Let’s walk through the ins and outs of creating a solid financial plan. This is not to be taken lightly because a good financial plan will drive many of your day-to-day money decisions. But creating the right financial plan for you, one that is personalized for you and personal to you, is more art than science.
A good financial plan contains a few basic elements. Start with where you are and then figure out where you want to go. A financial plan should consist of:
Your current financial situation: A numbers-based summary of how your finances look right now. Usually consists of a personal financial statement that shows your assets, debt, income, and expenses.
- You’ll need to pull up your bank accounts, credit card statements, loan accounts, and anything else that will help you compile all of your assets, debt, income, and expenses.
Your financial goals: A written compilation of your most important financial hopes and dreams. This list should not be exhaustive but rather consist of a few main goals that are specific, realistic, and achievable.
- Your goals should be things like “I will pay off my $25,000 of student loans in 3 years”. Or “I will save up $950,000 to achieve financial independence by age 40”. Goals of “I want to own a house someday” or “I want to buy a boat” are not specific enough.
- To be clear, financial goals of buying a house or a boat are totally fine – just make them specific. In this case, specific goals would be “I will save up $60,000 to buy a house in 5 years” or “I will save up $20,000 for a boat by the end of this year”.
- As you’re thinking through your goals, make sure your goals are tailored to you and what you want. This isn’t a plan for what you think your friends and family want for you, this is a plan for YOU.
How you will achieve your goals: List of the ways you’ll accomplish your financial goals.
- If your goal is to save up $60,000 to buy a house in 5 years, this is where you figure out how you’ll do it.
- A simple approach to accomplishing this goal would be to break the goal up into smaller pieces rather than randomly throwing money every so often into a savings account. If you want to have $60,000 in 5 years, you’ll need to save $12,000 per year to make that happen. Conveniently, $12,000 divided by 12 months of the year is $1,000 a month. So now you know you need to save $1,000 per month for 5 years to have $60,000 at the end of those 5 years.
- Consider your relationship with money and your financial circumstances when figuring out how you’ll accomplish your goals.
- If your spending is out of control, then saving $60,000 in 5 years is probably not a realistic goal. If this is you, take a step back and get your spending under control first.
- You know yourself better than anyone else so be real. If you know money is usually tight around the holidays, then plan for that.
- Back to the house savings example above… if you’re saving $1,000 per month but you know you’ll have trouble making that in December this year, plan around it! Maybe you save $1,500 in October and $1,500 in November to make sure you’ll hit $12,000 total for the year. So your financial plan should say “I will save $1,000 per month from January through September, then $1,500 per month for October and November, for a total of $12,000 a year.” It’s that simple!
Here is a template for a personal financial statement, and here’s one to help you create your financial goals.
You’ve probably been thinking in the back of your mind about your life’s financial goals for awhile now, you just may not have put pen to paper. It will require some soul-searching and might prompt some healthy financial discussions between you and your partner if you have one, but remember, this should be a fun experience. This is where you get to dream your biggest dreams and plan things out! Think positively and get creative with it… you never know what you might dream up.
For lots more on how to crush the personal finance game and find early retirement, make Firreo your financial advisor. We’ll help you out of your job and on your way to financial freedom!