Chances are good that you’re familiar with the basic financial plan definition. You might also know that having a financial plan can improve your chances of reaching your money goals. But what is a financial plan, exactly? And how do you create one?
In this article, we’ll take a look at how to make a financial plan for beginners.
How Do I Create a Financial Plan?
Different people have different takes on financial planning. If you’ve already started researching financial planning strategies, you might have discovered that there’s no shortage of options.
On a basic level, creating a financial plan requires you to do three things:
- Assess your current situation.
- Create goals for the future.
- Develop a strategy to help you reach those goals.
You might find yourself asking, “How do I create a personal financial plan?” To answer this question, let’s take a look at a common five-step financial planning method.
What Are the 5 Steps in Financial Planning?
If you’re looking to create a financial plan for the first time, it may help to break it down into five main steps:
- Evaluating your baseline
- Setting financial goals
- Devising a strategy
- Implementing the strategy
- Monitoring and adjusting as needed
Let’s examine each of these steps in greater detail.
1. Evaluating Your Baseline
What is the first step in the financial planning process? Before you start, you need to understand your finances as they stand right now.
It’s hard to set financial goals if you don’t know your current financial status, so take some time to get familiar with your money before you begin. Try asking yourself questions like:
- How much am I bringing in each month?
- What are my monthly bills?
- How much debt do I have?
It’s also a good idea to track your spending. When you have a sense of where every dollar is going, you’ll understand where you can make improvements.
During this stage, many people realize that they aren’t where they want to be financially. If that’s you, don’t be discouraged! You’re formulating a plan to improve your situation, and that’s what matters.
2. Setting Financial Goals
Now that you know where you are, it’s time to decide where you want to be. This is arguably one of the most important steps in financial planning. But what is a good financial goal?
To set yourself up for success, avoid overly general goals like “I want to save more money” or “I want to buy a car.” These are good starting points, but ideally, you should use SMART goals when making a financial plan.
“SMART” stands for:
- Specific
- Measurable
- Achievable
- Relevant
- Time-Bound
For instance, instead of setting a goal to save more money, you might decide that you want to have a $1,000 emergency fund saved by the end of the year.
3. Creating a Strategy
Next, it’s time to come up with a strategy for achieving your goal. For example, if you’re currently having trouble saving money but want to have $1,000 set aside by the end of the year, your plan might include:
- Setting up an automatic transfer to your savings account after each paycheck
- Starting up a side hustle
- Limiting your non-essential spending
For most people, building a budget is an indispensable part of creating a strategy. There’s no single way to make a budget, and you can be as general or as detailed as you’d like.
If you’re looking for a starting point, the 50/30/20 model is a popular budget for beginners:
- 50% of income goes to needs (utilities, rent, groceries, minimum debt payments)
- 30% goes to wants (dining out, entertainment, hobbies)
- 20% goes to savings or extra debt payments
You can adjust this budget depending on your goals. For instance, if you’re hoping to pay down debt aggressively, you might choose to put 30% of your income toward savings and debt payments and 20% toward wants.
4. Implementing the Strategy
This might sound like an obvious step. However, you might be surprised how many people set goals, create budgets, and never put them into action.
Before you get started, write down your goals, your strategy, and your budget. Being able to reference your plan can help keep you motivated as you put it into action.
5. Monitoring and Adjusting as Needed
Many people think of financial plans as being one-and-done endeavors. However, if you want your plan to be effective, it’s important to check in regularly to evaluate your progress and make necessary adjustments.
When you’re in tune with your finances and motivated to accomplish your goals, it will be easy to make the small changes required to keep your financial plan on track. More often than not, those small changes make a big difference.
What Is a Financial Plan Good For?
What is a financial plan? Now that you know the answer, you’re ready to make your own and change your relationship with money for the better. Building a financial plan is more than just jotting down your goals. It’s about creating a roadmap for your future.
