May 20, 2024
As the saying goes, if you fail to plan, you’re planning to fail.
This certainly applies to your personal finances. You can’t prepare well for your financial future if you don’t have a plan. A financial plan is a detailed picture of your financial situation today, as well as strategies for how to achieve your short- and long-term goals tomorrow .
Creating a solid financial plan involves a lot of moving parts, and it's often hard to get started. That’s why we’ve created a step-by-step personal finance guide to help you begin the process.
Start by creating a vision for your financial future. What do you want your life to look like in five, 10, or 20 years? This vision might help you focus on the big picture when making tough decisions and may provide the motivation you need to keep going.
Vision isn’t enough, however. You also need tactics to bring that vision to life. By following specific steps, you can work to realize your financial dreams. This is where well-defined goals come in. Concrete financial goals along the way might help anchor your personal financial plan. A useful guide may be to create S.M.A.R.T. goals. This stands for “Specific, Measurable, Achievable, Relevant, and Time-bound.”
What makes a goal S.M.A.R.T.? It’s when you know exactly what you want to achieve, when you will achieve it, and why it’s important to you. It may be a good idea to divide goals between short term and long term.
For example, a short-term goal might be to save enough for a 20% down payment on a home within the next few years. Another example could be saving $250 a month for a dream family vacation in two years.
A long-term goal might be to grow your retirement accounts or 401(k) each year (especially if you get an employer match) with the idea of retiring by age 65. You could also set a goal to pay off your mortgage early (which might mean making one extra mortgage payment each year).
By deciding what matters most, you can create specific financial goals that match these priorities. Be sure to write all this down in your financial plan. You may create this plan on your own or seek help from a financial advisor to make sure you capture everything.
Either way, it’s helpful to have a written plan to help you gauge your progress.
After you lay out your ideal financial future, review your current finances. This can help you compare where you are now with where you want to be. Then, identify any gaps that exist that could hold you back from achieving your goals.
Don’t get discouraged if the gap seems huge. That probably means you need to break your goals into smaller, more achievable steps. A good first step is to gather together all your financial information.
“To develop your financial plans for the future, you must first understand your current situation. This means gathering pertinent financial documents, including pay stubs, account statements, employee plan benefits, insurance policies, estate documents, Social Security statements, and tax returns,” said Jay Abolofia, PhD, an economist and certified financial planner in Boston.
The documents you gather will help you determine your current income and expenses. You may have pay stubs from your job or evidence of other income that you should add up.
Then, turn your attention to your expenses. You are likely to have some fixed expenses like rent or a mortgage, as well as variable expenses like utilities and groceries.
In addition, there may be discretionary expenses like a gym membership, streaming subscription services, or dining out. Add everything together to see how much money is coming in—and going out—each month.
Once you have an accurate picture of your finances, move on to the next step of your financial plan and consider building an emergency fund.
To develop your financial plans for the future, you must first understand your current situation.
Jay Abolofia, certified financial planner
An emergency fund is a critical part of an effective personal financial plan. Financial advisors often suggest that you have a cash reserve equal to three to six months' worth of expenses in your emergency fund.
In fact, only 16% of respondents in a recent consumer survey by Discover® Personal loans said that they were “very prepared” to handle an unexpected expense over $5,000.*
Do your best to save, with a goal of ramping up savings as you’re able. It’s okay to start small when building your emergency fund. Think about setting aside $25, $50, or $100 a month in a high-yield savings account. Automating the process may help make saving easier. Even a small emergency fund of $1,000 may help ease your mind now and your financial situation later.
Good personal financial management also means having a debt-management plan. After all, you can’t save for your future without handling your current financial obligations.
After you know your income and expenses, see what is left over to pay down debt. It is often best to deal with higher-interest debt first.
This is where a personal loan for debt consolidation may help. A personal loan can help you pay off debt sooner and save money on interest when consolidating higher-rate debt. 83% of surveyed debt consolidators said they saved money and time by taking out a Discover® personal loan .**
Many personal loans offer a range of repayment terms (the number of months you will have to pay off the loan). Typically, the longer the period of time you choose, the lower your monthly payment may be, which can give you some financial flexibility.
A fixed repayment term with a fixed rate will also give you one set regular monthly payment, which may make budgeting your money easier. With a Discover personal loan, for example, if you get approved for a $15,000 loan at 13.99% APR for a term of 72 months, you'll pay just $309 per month.
Your personal financial plan should also include protection for yourself and your family for the future.
Life insurance may provide a valuable cushion if the unexpected happens. Term life insurance expires after a set period that generally ranges from five to 30 years. It may replace lost income in case of your death. It is generally more affordable than other policies, such as whole life insurance, which may build value over time and is permanent. There are also other types of life insurance, so be sure to consult with an insurance professional. This might help you understand what coverage you need and how it may fit your budget.
It’s not fun to think about making a will, but it’s important to outline your wishes to your loved ones. By leaving a will, you can help guide your family on how to distribute your estate and make the process run more smoothly. A financial advisor or estate planning attorney may be able to offer valuable advice as you tackle this part of your financial planning.
Once you create your financial plan, don’t assume it is set in stone. You will likely need to make changes along the way.
“In reality, your financial plan is obsolete the minute you finish putting it together. Life is just too unpredictable,” said Abolofia. “What’s most important is ultimately the process of planning itself.”
He added that it’s best to revisit both your financial plan and your expectations for the future. For example, you may decide to delay buying a home or push back the date of your retirement. Whatever the change, you should adjust your financial plan to make room for these shifts.
“For most people, it’s important to review their plan when a major life event occurs or if your financial goals change materially around work, family, health, or housing,” Abolofia said. “Otherwise, planning to revisit the plan every few years is good financial hygiene.”
Creating a personal financial plan takes time and effort. The upfront work, however, could pay off in peace of mind, greater financial security, and the ultimate satisfaction of achieving your goals.
Every dream requires a bit of work to make it a reality, and achieving your financial dreams is no different. Just remember that what you do today may pave the way for a brighter future tomorrow. Keeping this in mind will help make your investments of time, effort, and money well worth it.
Want more tools for effective financial planning?
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
Discover Bank does not sell non-deposit investment products (“NDIP”) or provide recommendations regarding NDIP. NDIP are NOT FDIC insured.
* ABOUT SURVEY
A national survey of 1,000 U.S. residents ages 18 and up was commissioned by Discover and conducted by Dynata (formerly Research Now/SSI), an independent research firm, between June 28 and July 3, 2023. The maximum margin of sampling error was +/-3 percentage points with a 90 percent level of confidence.
** ABOUT SURVEY
All figures are from an online customer survey conducted September 14 to October 3, 2023. A total of 1,191 Discover personal loan customers were interviewed about their most recent Discover personal loan with 550 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2023 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.
