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Budgeting & Saving

How to Make a Financial Plan

A financial plan can ease your short-term and long-term concerns about money. It's essentially a guide to spending and saving, whether to take care of everyday expenses, cover an emergency home repair, tide you over when you lose a job, pay for a dream vacation or pave the way for a comfortable retirement.

You can start making a customized financial plan by reviewing your spending, setting goals, creating a budget, seeking ways to reduce expenses and making other money moves. Whether you produce this customized financial plan on your own or turn to a financial advisor for help, it can put you on a course toward financial security and freedom.

What Is Financial Planning?

Financial planning involves building a strategy to accomplish your financial goals. A financial plan gives you a roadmap for navigating all the monetary decisions that go into realizing your hopes and dreams.

In the short term, this plan can help ensure you're able to meet your current financial obligations, such as credit card bills and mortgage payments. In the long term, the plan can help you set aside money for things like retirement or a home purchase.

Four benefits of putting together a financial plan are:

  1. Getting a handle on your financial situation: A financial plan helps you track how much money you're earning, saving and spending. By establishing a budget, you know where you stand financially and can more easily prepare for the future.
  2. Preparing for the unexpected: As part of a solid financial plan, it's smart to set up an emergency fund. This pool of money can help you weather tough times, such as the loss of your job or a long hospital stay. A financial plan also can help you figure out your needs for health, life or disability insurance.
  3. Paying off debt: If you're coping with debt from sources like credit cards and student loans, a financial plan can help erase it. The plan should include steps you can take to eventually become debt-free, such as zeroing in on high interest debt before addressing lower interest debt.
  4. Realizing other savings goals: Maybe you're itching to spend a week on the beach in Hawaii or you're putting away money for a down payment on a home. A financial plan can lay out ways to attain these types of short-term savings goals.

How to Create a Financial Plan

You may choose to create a financial plan on your own or hire a financial planner who will work with you to put your goals into action. In either case, you'll need to start with the following steps.

1. Set Your Goals and Priorities

A financial plan is like an explorer's compass: It can point you in the right direction and set you on a path for financial stability and success. This starts with defining your goals and priorities, which could range from having a few months' savings in the bank to buying a house to building a certain amount for your retirement—and everything in between. Make a list of your goals and priorities to give your financial plan a foundation.

2. Understand Your Current Financial Standing

Before you assemble a financial plan, it's wise to take a snapshot of your current situation. How much money is coming in every month? How much money is going out? How much are you saving and investing?

As part of that snapshot, take time to figure out your net worth. How do you do that? By subtracting everything you owe (the value of your liabilities) from everything you own (the value of your assets). This number can help you gauge your current financial well-being.

3. Create a Budget and Cut Expenses

Two keys to putting together a financial plan are developing a budget and reducing expenses. Your budget serves as a guide to saving and spending so you can stay on track with your financial goals, while a cost-cutting program can help ensure you're saving more money than you're spending.

Creating a budget starts with determining your income and expenses, and tracking your spending. Fortunately, you have an array of budgeting methods and tools at your disposal to help you get started. As you create your budget, look for ways to reduce your expenses so that you can put more toward reaching your financial goals.

4. Plan for Emergencies

Emergencies happen. Your spouse loses their job. You need to repair the roof on your house. As part of your financial plan, you can prepare for emergency situations by setting up an emergency fund. An emergency fund is an account separate from your primary checking or savings account where you stash money as a safety net—sort of a "just in case" insurance policy. When a crisis strikes, this cash cushion can help you avoid running up charges on your credit cards or taking out loans, both of which could put you further into debt.

5. Get Out of High Interest Debt

High interest debt can eat up a lot of your budget and make it difficult to stick to a financial plan. To start deleting this debt, make a list of all your credit accounts, such as credit cards and loans, and the interest rate associated with each one.

