When it comes to setting and achieving a personal financial goal, the best way to do so is to start with a personal finance plan. Planning your personal finances might seem hard at first, but there are a number of steps you can take in order to make creating a personal finance plan a breeze.
How to Plan Your Personal Finances
There are several steps to personal financial planning, but let’s start with number one.
Figure out how much you’re earning and how much you’re spending. This is your net worth – put simply, it’s how much you own (how much you’re earning) less how much you owe (how much you’re spending). Figuring out your net worth is the first step to any solid financial plan, because it lets you know how much money you’re actually taking in. The best way to do this is to total up your income, including savings and investments, on a sheet of paper. On the same sheet of paper, calculate your expenses, like rent, mortgage, bills or loan payments. Subtracting your expenses from your income will leave you with your net worth.
Set a financial goal. Now that you know your net worth, you can start setting a financial goal or two. Set a mix of short and long-term goals so that you have things that you can work toward. For example, a short term goal might be to save up some spending money for an upcoming trip, while a long-term goal would be to spend less overall on fast food or going out to eat. Short-term goals can even feed into long-term goals: a short-term goal of finding an apartment with cheap rent might help with the long-term goal of saving for a house.
Devise strategies for meeting your goals. After you’ve developed some short and long-term financial goals, you can start thinking of ways to meet them. Using the fast food example from Step 2, you could look at your expenses from the past month and figure out how much you’re spending on fast food. Figure out how to cut out $10 week, whether it’s skipping soda for a week or packing lunch for a day, and you’ve soon saved yourself $40 a month. That’s up to $520 a year — enough to pay rent for another month, make another car payment, or buy yourself a big treat like a new computer or a gaming console.
The three steps above are your mainstay when it comes to personal finance planning — as you devise and finish one financial plan or series of financial plans, re-evaluate your net worth and devise new goals based on your accomplishments.
As you follow through on your financial plans, here are some other steps to take to ensure that things go smoothly.
- Check up on your credit as you go. There are three main credit reporting agencies: TransUnion, Experian and Equifax. Pull credit reports from each and check them against your records. If you notice any discrepancies, dispute them with the agency that’s reporting them.
- Build an emergency fund. Emergency funds can help you deal with the unplanned, like a sudden doctor’s visit or much-needed repairs on your car. The best way to set up an emergency fund is to make it one of your financial goals or to work it into your financial plan in some way.
- Buy insurance so that you’re prepared for the unexpected. If you don’t have some already, purchase disability insurance to protect your livelihood in case of accidents, especially accidents caused at work. Maintain adequate or above-adequate health insurance, auto insurance and homeowner’s or renter’s insurance to make sure that you’re protected when the unexpected inevitably comes knocking.
As you work on your financial plans and keep the above steps in mind, you should know that financial plans aren’t necessarily one-time affairs: they’re something that you’ll need to plan, build and stick to for the rest of your life. However, you still need to develop exit strategies for the money from each of your plans. Once the financial plan has run its course to get you the money you need, in comes the exit strategy so you can spend the money without otherwise denting your net worth.
Possibly the most important thing when it comes to financial planning — it’s a give and take. You have to put money into the plan if you want to take money out of it later, whether it’s one year later, or ten.