How to Make a Personal Financial Plan | 8 Steps Explain

When it comes to your finances and plans, it can be difficult to balance short-term desires, long-term dreams, and unexpected events beyond your control.

With groceries, retirement, and the auto repair bill looming, it can be difficult to know how to manage bills while planning for the future.

This set of instructions can help you. It explains step by step what you need to create a personal financial plan and get money. In nine steps, you have a beautiful system that you can rely on for the rest of your life.

It’s okay if you’ve already started some of these steps. It’s good otherwise. Start with one task and move on. (Or brave it all on a rainy long weekend with a big cup of coffee and a dog at your feet.)

Let’s start.

8 Steps to Make a Personal Financial Plan

1. Financial goals

You can’t make a plan until you know what you want to accomplish with your money, so whether you’re doing it yourself or working with a professional, your plan should start with a list of your goals, small and big. Sorting money by how quickly you need it can help you:

Short-term goals are things you want to achieve in the next five years, like paying off debt or buying a new car.
Medium-term goals are things you want to achieve in the next five to ten years, like making a down payment on a house or starting your own business.
Long-term goals are goals in 10 years or more, including college and, of course, retirement.
Any time is good to make a financial plan.

Ideally, you’ll start investing early in life to achieve your financial goals, but now is a good time to review your current financial situation and assess how you’re doing. Are you still on the right track? Do you have other goals that you hadn’t thought of before? With a financial plan, you can assess where you are now and where you want to go.

2. Net Worth Statement

All plans require an entry level, so you need to figure out your net worth after that. List all of your assets (bank and investment accounts, real estate, personal valuables) and all of your debts (credit cards, mortgages, student loans). Your net worth minus your debts equals your net worth.

3. Budget planning and cash flow

With a plan, your budget is where the rubber meets the road. This can help you determine where your money is going and where you can spend it to achieve your goals.

A budget calculator can make sure you don’t overlook infrequent but important expenses like car repairs, health care costs, and property taxes. When making your list, divide your expenses into two categories: basic expenses like groceries and rent, and more sophisticated items like lunch and gym memberships.

4. Debt management plan

Debt is sometimes treated as a four-letter word, but not all debt is bad debt. For example, a mortgage loan can help you build capital and increase your credit score with the market. On the other hand, high interest consumer loans like credit cards put a lot of pressure on your credit score. Also, the dollars you pay in finance charges and interest cannot be used for other purposes.

5. Plan for retirement

An old rule of thumb says you need about 80% of your current income to retire. However, this assumes that your pension relieves you of all work-related costs and taxes, that you have paid your mortgage and that your children are financially independent.

It’s also important to remember that Medicare doesn’t cover everything, and health care costs not covered by Medicare, such as long-term care, can add up quickly. You can also devote more free time to other things, such as traveling, eating out, giving gifts, or financially supporting a family member or friend.

If you’re saving 20-30% of your pre-retirement income, an 80% income replacement plan is a good place to start. Alternatively, you can try to cover 100% of your pre-retirement income minus your pre-retirement savings. As with any general rule, there are many exceptions. So remember to sit down and calculate your retirement budget when the time comes. This should be your top priority because you can borrow for many other purposes, but not for your retirement.

6. Contingency fund

In the event of the unexpected, such as the loss of your job or unexpected medical expenses, an emergency fund can help protect your savings for the long term.

It’s generally a good idea to save enough to cover at least three months, but ideally six months, of essential living expenses (like groceries, housing, transportation, and utilities). Keep this money in a very liquid checking or savings account so you can access it quickly when needed.

7. Insurance cover

Insurance is an important part of your protection against financial loss, but you don’t have to pay more for insurance you don’t need. Usually:

  • Health Insurance – Without this coverage, even routine care can cost pennies, and a serious injury or hospital stay can cost hundreds of thousands of dollars. As you age, you may want to consider long term care insurance.
  • Disability Insurance – This coverage protects you and your family if you are unable to work. Disability insurance provided by the employer usually replaces about 60% of your salary.
  • Car and Home/Rental Insurance – If you are renting a car or house and cannot afford to replace the property out of pocket, make sure you have the right coverage.
  • Life insurance – for residents is generally a good idea. Work with an insurance agent to find out what coverage is best for you and at what level.

8. Estate planning

At the very least, you should have a will that sets out your last wishes regarding your property, your loved ones, and who you want to manage your property. You must also keep your insurance policy and your pensions up to date. Also consider having a power of attorney to make financial and health care decisions if you are incapable.

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