plan or owning a new business. Your goals need to be SMART, that is,
- Specific
- Measurable
- Attainable
- Realistic
- Time-based
After you have set your goals, you can fix your target date and the time you will need to achieve them. You should also make a plan for funding that you will need to fulfill your goals.
It is suggested to make a monthly cost that will be associated with working toward your goal.
Step 3: Create a plan for your debts and liabilities
Now it’s time to think about your debts and liabilities. You will need a plan for repayment of debts on time and if you have other liabilities you have to address them too. Figuring out your debt repayment plan will help you a great deal with your financial plan.
It is likely that you can’t really focus on your goals or make good funding for your future plans until you get rid of your debts and liabilities. So it’s time to take action and start working towards becoming debt free. You can get into a debt reduction plan if you think that will help you in this process.
Step 4: Establish an emergency fund
No matter how much you have planned for your financial stability an emergency can occur at any time. So you need to establish an emergency fund that will be your safety blanket.
An emergency fund will let you out of any financially bad situation. Any kind of unexpected occurrence like sudden illness or losing your job can be overcome if you have an emergency fund ready to help you in this kind of situation.
How much you will save in the emergency fund that’s up to you but make sure that will at least cover at least 3 to 6 months of your fixed cost.
Step 5: Develop a Budget
A budget is a plan that is created to manage your money. This plan includes managing income and expenses over a period of time.
Budgeting can help you immensely with your financial plan. When you develop a budget you will have full control over spending and can have a proper future goal-oriented plan.
It will make you confident enough to have your own money management rules and implement them to get a stable and financially secure lifestyle.
Step 6: Begin investing in your future
At this step, you can begin investing in your future. At this moment maybe you are hustling with a lot of debt payments and liabilities that you need to fulfill but you are hoping for a stable future where you don’t have to think of money or stress about paying your repayments.
This is the time when you plan your future and begin focusing on your savings and making investments. Investing for your retirement is one of the best ways to make your future secure.
Plan for saving or put your money in some kind of investment that will be matured in time to get the desired life that you have always wanted.
Step 7: Keep track of your plan
At this stage, you already have a plan that is working well for you but you must keep reviewing it to match up with your changing needs. Reviewing your financial plan can help you see your progress toward meeting your goals. In the course of time, you might need to do some adjustments to help you meet your goals.
You can’t always hope to have a stable financial situation to meet all your needs. Things can go wrong and unexpected occurrences can occur that cost your unplanned expenses. These kinds of events may have an impact on your original plan.
As goals and situations can change from time to time you will need to reevaluate your plan according to your priorities. That is why you need to keep track of your plan and review it when it is necessary.
Example of Personal Financial Planning [Templates]
You can use some templates for your personal planning.
you can use this template to calculate your net worth.
You can also use this financial goal worksheet to make your financial goal plan in terms of short and long-term goals.
Financial Planning Tools
Depending on your needs, you can use financial planning tools that are available on the internet. Fortunately, M1 Finance, Moneyspire, and Personal Capital are some software that you can use for your personal financial plan. There are also some options like the Required Minimum Distribution Calculator and Compound Interest Calculator that you can use.
These calculators can help you determine how much money you need to save each month to reach a specific savings goal, or how long it might take you to save toward a goal. They can also help you calculate the deposits required to reach a future value of a savings account.
Conclusion
As you have come to the end of our discussion, now you have a proper idea and clear perspective on how you can manage your money through a financial plan and set up to achieve your goals.
Making money is not easy but having control over it and using it properly toward your needs and goals is even more difficult. A financial plan can help you overcome these difficulties and achieve your financial goals. Your financial plan can give you the comfort of financial stability and make you confident enough to reach your financial goals.
So take the first step to make a plan that will help you turn your dreams into reality.