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How to Make a Financial Plan the Right Way

How to Make a Financial Plan the Right Way

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Daniel Cohen
UpdatedApr 1, 2019
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    9 min read
Key Takeaways:
  • Make a financial plan to prioritize the steps you will take to reach your goal.
  • Be realistic about the timeframe it takes to improve in any area and measure your progress. Hold yourself accountable.
  • Use new financial tools and apps, such as ones for budgeting, savings, comparison shopping, and monitoring credit.

How to Make a Financial Plan that Fits Your Situation

When you make a financial plan, you create the blueprint for the future you want to build. It is a way to take control of your situation, and avoid the easy way of doing nothing and not improving your financial health.

Your financial plan is not carved in stone. To be successful, be flexible, willing to adjust to changes in your financial circumstances, for the good and the bad. Your financial plan should:

  • Sketch out your financial goals
  • Prioritize your goals
  • Establish concrete action steps
  • Measure the effectiveness of your steps
  • Allow for adjusting the plan, where necessary

DIY Financial Planning

If you've accumulated a lot of assets in property, investment accounts, or real estate, and have a lot of money left over each month after you pay your bills and put money into savings, then you probably have a financial plan in place. Most financially successful people do. Those people already have or should have a personal financial advisor. When they measure their financial health, it is too see just how healthy they are, not how sick or where they are struggling.

Measure Your Financial Starting Point

Take the Financial Health Survey before you make a financial plan. Our survey is based on the research and methodology of the Center for Financial Services Innovation (CFSI). The reason to take the survey is that it will show your financial strengths and weaknesses. A clear understanding of what areas you need to improve gives you goals to aim for, help you assemble the right priorities, and allows you to measure your progress as you move forward. .

A financial plan takes time to achieve. There are only so many things you can do at once, so to be as efficient as possible, you want to improve your finances in small, achievable steps. Don't set yourself up for failure by taking on too much and then giving up, discouraged, when you find that you have taken three steps forward and two back.

Basic Financial Plan Priorities

How you scored on the Financial Health Surve will help you prioritize the building blocks of a solid financial plan. Don't expect that the order listed here is the order you need to follow, but you can use the listed items as a checklist. To assemble a financial plan that allows you to achieve your short and long-term financial goals, you should account for each item.

Make a Budget

OK. It's not breaking news that you should keep a budget. It's about as newsworthy an item as "eat a healthy diet" or "you should say please and thank you." That doesn't negate the value of eating well, good manners, or keeping track of your spending and expenses. There is no better way to figure out if you are wasting money or if you are directing your money to the priorities you have for yourself. Making a goal is talking the talk. Making a budget is the first step in walking the walk.

Build an Emergency Fund

You don't want to spend too much time thinking about worst-case scenarios. It's depressing. The way to do that is to be prepared for the unexpected, as best as possible. If you have enough money saved up to cover common emergencies, then you won't spend too much time thinking about it. It is when you know that a small expense could throw your entire financial picture out of whack that your mind revisits the topic and anxiety rises. Commit to saving up a fund, starting with a modest goal, if necessary. Even if it takes a year, get $1,000 set aside. Monitor your progress with our Emergency Fund Calculator.

Not everyone can afford to build savings at a significant rate, unfortunately, but it doesn't take a Herculean effort for most people, even if it may take cutting out discretionary spending.

Pay Down Debt

All debt is not created equal. There is a big difference between paying off a mortgage and carrying high-interest credit card debt, even if both are debts. Take your answers to the Financial Health Survey and an honest look at your budget to see what debts you are carrying. Calculate the percentage of income you are using to pay your debts, using our Debt-to-income (DTI) Calculator. Look at the interest you are paying on your debts. Use your budget and the DTI to track month to month whether your debts are growing or if you are successfully paying them down.

