Looking to improve your financial fitness in the new year? Start by creating a financial plan.
Whether you’re well-established or just starting out, a financial plan is a powerful tool that can help you reach your goals at every stage of life. We’ll explain what a financial plan is and how you can create one with our comprehensive, easy-to-use financial planning guide—complete with tips to boost your savings potential.
What Is a Financial Plan?
A financial plan is a 360-degree look at your current financial situation. When creating a financial plan, you’ll document what you own and what you owe, calculate net worth, and analyze cash flow to assess your financial health and identify opportunities for better money management—all so you can reach your goals, whether that’s saving for retirement or buying your first car.
If it sounds complicated, don’t worry, it’s not. Use our eight-step guide to create your own financial plan.
Eight Steps to Create a Financial Plan
Step 1: Identify assets and liabilities to determine net worth.
Your net worth is the value of all your assets (what you own) minus the total of all liabilities (what you owe). Here’s how to calculate yours:
- Determine assets: Take inventory of the things you own, include deposit accounts like savings and checking, retirement savings, real estate, vehicles, and any other owned assets. List each by name with its value.
- Identify liabilities: Outline your debts, include amounts owed on credit cards, vehicle loans, student loans, mortgages, and any other accounts you make payments to. Identify each by name with totals owed.
- Calculate net worth: With your assets and liabilities outlined, you can calculate your net worth by subtracting your total liabilities from your total assets.
Regardless of your net worth, this first step provides a foundation for the rest of your plan and sets a benchmark to measure progress.
Step 2: Set financial goals.
Now that you understand your net worth, dig into what you want to accomplish by identifying short- and long-term goals:
- Short-term financial goals are precise, actionable targets that can be achieved in a year or less: Pay off a specific debt, save for a vacation, or build your emergency fund.
- Long-term financial goals can be achieved in 5–10 years: Save for a down payment on a home, pay off all credit card debt, or save for college.
Be sure to include a mix of goals. Short-term goals reduce procrastination and keep you motivated—increasing productivity and willpower. With that kind of momentum, it’ll be easier to reach long-term goals.
Step 3: Understand your cash flow.
Cash flow is the movement of money in and out. Examining yours helps you understand your financial patterns—good and bad—so you can adjust and redirect cash toward your goals. Here’s how you can assess your cash flow:
- What do you earn monthly? Look at all sources of income: List and total each source.
- What do you spend monthly? Be honest and get detailed—frequent small costs add up: List and total expenses.
- Compare the two: Are you spending more than you earn? Are you saving any money? Is there extra cash to put toward your goals? What can you cut?
Step 4: Establish budgets to meet financial goals.
Now it’s time to establish budgets with your goals in mind: First, separate essential expenses (mortgage/rent, utilities, groceries, loans, etc.) from your discretionary expenses (entertainment, restaurants, subscriptions, etc.). Then, create categories for each type of expense and set limits to control spending.
Not sure where to start? Use the 50/30/20 rule as a budgeting framework: 50% of your income goes toward needs, 30% toward wants, and 20% toward saving and debt repayment.
Step 5: Establish an emergency fund.
Every solid financial plan includes an emergency fund. This fund prevents unexpected expenses like auto repairs or medical bills from becoming financial disasters. Set up a dedicated checking or savings account to keep these funds separate from your everyday cash.
Start small and build your stash over time as part of your budget. A strong emergency fund should have enough to cover three to six months’ worth of expenses.
Step 6: Start saving for retirement.
No matter your age, retirement savings need to be part of your financial plan. If you’re employed, find out if your employer offers a 401K. If they do, start contributing with automatic payroll deductions. It makes savings automatic, so it’ll be one less item on your budget. And while it reduces your take-home pay, it can offer tax benefits by reducing your taxable income.
If you don’t have a 401K option or you want to supplement your retirement savings, an IRA is another way to help you save for retirement.
Step 7: Make a plan to manage debt.
Not all debt is bad—so the way you manage it varies. “Good” debt, like a mortgage, can contribute to wealth or income over time and can offer tax benefits. “Bad” debt, like high-interest credit cards, does little to help your finances. Group your debt accordingly and determine when and how to pay down bad debt and other loans that won’t advance your financial goals.
If you’re struggling to manage credit card debt, consider credit counseling or debt consolidation with either a secured loan or home equity loan. A credit counselor will help you set up a plan to get out of debt. A lower-rate loan can help you save on interest, consolidate payments, and pay off debt faster.
Step 8: Automate savings and pay yourself first.
The easiest way to guarantee savings is to put it on autopilot. Set up automatic transfers or deposits into a dedicated savings account to make saving effortless. After looking at your monthly cash flow and planning your expenses for the year, you should be able to determine how much and how frequently you can automate your savings.
Many people choose to set up automatic transfers that line up with their pay schedule. For example, if you get direct deposit from your employer or Social Security, set up automatic transfers into your savings that recur simultaneously on the same day you receive your deposit. Saving just $100 every week could add up to over $5,000 at the end of the year.
At Rollstone Bank & Trust, our online and mobile banking tools make setting automatic transfers easy. You set the transfer details once—how much money, which accounts, and the frequency—and we handle the rest. Rollstone offers several affordable personal banking accounts—all with low minimums to open and free online and mobile banking.