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Now Is a Great Time to Create a Personal Financial Plan — Here’s How to Do It

By
Samantha Rose
Samantha Rose covers financial literacy for the educational arm of OppLoans. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Updated on March 18, 2021
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Plan for the future you want and deserve.

A personal financial plan is a tool to help take control of your money. It identifies where you want to be in the future and then helps you get there. 

This is important when times are good, but even more so when times are tough — like in the middle of a pandemic and economic turmoil, for example.

Given the state of the economy, a financial plan can set you up for success. If you don’t have one, now is a great time to take action. If you already have one, it’s a great time to assess where you stand and revise it if needed.

Follow these three comprehensive steps to start your financial plan today.

Step No. 1: Determine your current financial situation

A financial plan should include details about your cash flow, budget, and net worth. These factors paint a picture of your overall financial health. So where do you stand?

What is your cash flow statement?

A cash flow statement shows how money flows in and out. It’s essentially the money you earn (income) and the money you spend (expenses). 

When you live within your means you’ll have a positive cash flow. That’s good — you’re doing great! But if you spend excessively, you’ll have a negative cash flow. Yikes — time to put in the work!

An easy way to determine whether your cash flow is positive or negative is to look at your monthly banking statements. Are you in the black? This means you earn more than you spend and likely have savings. Are you in the red? Your account is likely overdrawn and you have trouble meeting your financial obligations. By understanding if you have a positive or negative cash flow, you are better prepared to take action to capitalize on your achievements or correct your mistakes.

What is your budget?

A budget goes a step further than a cash flow statement. It’s a plan for your income and expenses. 

Gather your bank account statement and receipts. Total all of your receipts to make a list of one month’s worth of income and expenses. Ideally, your income should be greater than your expenses. If not, it’s time to trim the fat.

Differentiate between needs and wants. Needs are essential to a budget. These typically include rent, a mortgage, utilities, grocery bills, transportation, and debt payments. Wants are nonessential, such as luxury items, dining out, and personal travel. Divide your expenses into two lists according to their category. Determine where exactly your money is flowing by providing a dollar amount tied to each expense.

What is the total monthly cost of your needs versus wants? Compare these amounts. If your wants outweigh your needs, reduce expenses. Stick to a budget in order to better control your cash flow.

What is your net worth?

To determine where you stand, it’s helpful to look at the overall financial picture. That’s where net worth comes in. Net worth is the value of all of your assets minus the value of any outstanding debts.

To calculate net worth:

  • First total your current liabilities — or outstanding balances. Liabilities include student loan debt, credit card debt, a mortgage, personal loans, a car loan, and other types of debt. 
  • Next, subtract the liabilities from your total assets. Assets generally include savings, investments, cash, properties, a retirement fund, and any income that adds to your wealth. 
  • Now you can calculate your net worth. 

The median net worth of a U.S. household is $97,300. How do your finances stack up?

No. 2: Develop your financial goals

Develop financial goals to give your plan a structure. Actions taken to achieve these goals allow you to follow a clear path to the type of life you desire.

What are your financial goals?

It’s important to set goals within a financial plan. Goals are used to create a road map to an ideal future. They also track progress getting there. Develop goals with these key points in mind to set yourself up for success.

Brainstorm straightforward goals, such as savings and retirement investments. These set us up for a stable financial future in old age. Don’t forget to consider less obvious goals, such as taking a vacation. These short-term goals provide satisfaction in our present lives. 

Here’s a tip: The best goals are SMART: specific, measurable, achievable, relevant, and time-based. 

  • Specific: Who? What? Where? When? Why? Which?
  • Measurable: How much? How many?
  • Achievable: How can I accomplish this goal? Is it realistic?
  • Relevant: Is this goal worthwhile? Is now the right time? 
  • Time-based: When? What can I do today? What can I do months from now?

Goals should also be a mix of short-term, intermediate, and long-term actions. Long-term goals require additional planning to achieve. That’s why short-term wins should compound into long-term achievements. 

Are your goals realistically aligned with your current financial situation? Review your net worth. For instance, if you have a negative net worth, perhaps one of your goals should be to pay off outstanding debts.

Finally, create a deadline for each goal. This is the time frame to complete each goal, whether days, months, or years from now. Use this to determine both the total and monthly cost needed to fund each goal.

What is your course of action? 

Identify the best course of action to achieve each goal is by creating a strategy. A strategy bridges the gap from where you stand today to where you see yourself in the future.

For example, maybe one of your goals is to pay off student loans. Which options are available? 

Think back to your budget. One option is to reduce nonessential expenses in order to re-allocate money toward monthly payments. Another option is to acquire a side hustle to generate a new stream of income to pay off the student loan faster. There are several alternative courses of action you can take in this situation. But typically a strategy will fall into one of two categories: re-allocating existing income or generating new income.

Take the best course of action by evaluating each option thoroughly. The best strategy depends on how you prioritize your goals. It will also take into consideration your overall financial picture, such as cash flow, budget, and net worth. How do these factors impact your goals and thus, your strategy?

No. 3: Create and implement your financial plan

It’s time to assemble the pieces to create your financial plan.

What is your financial plan?

Create a financial plan by reviewing your overall financial picture. Evaluate and revise each factor: cash flow, budget, net worth, goals, and strategy. 

Choose which financial goals to pursue first. The best strategy, including the subsequent decisions you make, will depend on the goals. Align your goals with your budget. Think about how to fund each goal — whether by reducing expenses or increasing income.

Weigh all of these factors in terms of your current financial situation in order to set and achieve realistic goals.

Once you’ve created your financial plan, it’s time to implement it. Celebrate wins and acknowledge mistakes. Remember, your financial plan is a marathon, not a sprint — it’s a journey with both ups and downs.

Is your financial plan flexible?

Life happens. The best financial plan is a flexible one. 

It’s crucial to frequently review your financial plan and revise it as needed. Your financial situation can and will change, so a financial plan should change accordingly.

In fact, regularly reviewing your financial plan can help you track progress toward meeting your goals. Maybe your current strategy isn’t the right fit. Or your spending priorities changed and your budget needs an adjustment. Fortunately, you can resume progress toward your goals at any time. Simply review and revise.

Bottom Line

Chart your path to financial health. Create a personal financial plan today.

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