Creating a Personal Finance Plan

A financial plan is a document that outlines your current financial situation, future goals, and the steps you need to take to achieve those goals. Making a financial plan, especially in your young adulthood can truly set you on the track to FINANCIAL INDEPENDENCE. 

Before you start drafting your financial plan, answer these 3 questions: 

-What is your current financial situation? 

-Where do you want to be in the future? 

-How will you get there?

Based on these answers you will have an idea of your goals which will be achieved by your plan.

Step 1: Identify Your Financial Values

It’s key to identify your personal values when it comes to finance. What do you want? What do you need? When identifying these values keep these following aspects in mind:

-Security. Valuing a stable and predictable financial future.

-Accumulation. The focus is to grow a number, such as your total net worth, over time. 

-Freedom. Prioritizing the ability to make life choices without financial constraints.

-Family. Ensuring the well-being and financial stability of loved ones.

-Generosity. The desire to give back and help others.

-Enjoyment. Spending on experiences and items that bring joy.

Remember Cathy’s values might differ from Little Johnny as they may require different things in life.

Step 2: Create A Net Worth Statement

A net worth statement, also known as a balance sheet or a personal finance statement, is a summary that shows you the value of what you own (assets) minus what you owe (liabilities).

1. List and value your assets. This means bank account balances, retirement accounts, taxable investments, real estate and vehicles.

2. List your liabilities. Include all debts, such as credit card balances, student loans, your mortgage, auto loans, and any other commitments for which you have borrowed funds. 

Then subtract your total liabilities from your total assets. 

The figure you get from this calculation is your current net worth. Don’t freak out if your net worth is a negative number! The point is simply to make yourself aware of your current financial reality, and then to create a plan for increasing the number over time. 

Step 3: Analyze Your Current Spending

The easiest way to do this is by using the framework of the 50/30/20 budget.

The 50/30/20 budget allocates your income into three categories:

50% for needs, such as housing, food, transportation, education and healthcare. 

30% for wants, such as gym memberships, eating out and travel.

20% for savings, including debt repayments, 401(k) contributions, and saving up for an emergency fund.

Step 4: Choose Your Financial Goals

When it comes to choosing financial goals, here are three helpful tips as outlined by the financial psychologist Brad Klontz:

• Pick up to three goals that would rank at least a 9 out of 10 on the excitement scale. 

• Give your goals an exciting name — think “financial freedom” rather than “retirement savings.”

• Give each goal a deadline, such as, “I’m debt-free by January 1, 2027!”

To achieve these large goals, focus and allocate money and time into smaller goals that will help you reach your large goals.

Step #5: Design Your Cash Flow Plan

Cash flow planning — how you decide to allocate your income — is the most important aspect of financial planning. 

In Step #3, you analyze your spending to determine where your money has gone, dividing it into needs, wants and savings. 

The idea here is to take your financial goals and design a spending plan around these goals. 

For example, imagine your take-home pay is $5,000 per month and your current spending is allocated as follows:

Needs: $2,500 (50% of your income) for essentials like housing, utilities, groceries and transportation.

Wants: $1,500 (30% of your income) for discretionary items such as eating out, entertainment and hobbies.

Savings: $1,000 (20% of your income).

Now, integrate the financial goals you choose in Step #4 into this plan. 

Let’s assume today is January 1st, 2024, and we have the following goals:

Dream Vacation Fund: Save $200 per month with the aim to accumulate enough for your vacation by January 1st, 2026.

Sleep Better Fund: Build a $12,000 emergency fund by July 1st, 2025, which requires savings of $667 per month.  

Financial Freedom Fund: Consistently contribute 6% of your income ($300 of your current salary) towards your 401(K), to get the full employer match.

All in all, your goals require you to:

Save $200 per month for a vacation fund.

Save $667 per month towards an emergency fund.

Save $300 per month towards retirement.

This requires $1,166 of savings per month, which is over your current 20% of savings.

So you have two choices:

Adjust your goals to fit within your $1,000 per month allocated savings.

Save more by cutting from other areas — e.g., your needs and wants — to make up for the shortfall.

The choice is yours. But the important thing is to understand what the opportunity cost is upfront, keeping in mind that financial planning is about making sure you prioritize what matters to you.

The final step here is to set up automatic transfers to align with your paycheck dates. If your direct deposit hits on the 1st and 15th, schedule transfers for shortly thereafter. 

For example:

Transfer #1: $333 to your emergency fund on the 3rd and 17th of each month.

Transfer #2: $100 to your Dream Vacation Fund on the 3rd and 17th.

The 401(k) contribution will be completed automatically by your employer. 

Transfers should go to separate savings accounts, so you understand this money is separate for your everyday living expenses. 

Lastly, in the financial planning template, fill in the “Target” spending plan to reflect the ideal distribution of your income across needs, wants, and goals, detailing the automatic transfers you’ll set up to ensure these goals are achieved.

Creating a financial plan is something that anyone can do, regardless of their income or financial situation. It’s also something that can help anyone on their journey to financial independence and success.

Click the link to learn more: How to Make a Financial Plan In 7 Steps (Free Template) (thewaystowealth.com)