How to Make a Financial Plan in 7 Steps

According to a joint poll conducted by the Consumer Federation of America and the CFP Board, 48% of households having a financial plan characterized themselves as “living comfortably.” Those without a plan shared this emotion only 22% of the time.

This guide explains seven basic stages for creating a financial plan, regardless of your income or financial status.

Here’s an overview of the seven steps we’ll discuss:

1. Set your values. 
2. Prepare a net worth statement. 
3. Analyze your current spending. 
4. Choose short-term financial goals. 
5. Create and automate a cash flow plan. 
6. Keep track of your KPIs.
7. Make adjustments. 

Big Ideas for Financial Planning

It’s easier to become an excellent planner and saver than to outperform the market or gain millions of dollars. It is tough and rare to beat the market or receive a cash windfall. However, this is what many individuals rely on to achieve their goals. Financial planning, on the other hand, is more easier and entirely under your hands. 

Cash flow planning is the most critical part of financial planning. Most people associate financial planning with managing an investment portfolio. However, most households should prioritize cash flow planning (which essentially means selecting what to do with their income). 

Financial planning focuses on maximizing opportunity costs. That involves deciding which goals to prioritize and accepting that you won’t be able to achieve them all at once.

What is a Financial Plan?

A financial plan is a document that describes your current financial condition, future goals, and the measures necessary to accomplish those goals.

At its foundation, a financial plan addresses three fundamental questions:

1. What is your present financial situation? This is determined by preparing a net worth statement and reviewing your spending habits.
2. Where do you want to be in the future? This entails creating motivating yet realistic financial goals. 
3. How are you going to get there? A financial plan establishes a cash flow strategy to steer revenue toward priority goals and monitors success using key measures.

A financial plan might be as simple as one page or as thorough as a spreadsheet. Regardless of style, the goal is to provide clarity, direction, and ideas for improving your financial well-being. 

Step 1: Identify Your Financial Values

A financial plan entails more than just defining financial goals, such as debt repayment, emergency fund building, and retirement savings.

A well-thought-out financial strategy connects these objectives to something deeper—your “why.” 

This “why” is what I refer to as your financial values.

Consider financial values to be a collection of two or three key concepts that govern your financial decisions.

What matters is that these principles resonate with you personally. While they can vary greatly amongst persons, I discover that they often fall under one of six categories:

1. Security. A secure and predictable financial future is valuable.
2. Accumulation. The goal is to increase a specific statistic, such as your overall net worth, over time. 
3. Freedom. Prioritizing the freedom to make life decisions without financial limitations.
4. Generosity. A desire to give back and assist others.
5. Enjoyment. Spending on enjoyable activities and products.
6. Family. Ensure the well-being and financial stability of loved ones.

The question that I find most useful here is this:

“When I look back on my life many years from now, which financial values will I most regret choosing not to prioritize?”

With that in mind, take the time now to identify the values that are most important to you and record them in your financial plan. 

While the main categories listed above are an excellent starting point, feel free to add your own spin to this exercise. Your values are your own.

Step 2: Create a Net Worth Statement

A net worth statement, sometimes referred to as a balance sheet or a personal financial statement, is a breakdown of the value of your assets minus your liabilities.

Measuring progress becomes easier when a simple statistic (such as net worth) indicates how you’re performing. If it’s increasing, that’s excellent! If not, you should reconsider your financial strategy.

With the spreadsheet open, you should do the following: 

1. List and value your assets. For most people, this comprises bank account balances, retirement funds, taxable investments, real estate, and automobiles.
2. List your liabilities. Include all debts, such as credit card balances, school loans, mortgages, vehicle loans, and any other obligations for which you have borrowed money. 

The spreadsheet will now remove your total obligations from your total assets. 

This computation yields your current net worth.

Don’t worry out if your net worth is negative! The idea is simply to become aware of your existing financial situation and then devise a strategy for expanding it over time. 

Step 3: Analyze Your Current Spending

With your net worth statement in hand, the next stage is to assess your present spending habits, looking for areas that are out of balance. 

The most straightforward approach is to use the 50/30/20 budget framework.

The 50/30/20 budget divides your income into three groups.

• 50% for necessities like shelter, food, transportation, education, and healthcare. 
• 30% for wants, such as gym memberships, dining out, and vacations.
• 20% for savings, which includes debt reduction, 401(k) contributions, and emergency fund saves.

Your objective is to examine your spending over the last three months to see what percentages went toward needs, wants, and savings. 

Step 4: Choose Your Financial Goals

Many financial goals appear uninteresting at first. Who wakes up enthused about saving for retirement or creating an emergency fund? 

That’s why it’s critical to connect financial goals to larger life objectives. 

For example, an emergency fund enabled me, as the sole breadwinner for a family of five, to leave the security of a job I had held for ten years and run this website full-time. 

Building my own business had been a long-term goal of mine, and a proper emergency fund helped me make it a reality.

Here are three helpful tips for choosing financial goals, as explained by financial psychologist Brad Klontz:

• Choose up to three goals that would score at least a 9 out of 10 on the thrill scale. 
• Give your ambitions a catchy term, such “financial freedom” rather than “retirement savings.”
• Set a deadline for each objective, such as “I’m debt-free by January 1, 2027!”

Your existing financial status will have a significant impact on the timeline for achieving your goals. If you’re living paycheck to paycheck, short-term goals are ideal.

While you should have a long-term vision of where you want to go, such as saving for a down payment on a house and retirement, focus (for the time being) on shorter-term goals that will help you get there.

Pro tip: If you have high-interest debt (such as credit card debt) and no emergency savings, educate yourself with the Baby Steps method. This simple framework can help you prioritize your financial goals. 