Next, pinpoint the debts with the highest interest and consider ways to eliminate them. Strategies might include:

  • Using the avalanche method: The avalanche method is one way to erase high interest debt, typically from credit cards. Through this method, you rank all of your debts by interest rate. You then carve out as much money as possible to pay off the debt with the highest interest and make minimum monthly payments on the rest of your debts. Once you eliminate the debt with the highest rate, apply the payment you were making on it to the debt with the next highest interest rate. Follow this method until all of your debt is paid.
  • Considering a debt consolidation loan: A debt consolidation loan allows you to combine several high interest debts, including credit card balances, into one loan with a single, lower interest rate. It can save you money in interest and also simplify managing your accounts.
  • Requesting a lower interest rate: If you have a good track record with a credit card issuer, you might be able to score a reduced APR (annual percentage rate), either temporarily or permanently.
  • Looking at a balance transfer: Another approach to slashing high interest debt is using a credit card that offers a special interest rate on balance transfers. For instance, you might be able to transfer a credit card balance with a 21.99% APR to a credit card offering a special introductory 0% APR for balance transfers.
    If you can pay off the transferred debt before the intro period ends, you could potentially save hundreds of dollars in interest charges. Keep in mind these offers are temporary, and you will be assessed interest on any leftover balance at the standard interest rate once the intro period ends. This strategy is usually best when you know you'll be able to pay off the transferred amount before the standard rate kicks in.
  • Working with a credit counselor: If high interest credit card debt is weighing you down, a credit counseling agency can create a debt management plan for you that allows you to make one payment to the agency, which then pays your creditors. Credit counselors can also sometimes negotiate lower interest rates on your debt. If you don't need a debt management plan, a credit counselor still can teach you how to create a budget and improve your handling of money.

6. Start Saving, Investing and Planning for Retirement

It's never too early to gear up for your retirement, and to begin saving and investing your money. The sooner you start, the simpler it will be for you to achieve your long-term financial goals.

Nearly half of American adults aren't saving for retirement at all, according to a 2019 study commissioned by the Certified Financial Planner Board of Standards. Schwab Retirement Plan Services says that if you start saving for retirement in your 20s, you will likely be able to retire comfortably by investing 10% to 15% of your salary every year. But if you hold off until age 45 or older, you might need to put away at least 35% of your salary every year to retire comfortably.

What can you do to put yourself in a better position for retirement? Here are a couple of suggestions:

  • Start saving now. If you haven't earmarked any money for retirement yet, there's no time like the present to start. If your employer offers a 401(k) plan, that's probably the best place to begin—especially if they offer a matching contribution, which is essentially free money to encourage you to participate. As an alternative, you can set up an individual retirement account (IRA) or Roth IRA on your own. If you go the IRA route and aren't planning to use a financial advisor for your financial plan, an online automated robo-advisor can offer assistance. In general, robo-advisors automate your investing based on your preferences and goals.
  • Check your Social Security statement. This statement gives you an idea of the amount of Social Security benefits you can expect to receive after you retire. Knowing this information can help you figure out how much money you should be socking away in retirement and savings accounts, though many experts advise against depending on this money for retirement.

Should You Get Financial Planning Help?

Are you overwhelmed by the thought of creating a financial plan? If so, you might want to consult a financial advisor. Only 18% of U.S. adults turn to financial advisors for retirement advice, according to a 2019 survey commissioned by the Certified Financial Planner Board of Standards.

Financial advisors provide advice to clients about matters like investments (including mutual funds, stocks and bonds), taxes, insurance and estate planning. Financial advisors strive to help clients achieve short-term and long-term financial goals, and may invest money on behalf of the client depending on the type of advisor and your preference. While robo-advisors do not offer this kind of hands-on assistance, they can help carry out investment decisions.

One of the most common types of financial advisor is a certified financial planner (CFP). These planners might work at a bank or investment firm, or operate their own firm. Certified financial planners must adhere to rigid requirements set by the Certified Financial Planner Board of Standards. One thing to keep in mind about CFPs is that some receive commissions or fees on investments and other financial products, while others make money only from fees paid by their clients.

The Bottom Line

No matter whether you hire a financial advisor or go solo, creating a financial plan is an important exercise. It gives you a strong sense of where you are and where you're going in your financial life—and it boosts your odds of safely riding out a short-term financial wave and smoothly sailing toward a long-term financial goal like retirement.

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