Copy for a client website, by John Sailors, August 2024.
A solid financial plan helps people manage all aspects of their finances, including income, expenses, spending, savings, investments, and retirement planning. Here are the fundamental steps to building a personal financial plan.
1. Set clear financial goals. Consider both short-term and long-term financial goals. In the short term you might be considering a down payment on a house, sending children to college, or paying off a car loan. In the long term, you might be eyeing a move to another city or preparing for retirement.
2. Assess your current finances. Collect information on your current finances including income, expenses, spending, and assets and liabilities. You need an overall picture of your financial situation to move forward.
3. Create a budget. A budget is a plan that outlines your income and spending to ensure your needs will be met and your bills will be paid. A budget will cover housing, utilities, groceries, transportation, and insurance.
4. Build an emergency fund. Be sure also to set money aside each month for a rainy day—all the planning in the world won’t prevent unexpected expenses, from medical bills to paying for expensive car repairs.
5. Plan for taxes. People can save huge amounts of money over their lifetime through tax planning. Make sure you’re taking all possible income tax credits and deductions and making use of tax-advantaged accounts such as IRAs and 401(k)s.
6. Manage debt. Find ways to consolidate debt, lowering overall interest rates and/or paying debt off faster. For instance, if you have a good credit rating, banks may offer balance transfers at zero percent APR for a year or more. But do the math first: some charge a fee that makes the balance transfer more expensive than it appears.
7. Plan for retirement. The fact is, it’s never too early to prepare for retirement. Start when in your thirties—or earlier—and by the time you’re in your fifties, you’ll be in a comfortable position.
8. Consult a financial adviser. Working with a professional financial advisor ensures your financial plan is covering all the bases and doing so according to best practices. At the same time, you’ll learn tricks and strategies for investment, debt management, and tax planning.
Building a comprehensive financial plan empowers you in all aspects of your life. When you put yourself on sound financial footing, all that other planning in life—like weddings, buying a home, and taking a dream vacation—become enjoyable instead of scary.
Key financial planning tools
Let technology make your financial planning both easier and more powerful. These financial planning tools help you gain a deeperpicture of your financial condition..
Required Minimum Distribution Calculators. Required minimum distributions (RMDs) are minimum amounts the IRS requires retirees to withdraw from retirement accounts such as IRAs each year. You can find a free required minimum distribution calculator here.
Emergency Fund Calculators. An emergency fund will cushion you against surprise financial setbacks. These include car repairs, medical expenses, or a job loss. And each individual’s needs are different, so an emergency fund calculator can be extremely helpful in making sure you’re covered for the unexpected. Nerdwallet has a free one available here.
Net Worth Assessment. Your net worth is the value of your assets minus the value of your liabilities. If your debts are larger than what you own, you have a negative net worth. Calculating your net worth gives you a valuable report card on your financial situation. Forbes put together a useful net worth calculator here.
Investment Risk Tolerance Assessment. Investors have different goals and different possibilities in terms of their assets and how much risk they are willing to accept. Risk tolerance is the degree of market volatility and loss an investor is willing to accept. The University of Missouri website has a useful risk tolerance quiz that can help you find your sweet spot in investing.
Compound Interest and Savings Goal Tracking. Saving money isn’t as easy as just putting it into a savings account. Make sure your savings are growing as fast as possible and track your savings goal with compound interest and savings goal calculators like this free one made available from the SEC.
Social Security Retirement Estimator. Understanding the best time to turn on Social Security benefits is essential in getting the most out of your Social Security. Remember, beginning benefits early lowers the monthly benefit amount while delaying retirement past your full retirement age increases the amount. This SEC website offers a free personalized Social Security benefit estimator.
529 College Savings Planner. It practically takes a college degree just to plan for college tuition and expenses. Use this 529 Expense Analyzer to assess how fees and expenses can affect the return you receive on various 529 college savings plans.
Long-Term Care Cost Calculator. As people are living longer and longer, the need to prepare for long-term care has increased. Long-term care may consist of home care provided by family and friends, or when intense care is required, it may be provided in a nursing home or memory care community, which can run thousands of dollars per month. Use this long-term care calculator from AARP to learn more and plan for your family’s future.