How to Create a Personal Financial Plan

A Personal Financial Planing is a process where you write down and organize your financial goals to help you control, manage, and improve your finances, as well as, achieve financial goals. Although a general financial success plan like 12 Steps to Financial Freedom and Personal Finance Success is a good place to start, you need to have a Personal Financial Plan to address your specific needs. A good Personal Financial Plan should be written down so that you can regularly review and make adjustments.

Steps to Set Up a Personal Financial Plan

As mentioned earlier, if this is your first time paying attention to your personal finance, a good place to start is Step 1 through 7 of our 12 Steps to Financial Freedom and Personal Finance Success Plan. The first 7 steps work for almost everyone in almost every situation, and it helps you improve your finances immediately. While you are working the steps, you can start to put together your Personal Financial Plan as follow:

1. Make a List of Your Financial Goals

First, make a list of things you want to accomplish. Make sure you make these SMART financial goals — i.e., Specific, Measurable, Actionable, Realistic, and Timely. For example, these might be your goals:

• Get out of debt — “I will completely eliminate my $5,700 credit card debt in 14 months.”
• Saving for retirement — “I will save $1 million in retirement fund in 30 years.”
• Saving for college education — “I will save $100,000 in college fund for my child within 15 years.”
• Saving down payment for a home — “I will save $60,000 in 5 years for the down payment for my first home.”
• Saving down payment for a car — “I will save $6,000 in 1 year for the down payment for my new car.”

2. Prioritize Your Goals

Second, figure out what is most important to you. For example, we might reorder the list as follow:

• Get out of debt — because this is costing you a lot of money and dragging you down.
• Saving down payment for a home — because you think homeownership is great for you financially and it is your dream.
• Saving for retirement — because you want to be able to live comfortably in 30 years.

If your top priority goals are all that you can handle for now, you could set aside some less important goals.

• Saving for college education — if you can’t accomplish this, it is not a big deal because you can take out a student loan or your child can go to a less expensive college.
• Saving down payment for a car — no important if you can’t get a new car.

3. Calculate How Much You Will Need Accomplish Each Goal

Third, do the math. Figure out how much money and what you need to do to accomplish each goal, for example:

• Get out of debt — use Debt Avalanche method and set aside $500 a month to pay down the debt in 14 months (see example).
• Saving down payment for a home — save $1,000 a month for 5 years in a savings account and have $60,000 by the end of 5 years.
• Saving for retirement — set up $500 a month automatic investment and invest in the stock market in a Roth IRA for 30 years (see example).

For the less important goals, you can simply wait 6 months to reevaluate because you might have better cash flow by then, or your priorities could change.

• Saving for college education
• Saving down payment for a car

4. Figure Out How You Will Fund Your Goals (Action Items)

To accomplish the first 3 goals, you need to have $2,000 a month. Is that doable? If not, then you have to figure out how to fund your goals. For example, if you’re $500 short, you could delay one of the goals, or you might figure out how to earn more and spend less to help you come up the extra $500.

5. Track Your Progress

Setting goals and determining ways to achieve them is very similar to finding your way around with a map.  Your goals are all the places you want to visit and your plan describe how you will get there, but all this is useless if you don’t know where you are at a given moment.

In this step, you want to set up a basic spreadsheet, or a journal, to help you document your progress toward each goal. Make sure you have your Plan with all the Goals and the Action Items in one place that you can see it all the time.

Update your journal on a regular basis to help you see the progress you are making which will further motivate you to accomplish more and do it faster. You also wants to do a thorough review every quarter and make adjustments as needed.

Setting Financial Goals to Change Your Life

Ideally your financial goals will be driven by what you want to do in life.  So if you are hoping to buy a house, your financial goals will focus on saving up the down payment, paying off any major debts and possibly raising your income in order to afford the mortgage payments.  It may take you a couple of years to achieve this goal, but at least if you know what you are aiming towards you can really focus your energies.

It also helps to categorize your goals into the long, medium and shorter-term’s:

• Long-term goals – These will likely be 20 to 40 years into the future and fairly broad.  Here you need to ask yourself what you want the final years of your career and retirement lifestyle to be like and then consider a plan for funding it (such as a pension, savings, investments, buy-to-let property, etc)
• Medium-term goals – Think about the next 5 to 10 years and the types of things you will want to do, such as buy a house, get married, start a family, start a business, etc.  What sort of savings and income will you require to achieve these goals?
• Short-term goals – What do you want to achieve this year and next year?  These goals may include paying off your credit card debt, going on a trip, buying a new car.  What can you do savings-wise to ensure you don’t need to borrow money to pay for these activities?

Once you have decided on your goals, start making your plans for achieving them.  In some cases you may need to seek advice from experts, such as financial advisers or from further reading of books and resources on the web, but don’t let that stop you from making and implementing your plans as soon as possible, as you can always refine them later on.

Pinyo Bhulipongsanon

Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.