There are few things that pave the way for success in our financial lives in comparison to having a financial plan.
While the majority of households are aware of the importance of having a financial plan, it still remains one of the most under-utilized tools.
Yet the same people that neglect taking the time and effort to create a plan are the ones wondering why they’re financial goals are slipping away from them.
Really, we’re at a point now, economically speaking, where a financial plan can no longer be considered an afterthought or a nice-to-have. It’s a must-have if you’re serious about achieving your financial goals and reaching financial security.
But what exactly are the steps involved in creating a financial plan and does a plan work?
If you’ve been asking these questions, you’ve come to the right place. In this article we’ll break down a financial plan into five different steps so that you can get a better understanding of what’s involved and how your financial plan benefits you both in the present and in the future.
Let’s get right to it.
Step #1: Review your current financial situation
First and foremost, your plan takes into consideration your current financial situation. Without properly understanding where you’re currently at, it would be next to impossible to address the next moves you should be making.
Your plan provides a snapshot and assessment of your current financial situation by taking a look at all of the areas in your financial life. This includes things such as your income, savings, investments, living expenses, debts, risk management, insurance, and estate plans. By doing so, your plan will start to formulate a picture of what areas you are doing well in and where you might need some serious improvement.
Without any of this information, it’s impossible to create anything close to a proper financial plan. This information is then used to determine your current path and future trajectory. This first step is where you begin building the foundation for all of your future financial planning activities.
Step #2: Set and create your financial goals
After you’ve assessed your current financial standing, you can then take that assessment and overview to create specific goals based on where you want to be and the types of things you want to achieve.
Really, you can do this before reviewing your finances, but it’s much easier to create specific and meaningful goals when you have an understanding of where you currently are. Without that insight, there’s a good chance you could be setting yourself up for challenges that work against your overall plan.
As you work on creating your goals, it’s important to make sure that you’re setting goals that are both personal and S.M.A.R.T.
It’s also important to make sure that you’re setting both short-term and long-term financial goals to keep you motivated while working toward your desired financial outcome.
Lastly, financial goal setting isn’t a one-and-done thing. As your situation and financial outlook evolves, it’s important to keep your goals aligned with your overall values.
Step #3: Prioritize your next moves and actions
Assessing your current financial situation, done.
Creating and setting new financial goals, done.
Next, it’s time to start mapping out and prioritizing the next steps you need to be taking in order to achieve your goals.
Here’s a really quick example below to help with understanding everything.
Let’s assume that you have $0 in total savings for a rainy day or in the case of financial emergencies. One of your financial goals after determining this, is to start building an emergency fund so that you have at least $1,000 tucked away should a financial emergency take place. By assessing your current situation and creating a goal for where you want to be, it’s now much easier for you to start making this a priority and to start working towards building up your emergency savings as your next step.
One thing you should also always consider are the consequences of your financial decisions and how they impact your financial plan.
Again, let’s quickly illustrate this by using the same example as above. By focusing on building your emergency fund, you will need to be that much more aware of your savings rate and stay on top of your spending habits so that you can work towards building your emergency fund.
When it comes to financial planning and critical financial decisions, there are always opportunity costs involved. This is why it’s necessary to make sure that your goals are set, and your next steps are mapped out and prioritized.
Step #4: Evaluate your alternatives and options
After mapping out your next steps, the next thing you need to start doing (which your plan will help you with) is evaluating the best options and route to take for those steps you’ve started to prioritize.
This part is all about doing your homework to help you determine the best ways to execute on those steps.
Again, let’s continue with the example of building your emergency fund.
After creating a goal of building your emergency fund and determining that your next move is to open a high-interest savings account, you’ll need to then do your research to determine what your best option is for a high-interest savings account.
In this example, here are a few of the things you’ll want to consider:
- Who are the top providers offering high-interest savings accounts?
- Are there any costs involved in opening and managing these accounts?
- How long will it take to open an account and transfer funds into them?
- How long will it take if I need to pull the money out and use it?
- Are there any repercussions of pulling the money out of these accounts?
- Are there any other limitations or notable features of these products?
Step #5: Update and revise your financial plan
Having a financial plan is not a one and done type of thing.
As long as you’re spending money, earning money, investing, saving, etc, then financial planning should always be a priority.
After having created your plan, it’s equally as important, if not more important, to stay on top of your plan by regularly updating it and maintaining it.
This is especially the case when significant life events, milestones, or changes take place. This includes things like: getting married, having a baby, taking on your first mortgage, losing your job due to layoffs, or even getting into an accident where you need to take time off work.
By actively reviewing your plan every three to six months, you’ll be able to make sure that you stay well-prepared and continue working towards your financial goals.
Author information:
Kris Borghesan (Director of Marketing, Savology)
Kris is an entrepeneur and multi-faceted marketing leader who has worked with many early stage, high-growth startups. He is currently the Director of Marketing at Savology, a fintech startup providing fast and free financial planning for everyone.
