Key insights:
- A financial plan is important to help you stay on track towards financial goals and prepare for emergencies
- Making a financial plan is relatively straightforward, and requires you to set goals, make a budget and adjust accordingly
- Regularly reviewing your financial plan may help you reach goals faster or adjust your spending and saving to meet your current needs
Financial planning can help you achieve short- and long-term goals, as well as prepare for any emergencies or unforeseen expenses along the way. Whether you want to better manage your spending, reduce financial uncertainty or save for a milestone, making a financial plan can help you achieve your goals.
Here’s how to create a financial plan in just a few steps, and some personal financial planning tips that can help you stay on track.
Step 1: Set your financial goals
Everyone has goals in life, and often, those goals require planning. One key to setting financial goals is to divide them into short-term goals, like saving for an emergency fund or a new car, and longer-term goals, like saving for a down payment on a new home or retirement. You want to keep your goals clear and realistic, keeping your income and regular expenses in mind.
One good tool is the SMART goal framework, which specifies goals should be:
- Specific
- Measurable
- Achievable
- Relevant
- Time-bound
For example, if you’re aiming to save $30,000 for a down payment on a home, you may want to set a target date and then work backward to determine how much you need to set aside each month to reach it.
Step 2: Review your current financial situation
After you set your goals, take a look at your current income, expenses, savings, debt and net worth. To get a clear picture of your finances, you may want to do a thorough audit of your past year’s earnings and expenses. Look at bank statements, paystubs and tax forms to get a complete picture of your current financial situation.
You may find that you spend more on some things during different times of the year. In that case, you could take seasonal expenses into account when you’re making a financial plan. Additionally, you may want to categorize your spending so you can separate necessary expenses from optional ones you can cut back on.
Step 3: Create a realistic budget and savings plan
Creating a monthly budget can help you balance your regular spending needs with your financial goals. There are a few different budgeting strategies you can employ to track your spending, income and savings. A couple of popular options include:
- 50/30/20 method: This method allocates 50% of your after-tax income toward your needs, 30% of your income toward your “wants” (things that make your life more enjoyable) and 20% toward your savings and debt repayment. You can always adjust the percentages to accommodate your financial plan’s timeline, such as saving more to purchase a new car by the end of the year.
- Zero-based budgeting: With this method, you create your budget every month based on your expected income and expenses. Every dollar you earn should be assigned to an expense category. As you track your spending over time, it’s easier to assign each dollar a job based on your goals and expected spending.
Step 4: Build a plan to help manage debt and protect your income
As you create a budget and set your financial goals, it’s a good idea to prioritize reducing your debt and creating an emergency fund. Unpaid debt can lead to damaging consequences, like lowering your credit score or having your account sent to a collections agency. If your credit score drops, you may have a harder time qualifying for certain credit cards, loans or apartment rentals.
Setting up an emergency fund is an important way to help protect your assets when things go wrong. You never know what life will bring, and planning for financial crises can help pay off when you least expect it.
Step 5: Monitor and adjust your plan regularly
Your financial plan doesn’t need to be set in stone. In fact, it shouldn’t be. As your life changes and your income, expenses and goals evolve, you should update your financial plan accordingly. You may find that you can allocate more funds toward your goals after you receive a raise, for example, or after you pay off debt. Keeping your plan fluid gives you the chance to adjust for new income, financial windfalls or unexpected expenses.
Additional personal financial planning tips
There are many tips to keep in mind as you make a financial plan, including:
- Automate savings and bill payments: Setting up automatic payments and transfers for regular bills and savings contributions allows your bank account to do some of the manual financial work for you.
- Stay informed: There are always new financial products and strategies that might help you achieve your goals. For example, you might be able to move some of your funds to a new savings account or perhaps adopt a different budgeting method that suits you.
- Be flexible and patient: Achieving financial goals can take time, so patience is crucial, even if it feels like it’s taking forever. At the same time, if your income or expenses change, you should be ready to change your budget right away so you can avoid shortfalls or reach your goals sooner.
- Consider professional guidance: If you think you need help making a financial plan, there are financial experts who can help you plan for your goals.
Creating a plan that works for you
Everyone has different goals, needs and resources, so your financial plan won’t look the same as anyone else’s. Make a plan that works for you by accommodating your regular wants and needs, while being sure to allocate funds for the goals you set. Prioritizing reducing your debt and building an emergency fund can help you create a future that’s more flexible and financially secure.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