If you have a firm basis, such as some cash in the bank and the ability to set aside money for goals each month, you may have a mix of short-term and long-term goals. 

The goal is to have one or three goals that you are excited about and driven to achieve. 

Step #5: Create your cash flow plan.

The most significant part of financial planning is cash flow planning, which involves deciding how to allocate your income. 

In Step #3, you reviewed your spending to see where your money had gone, categorizing it as needs, wants, and savings. 

The aim is to take your financial goals and create a spending plan around them. 

Assume your take-home salary is $5,000 per month, and your current spending is allocated as follows:

• Needs: $2,500 (50% of your income) for necessities like housing, utilities, food, and transportation.
• Wants: $1,500 (30% of your income) for discretionary expenses like dining out, entertainment, and hobbies.
• Savings: $1,000 (20% of your income).

Now, incorporate the financial goals you determined in Step #4 into your strategy. 

Let’s say today is January 1st, 2024, and we have the following goals:

1. Dream Vacation Fund: Save $200 per month with the goal of saving enough for a vacation by January 1st, 2026.
2. Sleep Better Fund: Create a $12,000 emergency fund by July 1st, 2025, which requires a monthly savings of $667.  
3. Financial Freedom Fund: To receive the maximum employer match, consistently invest 6% of your income ($300 of your current pay) to your 401(k).

Overall, your ambitions require you to:

1. Save $200 per month for your vacation savings.
2. Save $667 every month for an emergency fund.
3. Save $300 every month for retirement.

This requires $1,166 in savings per month, which is more than your current 20% savings rate.

So, you have two options:

1. Adjust your goals to fit within your $1,000 monthly savings budget.
2. To compensate for the gap, save more by reducing your needs and wants.

The choice is yours. However, the most essential thing is to recognize the opportunity cost up front, bearing in mind that financial planning is about prioritizing what is important to you.

The third step is to set up automatic transfers based on your paycheck dates. If your direct deposits arrive on the 1st and 15th, arrange transfers for shortly after. 

For example:

1. Transfer #1: $333 to your emergency fund every 3rd and 17th of each month.
2. Transfer #2: $100 to your Dream Vacation Fund on the third and seventeenth.
3. Your employer will make the required 401(k) contribution automatically. 

Transfers should be made to different savings accounts so that you understand this money is separate from your daily living costs. 

Finally, in the financial planning template, complete the “Target” spending plan to represent the optimal distribution of your income across necessities, wants, and goals, including the automated transfers you’ll set up to ensure these goals are met.

Bank organization tips: Some banks allow you to set up sub-savings accounts, but many do not. If you’re not willing to move banks to one that does, here are some alternatives: If your bank has a checking and savings account, use the savings for your objective. Have your income deposited into your bank account, which should be sufficient to meet your bills and make contributions toward your goals. (This only works if you have one goal and do not currently use your savings account.) Alternatively, you might use your investment brokerage account’s money market fund or cash management account. Finally, you can open a new bank account just for this purpose. 

Step 6: Monitor Your KPIs

A KPI, or key performance indicator, is a business term for a variable that allows you to assess your current condition. In other words, KPIs are facts and numbers that indicate if you are moving in the correct or wrong direction. 

When it comes to financial planning, your KPIs should clearly demonstrate how you’re progressing toward your financial objectives. 

For example, if your aim is to develop an emergency fund of three months’ costs, your key performance indicator could be:

KPI = Current Emergency Fund Savings/(Monthly Expenses X 3).

One method for creating effective KPIs is to keep track of when you’re on pace to meet your goal. 

Instead of accumulating a specific amount for retirement, track the age at which you will be financially independent.

Instead of noting the overall amount of debt, chart the date you plan to pay it off.

Why prefer dates over monetary amounts? In my experience, dates are far more motivating. In addition, they frequently provide a more realistic account of your development. 

Of course, KPIs will depend on your goals (which are based on your beliefs!) However, here are some of the most common key performance indicators in personal finance:

1. Net Worth
2. Emergency fund size
3. Savings Rate
4. Credit Score
5. Projected retirement age
6. Time till you achieve a goal (e.g., paying off debt)

Step 7: Make Adjustments.

KPIs are only relevant as a long-term tool for measuring progress. If the deadline for being debt-free is approaching, it should be clear that more changes are required. 

The most important thing to realize about financial goal setting is that the speed with which you reach your goals is determined by the difference between your income and expenses. 

Benjamin Franklin said:

“There are two ways to increase your wealth. Increase your means or decrease your wants. The best is to do both at the same time.”

Saving money is often more easier than earning more money. However, saving money yields diminishing returns. In other words, you’ll soon be traveling across town to save three cents per gallon on gasoline. 

Making money, on the other hand, is significantly more scalable. There is no limit to how much you can earn. 

As a result, once you’ve made some wise decisions to reduce your expenditure, you should focus your efforts on producing money.

Final Thoughts On Financial Planning For Non-Millionaires

According to a 2015 study by Drs. Nathan Hudson and Chris Fraley, goal planning and sustained effort can affect one’s personality.

Many people avoid financial goal setting and planning because they believe they aren’t good with money – that personal finance, or money in general, is something they will never be good at due to an inherent feature. 

The truth is the contrary. According to research, setting goals and working hard to accomplish them might affect how you perceive yourself. And this can fundamentally alter your financial future.

For example, you can transform yourself from someone who believes they aren’t adept at money management to a careful and disciplined saver, a high-income earner, or someone who retires early. 

You get to chose. It all starts with identifying the proper goals and implementing the correct plan to see them through to completion.

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