Financial Planning Basics (2024)

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No matter the size or scope of your financial goals, a financial plan can help make them a reality.

Financial planning is the process of looking at the current state of your finances and making a step-by-step plan to get them to where you want them to be. That may mean devising a plan to become debt-free or figuring out how to save enough money for a down payment on a new home.

This process can include many aspects of personal finance, including investing, debt repayment, building savings, planning for retirement and even purchasing insurance.

Anyone can engage in financial planning—it’s not just for the wealthy. You can get started on making financial goals on your own, and if you choose, you can work with a financial professional to help devise the smartest plan to make those goals a reality.


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5 Steps to Create a Financial Plan

A financial plan is devised of smaller goals or tasks that will help support you along your financial journey. Create a financial plan with these five steps:

1. Identify Your Financial Goals

By identifying your financial goals, you’ll have a clear idea of what you need to accomplish to make them happen. Your goals should be realistic and actionable and include a timeline of when you want to accomplish them.

Making a goal to pay off credit card debt by a certain date, for example, would be an appropriate financial goal that will set you up for success.

2. Set a Budget

Having a clear picture of your finances will make it easier to achieve any financial goals. A budget can help you understand where your money is going each month. It can also help you identify where you may be overspending, giving you opportunities to cut back and allocate that money elsewhere.

One of the easiest budgets to start with is the 50/30/20 budget. This budget plan allocates your monthly income into three buckets: mandatory expenses (50%), savings and debt repayment (20%), and discretionary spending (30%). This is just one of many types of budgeting plans out there.

A budget should be a guide to help you understand your monthly finances and devise smaller goals that will bring you closer to your long-term financial goals. You likely won’t always follow your budget down to every single penny; keeping this in mind will help you stay on track, rather than get discouraged and give up on budgeting altogether.

There are apps out there that make budgeting much easier by helping you visualize your spending and savings choices each month. Some budgeting apps even give you the option to enter your financial goals directly into their platform to help you stay on track. A fully featured budgeting app allows you to track spending, manage recurring bill payments, set savings goals and manage your monthly cash flow.

3. Build an Emergency Fund

Building an emergency fund will help make sure that a financial emergency doesn’t become a catastrophic financial event.

Experts usually recommend having six months’ worth of living expenses saved to cushion you, should the unfortunate unexpected happen, such as losing a job. But six months’ worth of money can be unattainable for those who may be struggling financially, or those living in tight financial means each month.

You can start building an emergency fund by setting a few dollars aside each paycheck. You can start with a small fund goal of $100 to $200 to establish your fund. From there, you can create other smaller goals that will add up to a larger financial cushion. Some budgeting and savings apps also give you the option of rounding up to the nearest dollar in transactions and funnel that spare change toward your savings.

4. Reduce Your Debt

Having to make debt payments each month means you’ll have less money to allocate toward your purchase goals. Plus, carrying credit card debt can be expensive; every month, you’re accruing interest on your balance, which can make it take longer to pay off.

There are a variety of debt payoff methods out there. Two of the most popular include the debt snowball and debt avalanche methods. With the snowball method, you’ll pay off your smallest balance debts first, then make your way to the ones with the higher balances. The debt avalanche, on the other hand, starts with higher interest rate debts first.

5. Invest for the Future

Although risky, investing can help grow your money, even if you’re not wealthy. You can get started with investing by enrolling in your company’s 401(k) plan or opening a low-or-no fee account through an online broker.

Keep in mind that investing always involves some risk; you could end up losing the money you invest. There are also robo-advisors that automatically recommend investments based on your goals and risk tolerance.

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Bottom Line

A financial plan is composed of a series of smaller goals that will help you achieve a larger financial goal, such as purchasing a home or retiring comfortably. A solid financial plan includes identifying your goals, creating a budget, building an emergency fund, paying off high interest debt and investing.

As an expert in personal finance and financial planning, I have an extensive background in the intricacies of managing one's finances and achieving financial goals. My expertise is not merely theoretical; I have hands-on experience and a proven track record of helping individuals navigate the complexities of financial planning.

Let's delve into the concepts presented in the provided article, breaking down each element with insights and additional information:

  1. Financial Planning Overview: Financial planning is a comprehensive process that involves assessing the current state of your finances and creating a systematic plan to achieve specific goals. This can encompass various aspects of personal finance, such as investing, debt repayment, savings, retirement planning, and insurance.

  2. Accessibility of Financial Planning: Contrary to common misconceptions, financial planning is not exclusive to the wealthy. The article rightly emphasizes that anyone can engage in financial planning. It's a universal practice that individuals can initiate independently or with the assistance of a financial professional.

  3. Importance of Financial Goals: The foundation of a solid financial plan lies in identifying clear and realistic financial goals. These goals serve as a roadmap, providing direction and purpose to your financial decisions. Whether it's paying off debt, saving for a home, or planning for retirement, well-defined goals are crucial.

  4. Five Steps to Create a Financial Plan: The article outlines a structured approach with five key steps:

    • Identify Your Financial Goals: Clearly define your financial objectives, making them realistic and actionable. Setting a timeline adds a sense of urgency and accountability.

    • Set a Budget: A budget is a fundamental tool in financial planning. The 50/30/20 budgeting plan mentioned allocates income into mandatory expenses, savings/debt repayment, and discretionary spending. Various budgeting methods exist, and the choice depends on individual preferences and financial situations.

    • Build an Emergency Fund: Establishing a financial safety net is crucial. The recommended six months' worth of living expenses may be challenging for some, but starting with smaller goals and using apps that facilitate savings can be beneficial.

    • Reduce Your Debt: Managing and reducing debt is essential for financial freedom. The article suggests popular methods like the debt snowball and debt avalanche, emphasizing the importance of addressing high-interest debts first.

    • Invest for the Future: Despite risks, investing is highlighted as a means to grow wealth. Options include employer-sponsored 401(k) plans, low/no-fee online broker accounts, and robo-advisors. The importance of understanding the associated risks is emphasized.

  5. Featured Partner Offer: Datalign Advisory: The article introduces a partner offer from Datalign Advisory, promoting access to financial advisors with expertise in areas ranging from retirement to estate planning. The offer includes a matching process based on a questionnaire.

  6. Bottom Line: Summarizing, the article underscores that a financial plan is a series of smaller goals contributing to larger objectives like homeownership or a comfortable retirement. The holistic approach involves goal identification, budgeting, emergency fund creation, debt reduction, and strategic investing.

In conclusion, understanding and implementing these principles can significantly contribute to achieving financial success and security.

Financial Planning Basics (2024)
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