If you are paying for basic needs with credit and your debt level is rising each month, that is a big red flag. It is not a sustainable situation. You need to find a way to cut expenses to put more towards your debt, or a cheaper way out of debt. If not, you are headed for credit debt that keeps rising until you eventually max out your credit, with payments you barely can afford. That's called debt pyramiding. Once you reach the top of the pyramid with no more credit available, it is a fast, steep crash. If you are headed in that direction, find the best debt relief option for your situation. There are solutions available, but your options narrow the same way the pyramid does, the closer you get to the top.

Find the Right Debt Relief Option

The Debt Pay Off Calculator is a free tool that helps you assess your options and then make a recommendation based on the priorities you express and the monthly payment you say you can afford

Get Appropriate Insurance

Your emergency fund exists to protect you against short-term financial shocks like car repairs, crucial home repairs, and loss of income due to layoff, illness, or a cut in hours. Insurance is there to protect you or those dependent on you from even more severe financial shocks. Whether it is affordable or not, assess the value of having short and long-term disability insurance, life insurance, and proper medical care. Knowing your insurance priorities and what kind of value different coverage delivers, gives you the power to slot them in with your other financial priorities. For instance, a young parent, who is the sole supporter of a family is going to have a greater need for life insurance than someone the same age who only supports him or herself.

Build and Maintain Excellent Credit

Credit scores are important for a variety of reasons: access to better interest rates, cheaper insurance, ability to rent an apartment, to name a few. It is easy to guess the answer to the following question, "If you can choose your credit score, would you choose an excellent score, an average score, or a poor score?" Of course, an excellent score is desired. The good news is that it is not hard to have excellent credit. Even if you have awful credit today, you can build a strong credit score in less than two years if you take the right steps.

There are times when the goal to build an excellent credit rating is less important than other financial goals. If things are so rough that you can't take steps to improve your credit, because, for example, you are drowning in debt, then it makes sense to prioritize getting out of debt. Start working in improving your credit as soon as you can, but keep your priorities in order.

Build Long-term Savings

Your secure financial future depends on putting money aside each month. There are different reasons to save. You can save for a down-payment on a home, which can take a long time, depending on what houses go for in your area and what kind of loan program you qualify for.

Retirement savings are built over an even longer period. Your plans for retirement savings depend on the type of job you have and the benefits that come with it. A career member of the Air Force who will receive a pension for life if he or she hits 20-years of service will prioritize savings differently than a person who has no retirement benefits through work and has to build a retirement fund from his or her income.

Investment savings also take a sizable time to grow. A basic rule to follow for long-term saving is "save early and save often." The sooner you start saving for your retirement, the longer your savings have to grow before you access them, and the more years the interest can compound.

Financial Tools

A financial plan, no matter how detailed your goals, ordered your priorities, and precise your action steps is dependent on the tools you use. You could have the fastest care in the world, for example, and you're not going to win a race from San Francisco to New York with a jet plane. Similarly, if you need to pay a bill right away, driving to your cellphone carrier isn't going to be as quick or efficient as using an online bill paying service.

There have never been more options than there are today for excellent financial tools to help you with every aspect of your financial plan. These tools will save you time and money in a variety of ways, including:

Using the tools and apps available make it easy to adjust your financial plan as you move forward. You could need to adjust because you accomplished one goal and are moving on to another, or due to some change in your financial circumstances.

Once you see that you are making progress, you create a positive feedback loop. The progress feels good. You are motivated to continue, the success you have makes it easier to accomplish the next goal, and the behaviors become habits. That doesn't mean it is time to relax and let things slide. Habits are only habits when you maintain them. Keep track of your successes and reward yourself, when you deserve it, with praise and a well-earned sense of accomplishment.

Because money issues can cause such stress in life, the more secure you become, the less you are subject to those stresses, and you can focus on the positive things that money and good financial deliver: peace of mind and freedom to do things for yourself and others with your money.

Benefits of Charitable Giving

Research shows that giving to others benefits the giver's health and well-being. When you are making a financial plan and see improvement, consider putting something towards a well-run charity.