A personal financial plan is a step-by-step guide that tells you how much money you earn, how much you spend, and how you can achieve your financial goals. Just like studying for an exam or applying for a job, managing your money requires planning ahead and setting realistic goals for yourself. Financial goals can be short or long-term, but you should have some of both when creating your personal financial plan. This 3-step guide will help you make your own plan so that you can determine your current financial situation, establish goals for yourself, and decide the best way to meet those goals while managing your money wisely.
Step 1: Calculate Your Net Worth
Before you start making any financial goals, it’s important to visualize how much money you are spending and how much you are earning. To do this, write down your monthly income and any savings or investments you may have on a piece of paper, including checking and savings account balances. Add it all up and write down the total. Next, record your monthly expenses on the same sheet of paper. This includes any student loan payments, credit card debt, rent or mortgage bills, utilities, food, and entertainment purchases. Add these up and record the total. Then, subtract the earnings from the expenses to calculate how much money you have left over each month. This is your net worth.
Step 2: Determine Your Financial Goals
Now that you are aware of your current financial situation, you can decide what to do with your money. Try to think of both short-term and long-term financial goals you may have. For example, if you’re in college and plan on studying abroad, a short-term goal could be saving up $1,000 to take with you to spend. A long-term goal could be planning to pay off your student loans within three years after you graduate. You can also use your short-term financial goals to help you achieve your long-term ones. For instance, setting a short-term goal to find a house with an affordable mortgage could help you reach your long-term goal of paying off your home before you retire. Just don’t forget to make sure your goals are realistic and within your budget. It’s okay to start small, because through experience you will learn how to better manage your money and improve your financial plan.
Step 3: Develop Goal Strategies
Once you have made a list of financial goals that fall within your budget, you can start thinking about how you plan to meet them. If we were to use the study abroad example from the previous step, there are several ways in which you could plan to save $1,000 for your trip. Let’s say you have calculated your net worth, and after subtracting your expenses you have $100 left over every month. You could simply take a portion from that $100 and put it aside until you have $1,000 saved, or you could decide to cut back on eating out for a while and use the money you saved from your food expenses to put toward your study abroad trip. If you only had a few months left before your trip and you hadn’t saved anything, you could consider putting in more hours at work or even picking up an additional part-time job to help you meet your financial goal. The point is, there are many options available to you when deciding how to reach your goals, and it’s important that you choose a strategy that makes the most sense for your budget. For example, if you had previously been using that $100 monthly surplus to create an emergency fund for yourself, it’s probably not a good idea to use any of that for your study abroad trip. Just like creating your financial goals, you should only choose between alternatives that are realistic to your budget to complete your financial plan.
Wrap-Up: Finally, remember to expect the unexpected. You never know when your computer might crash, or your car will need maintenance, so leave yourself some wiggle room in your personal financial plan for any unforeseen expenses. Your plan should reflect your current financial situation, so be prepared to change your short and long-term goals so that you are always on target to meet them. Also, continue to create new goals for yourself once you’ve met your old ones. As you become familiar with keeping a personal financial plan, you will start to feel more in control of your money, instead of feeling like it’s controlling you!