Create A Financial Plan
Creating a Financial Plan Yourself Isn’t Difficult
You don’t have to spend a lot of money to learn how to create a financial plan. Our tips will show how to do it for free.
A 2019 survey by a respected financial firm, revealed some interesting statistics. The survey pointed out that about 75% of individuals who had a financial plan in place paid their bills on time.
In contrast, about 35% without a plan paid their bills on time. In addition, about 65% who had a financial plan, set up an emergency fund to cover unexpected expenses. About 25% of those who had no plan, created an emergency fund for future unforeseen expenses.
Statistics like these show that anyone, regardless of their personal financial situation, will benefit by learning how to create a personal financial plan.
Many individuals, however, feel that they don’t have enough money to bother with a financial plan. Many others, who may have substantial assets, are of the mindset that creating a financial plan costs too much.
Neither one is accurate. The fact is that you can learn how to create a financial plan for yourself, at no cost. The time to start is now, don’t delay.
8 steps to follow when you create a financial plan
- Make a list of your goals – Try to be specific and consider both short term and long-term goals. As an example, a short-term need might be having to replace your computer, or maybe saving for a down payment on another car. Jot everything down that comes to mind, no matter how long the list is.
- Calculate your current net worth – You need to have a starting point and a good understanding of where you stand right now. When learning how to create a financial plan, you’ll start by making a list of all of your assets. These will include bank accounts, stocks, bonds, and your home.
The next item is to make a detailed list of all of your debt. These include credit cards, mortgage, student loans, auto loans, and any personal loans. Use a spreadsheet such as Excel, for this, and it will do the math for you.
Get a total of your assets and from that number, subtract the total of your debts. The difference is your net worth. If it’s a positive number, that’s great. If the result is a negative number, you’re not alone and you’ll have more work to do. Many individuals, because of high student loans, are in this category.
The net worth number that you calculated will be a benchmark used to measure your progress.
- Measure your cash flow – All this means is to get a total of money coming in (income) and from that subtract the total of all money going out (expenses, debt repayment). Don’t forget to factor in certain bills that are paid maybe once or twice a year, such as car or home insurance, auto registration, etc. These are important financial planning steps.
- Create a budget if you don’t have one – This is very important. When you do your budget, I find that it’s much easier to get a good budget software program. A good program will do most of the hard work for you, and will serve as a reminder.
In your budget, list everything in detail. There are items like mortgage and other loan payments, food, travel, utilities, lunches out, entertainment, clothing, etc. Be sure to factor in savings and an emergency fund.
- Concentrate on debt management – This is one area that I personally focus on and try to eliminate as quickly as possible. Credit card debt, with its high interest rate, can and does hurt many individuals.
Many don’t agree with me, including some financial planners, but my early goal was to eliminate all debt. I’ve been debt free for many years and I wouldn’t have it any other way. There are different methods to repay debt. Some say to repay high interest rate debt first and some say to repay the ones with the lowest balance first. When creating a financial plan, concentrate on this.
I say, use the method that works for you, and stick with it. This is the area of your budget that you need to keep a sharp eye on and also entertainment expenses.
- Start retirement savings early – This concept is the hardest for a young person to understand. Many feel that they have a lot of years until they retire, and have plenty of time to begin savings.
Retirement savings should begin at your first job. If your employer has a 401(k) or some other type of plan, start contributing to it as soon as you’re eligible. Because of other unforeseen circumstances, you may be only able to start with a small contribution. That’s fine, but when you’re able to increase the amount, go for it.
- Review your insurance coverage – Several types of insurance are a given, that is, it’s required. Most states require liability insurance on your auto and lenders require it on mortgages. Medical insurance, though not required, is a must. A lot of Chapter 13 bankruptcies are for unpaid medical expenses.
Many without coverage are limited in many ways and can be in debt forever. As long as you’re working, it’s usually a good idea to carry disability insurance and is low cost.
Lastly, life insurance is usually a good idea, especially if you have a family. Buying a whole life policy at a young age is not expensive and the value will increase as the years go by.
- Assess your income tax circumstances – The tax reform that went into effect in 2018 made quite a few changes in deductions and other areas. It’s a smart move to check on your tax withholding to make sure you don’t have a large tax refund or a balance due. To create a financial plan, it’s critical to update your tax information.
Our website has a link where you can do an estimate with the Form W-4. You may also qualify for tax credits and other deductions. Preparing your income tax return with us will automatically check for any tax credits that you may qualify for.
- Review or create an estate plan – For the average person, this doesn’t require an estate planning law firm. Simple wills can be prepared at several legal websites, as well as a health care directive.
It’s a good idea to have a power of attorney prepared that covers finances and healthcare. If you have a special needs dependent, I would recommend contacting an experienced attorney for the wills and possibly a Special Needs Trust and/or an Able Account.
In my opinion, you don’t have to be wealthy to create a financial plan. Following the points above, you’ll have a good handle on your finances. You should continue to review it periodically making sure that you are able to reduce expenses, increase savings, and reduce or eliminate debt.
We hope that you’ve been able to learn how to create a financial plan from our suggestions. Once you have the plan in place, you’ll find it much easier to make the right decision in any particular situation. We would appreciate your comments and/or suggestions below regarding this matter.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.