If the extent of your financial planning is, “I want to have a lot of money one day,” then it’s definitely time to step up your game. Most people never do any financial planning because they:
• Don’t realize how important financial planning is for their future success
• Don’t want to face their current financial situation
• Mistakenly believe that financial planning is too complicated
You’ll be glad to know that you don’t have to be a financial wiz to understand your money and set yourself up for success. Financial planning doesn’t have to take a long time or be complex. Although it may seem boring, you just have to hunker down and do it into order to make smart moves and create a financially secure life.
One of the best ways to turbo charge your financial life is to spend 30 minutes right now creating a simple financial plan. Chapter 2 of my book, Money Girl’s Smart Moves to Grow Rich, called “Creating a Financial Plan,” tells you everything you need to know. So be sure to read the entire chapter at least one time.
Click here to buy Money Girl’s Smart Moves to Grow Rich (paperback or ebook) now!
But I’ll give you the highlights of financial planning here. You’ll learn how to approach it in 3 basic steps—plus, get terrific resources that make it easy to put your plan into action.
Financial Planning Step #1: Understand Your Current Situation
In order to know where to go, you have to know where you are right now. The best way to understand your current financial situation is to get a bird’s-eye view of it using a tool called a Personal Financial Statement (PFS).
The purpose of your PFS is to calculate your net worth—so you may also see it called a net worth statement or summary. Net worth is a simple formula that equals your assets (what you own) minus your liabilities (what you owe).
For instance, if your total assets are worth $100,000 and your total liabilities are $80,000, then your net worth is $20,000. Net worth can also be negative if you owe more than the value of your assets.
Your personal net worth is important because it reveals the true value of your financial resources (or lack of them) at a given point in time. Your goal should be to increase your net worth by increasing your assets, such as savings or investments, and shrinking your liabilities, such as credit card debt and loans.
If you’re wondering what your net worth should be, here’s a rough guideline:
[Your age – 25] x [Gross annual income / 5]
For example, if you’re 35 years old and earn about $60,000 per year, a good net worth to have is approximately $120,000, as follows:
= [35-25] x [$60,000 / 5]
= 10 x $12,000
= $120,000
So, how do you figure your net worth and create a PFS? You can list out your assets and liabilities on a blank page or spreadsheet. However, I recommend using a Net Worth Calculator like this:
I don’t do one-on-one financial coaching anymore; however, this is a tool that I previously used with clients. It’s also what I personally use to update my own net worth on a regular basis, such as annually or quarterly.
This Excel-based calculator has multiple asset and liability categories that you can change to your preferences. What I like best about this tool is that it gives you a high level picture of your finances over time that you can print out for your files or safe deposit box.
A side benefit of creating a good PFS is that it will contain everything loved ones would need in the event of your death.
Click here to download a FREE demo of the Net Worth Calculator now!
If you haven’t reached the target net worth yet for your age and income, don’t beat yourself up about it. Instead, complete the next 2 steps and start your financial planning so you get there as quickly as possible.
Financial Planning Step #2: Set Your Goals
There are 3 different types of goals that you may want to consider when you’re doing financial planning: short-, medium-, and long-term.
1. Short-term goals are those you want to accomplish within a year, such as going on vacation, establishing an emergency fund, or maxing out a retirement account.
2. Medium-term goals are those you want to achieve within the next one to 5 years, such as buying a car, saving a down payment to buy a home, or funding a new business venture.
3. Long-term goals are those you want to achieve beyond 5 years into the future, such as saving for retirement or funding college for children.
Also see: Retire Rich Using These 5 Tips
I encourage you to dream big and create as many financial goals as you like. Reflect on the big picture of your life and consider what you want it to be like in 5, 10, and 20 years from now.
Ask yourself what accomplishments would make you feel good if you only had a few more years to live or were on your deathbed. The answers to these tough questions are key to knowing how to plan for what truly matters to you.
If you’re not sure what your financial goals should be, I want to make sure that you include at least two: maintaining an emergency fund and saving for retirement.
