Everyone should have a financial plan, and writing one is easier than you think

Clint Proctor

Nov 21, 2019, 00:49 IST

Everyone should have a financial plan, and writing one is easier than you think

Klaus Vedfelt/Getty Images

Your financial plan should include debt payoff, savings, and estate planning goals.

A financial plan is a document that thoroughly details your financial goals.
Your financial plan should include debt payoff goals, savings goals, and estate planning goals.
You can create your financial plan yourself or work with a financial professional, such as a credit counselor, financial adviser, or certified financial planner (CFP).
A financial adviser can help you build a complete financial plan. Use SmartAsset's free tool to find a qualified professional in your area »

Most of us hope to succeed with money. But the reality is that sometimes our money can seem to have a mind of its own.

A recent study by Charles Schwab found that 59% of Americans are living paycheck to paycheck and only 38% have built an emergency fund.

These numbers reveal why it's so important to build a financial plan. A financial plan makes it easier to take control of your money instead of allowing your money to control you.

But what exactly is a financial plan? And how would you go about building one? Here's what you need to know.

What is a financial plan?

A financial plan is a document that thoroughly details your financial goals. Think of it as a roadmap showing you how to build the financial freedom that you desire for yourself and your family.

In order for a financial plan to be effective, you need to honestly evaluate where you are, money-wise, and where you want to be someday. When it's done right, a financial plan can remove a lot of financial stress and anxiety from your life.

What should you include in your financial plan?

As we'll see later, there are professionals who can help you build your financial plan. But you can also choose to create your own. If you decide to go the DIY route with your financial plan, here are a few things you'll want to include.

1. Your current net worth

The first step towards building a solid financial plan for the future is to honestly evaluate where you are today. And one of the best ways to do that is to determine your net worth.

To find your net worth, simply subtract your debts from your assets. If you have money stashed away in a savings account or in a retirement fund, you'll add those to the "assets" column. And credit card balances, student loans, or personal loans will go in the debt column.

Certain things, like homes and cars, can be both assets and liabilities. If the asset is worth more than you owe, then it adds to your net worth. But when you owe more on the asset than it's currently worth, it subtracts from your net worth.

Let's say you own a home that's currently worth $250,000 and you owe $150,000 on your mortgage. You'd take $250,000 and subtract $150,000 to find that your home currently adds $100,000 to your net worth.

Calculating your net worth can be a surprising experience. You may not have expected your net worth to be so high. Or you may have guessed that it would be higher. But either way, you'll know exactly where you stand once you finish the exercise, and that's an important first step.

2. Your monthly budget

Your budget or cash flow plan is really the central piece of your financial plan. It's the key to being able to achieve all the other financial goals that you'll set down the line.

To build your budget, begin by adding up all of your expected sources of income for the month. Then, assign a portion of your income to each of your expenses and savings goals, until you arrive at $0 left over.

You don't need fancy software to build a budget. Technically, a pen and paper or computer spreadsheet can suffice. But budgeting tools can definitely make the process easier and more automated.

A financial planner can help you create a budget that works. Use SmartAsset's free tool to find a qualified professional today »

Some of the best budgeting apps available can automatically import your credit card and debit card transactions and even assign them to the proper budget categories. With all the amazing tools that are available today, creating a budget no longer needs to be a complicated and exhausting exercise.

3. Your plan to build an emergency fund

Once you've created your budget, you may find that you have a little extra money each month that you can spend however you like. So what should you do with that extra cash?

You may be eager to start attacking your debt. But, according to some experts, your first goal should probably be to build up an emergency fund. Why?

Because with an emergency fund in place, you'll know that if your transmission blows or the refrigerator breaks down, you have the money in the bank to cover the expense. And that can lead to more peace of mind and fewer restless nights.

There's no perfect answer to how large your emergency fund should be, but three to six months of expenses is a popular recommendation.

4. Your debt payoff plan

Once your emergency fund is in place, you'll want to create a plan for paying off high-interest debt. For many people, credit cards will be one of the biggest contributors to high-interest debt. According to the Federal Reserve, the average credit card interest rate is over 15%.

But personal loans are known for charging high interest rates as well. The average interest rate on 24-month personal loans is currently over 10%. And if you have private student loans, they could have high interest rates, too.

There are two different opinions of how to pay off debt. Some people recommend focusing on the smallest debt first and working your way up to the largest debt (i.e. the "debt snowball" method). Others recommend paying off the highest interest rate debt first and working your way down (i.e. the "debt avalanche" method).

Both strategies are perfectly fine. Just pick whichever one you think will motivate you the most and will be the easiest to follow through with.

5. Your plan to save for major expenses

Would you like to own a home? Will you need to buy a car in the next few years? Would you like to pay for your kids' college education? Have you always dreamed of spending a summer in Europe?

These are all "big ticket" financial items, so most of us will need to save up for them over time.

As you're creating your financial plan, be sure to list out all your financial goals that have a price tag of $5,000 or more. Then try to set aside money each month towards these goals.

6. Your investing and retirement plan

Retirement is coming for all of us. And it's never too early to prepare. Your financial plan should include a retirement savings goal and how much you'll need to save each month to get there.

Then, get started investing for retirement. You can choose a self-directed path using index funds or robo-adviser portfolios. Or, you can choose to work with an investing professional, such as a financial planner (more on that later).

Looking for a financial planner to help with your retirement savings goals? Use SmartAsset's free tool to find a qualified professional »

But regardless of which route you take, just be sure to get started as soon as you can. The earlier you invest, the more time you give for compound interest to work its magic on your retirement portfolio.

7. Your estate plan

Estate planning is simply thinking about what will happen to your assets after you die and how your family will be protected.

One of the first estate planning questions you'll want to answer is "Do I need life insurance?" If you have dependents who rely on your income, the answer is probably yes. Beyond life insurance, most families will want to have a will as well.

For some people, a life insurance policy and a will may be all they need. But if you have a complicated family situation or a very large estate, your estate plan may need to be more involved. In that case, you may want to sit down with an estate planning attorney.

Should you get help with building your financial plan?

You don't have to, but it could be a good idea. If you're struggling with budgeting and debt, you may want to consider meeting with a certified counselor from the National Foundation for Credit Counseling.

If you're looking for investing advice, you could talk to a financial adviser. Alternatively, you could use a robo-adviser service that uses algorithms to build portfolios to match your risk profile. Generally, you'll pay less in fees with a robo-adviser than a human adviser.

Finally, if you're looking for someone who can help you develop a comprehensive plan from A to Z, you may want to consider meeting with a certified financial planner (CFP). CFPs are well-versed in a wide variety of financial topics, including investing, insurance, tax planning, estate planning, and more.

If you've found an adviser near you who claims to be a CFP, be sure to check his or her credentials with the CFP Board. The CFP Board website is a great place to find CFPs as well.

And if you're specifically looking for a fee-only financial planner, try searching on the National Association of Personal Financial Advisors or the XY Planning Network.

SmartAsset's free tool can help you find a financial planner with just a few clicks »

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