Having an emergency fund will make it possible to survive temporary financial hardships, such as a job loss or a big medical bill. Your retirement fund will allow you to pay for living expenses, and maybe some nice extras, after you can’t or don’t want to work.
In the last step you’ll find out how to manage your money to achieve any realistic goal that you set.
Financial Planning Step #3: Create a Spending Plan
After you get a clear picture of your current financial life by creating your Personal Financial Statement and where you want it to be by setting goals, the next step is to close the gap between the two by creating a budget or spending plan.
A spending plan is simply a plan for how you intend to manage your money. The goal in creating one is to make sure you account for all your financial goals in addition to your necessary living expenses.
As you monitor your spending, you can adjust your expenses and make sure you have enough left over for your short-, medium-, and long-term goals. Here’s a rough guideline for allocating your gross income:
• 10% for long-term goals, such as retirement
• 10% for short- or medium-term goals, such as an emergency fund
• 30% for variable expenses, such as entertainment, groceries, or gas
• 50% for fixed living expenses, such as housing, utilities, loan payments, and insurance
A big part of creating your spending plan is incorporating your priorities and values. If you did a good job setting goals in step number two, they should give you the motivation to carry out your plan on a daily basis. A realistic spending plan should get you excited about aligning your money with your deep, core values.
Just like with your Personal Financial Statement, you can create a spending plan using a blank page or spreadsheet—but I use and recommend Quicken.
Quicken is an easy-to-use personal finance software with terrific features:
- Automatically and securely downloads transactions from your bank accounts and other financial institutions in seconds in one place
- Puts your income and expenses into categories that are easy to manage
- Shows your income and expenses in a simple chart
- Forecasts your account balances
- Reminds you to pay bills
- Gives you reports to view or print out
- Organizes paper receipts by snapping a photo
- Offers a free mobile app to manage money on the go.
- Makes creating and sticking to a realistic spending plan simple
Click here to compare Quicken for PC or Mac now!
Your job is to find a way to track your cash inflows and outflows that works best for you. When you spend too much, cut back in categories that are easies for you. If you still can’t stick to your plan, make tougher spending sacrifices.
Understanding your cash flow is a powerful step in taking control of your money. With a plan in place you’ll feel more peaceful about your finances than ever before. You’ll be able to live fully in the moment, shed your worries, and sleep better at night.
I think the advice to create a spending plan is as important as any tip for financial management and planning. I think anyone who puts together a spending plan for the first time would be surprised to realize how much money they spent needlessly before. More than anything, I believe that sticking to a spending plan makes us more aware of what we do with our money, which inevitably leads to smarter decisions.
With step #2, I would also like to recommend that when setting goals, to make sure you have a goal set to be free of debt. That may correlate with step #3, but it is important when creating a financial plan to also include steps as to how you will pay off debt. We definitely need to be much more savvy when it comes to spending and getting in debt.
These are some excellent financial planning tips! It seems like I could benefit from your tip to create a spending plan. Usually, I’ll spend my money on anything all willy nilly, so that would explain why I wipe out each paycheck every month. I don’t have any money in savings, so I should take your advice and start putting some money in savings in case I need to pay for emergency expenses.
I appreciate alot your guidance and advice on money.
Those goals really help me when planning for my finances. I was stressed out because I was thinking too big I think and organizing it by smaller to bigger goals would really help. What would you classify as a long term goal for finances?
Long term goals are typically those to achieve in more than 5 years, such as saving for retirement, paying for a child’s education, or even saving for a home.
My husband and I are currently trying to do our financial planning so that we can be prepared for future things, like our retirement. However, we don’t separate our savings in terms of retirement and emergency. Now that I realize that a certain amount should be going towards each of those separately, I am going to start saving 10% in each of those categories like you suggest. However, I may put 5% of my income towards saving for things that I want, like a new computer or something like that.
Laura, thank you so much for your ever so helpful advice! I have bought the book, but kept finding reasons to put off reading it. (Fear of budgeting!) now I am onboard and grateful.
Vicki, thanks so much for being a reader! Glad you found the courage to get on board 🙂