5 Steps to a DIY Financial Plan

You don’t have unlimited time and I’ll bet that you don’t have unlimited money either. However, if you didn’t have at least a small amount of interest in getting your personal finances in order, you wouldn’t be here, right?

Well, you are in the right spot! Far too few people pay attention to their money at all, let alone take on the task of creating a full financial plan for themselves or their families. However, a good financial plan is the only way to really coordinate all of your competing financial goals.

Money is a finite resource for most of us and that’s why it’s SO important to manage where it goes.  That’s what Making Your Money Matter is all about: using your money wisely to ensure that is used to further your goals and improve your life.

Having a financial plan will help you to:

  • Set specific, measurable goals
  • Gain motivation to cut expenses to reach those goals
  • Gain motivation to increase income to reach those goals
  • Set up resources to track your progress on all of your goals

In addition, it will empower you (the one that actually has the power to make the decisions) to change some of the inputs in the future such as income, spending, and saving rates.

Ready to get started? I won’t lie to you and tell you that these are little baby steps. They are all big, important steps that will take thought, time and effort. It will so be worth it, not only for the money you save by doing your own financial plan but for the knowledge you will gain in taking control of your own financial future. You can do it!

Step 1: Find your why

Before you even begin thinking about personal finances on a quantifiable level, you have to figure out the reason “why” you even care to change your financial life (hint: it’s likely not even directly related to money at all). None of this matters without a purpose. This insightful article suggests that you ask yourself these 3 questions to figure out your purpose:

  1. What is my definition of success?
  2. What am I passionate about?
  3. If money were no object, what would I do?

Money is simply a tool to help you achieve your dreams and goals. If your purpose is the “why”, then money is the “how” and your financial goals are “what” you need to do to get there.

Step 2: Define your specific financial goals

Based on your why, what do you really want your money to do for you? Do you want to get out of debt so that you have the cash flow to change careers? Do you want to save enough money to take a year off and travel around the world? Are you working toward financial independence or early retirement?

This is the point where you need to come up with a set of actionable plans that will help you to get there. Following the previous examples, to set your financial goals you would need to quantify your debt and set up a debt payment plan, make a savings plan for your travel with an end goal date in mind, or run some calculations to find out how much you need to save now for early retirement.

I’m sure you’re already very familiar with the SMART acronym for setting goals. The more specific your plan is, the more likely you are to achieve your goals. Don’t let uncertainty stop you from setting goals. They will likely get revised multiple times, but you have to start somewhere!

Learn more about setting your financial goals in mini-class: PF101: Personal Finance Overview & Goals. An extensive list of example ideas for short, intermediate and long-term goals is included in the handout for this class.

Step 3: Calculate where you currently stand financially

In conjunction with setting your financial goals, you’ll need to know exactly where you currently are with your finances. This is best determined by completing a net worth statement. This is a list of all of your assets and all of your debts.

This may be a painful process, especially if you have a lot of debt. However, it’s an absolutely necessary one. Once you start tracking your net worth going forward, you’ll be able to see all the progress you’re making it and it WILL all be worth it.

Learn more about creating your net worth statement in mini-class: PF102: Creating a Net Worth Statement

In addition to your net worth statement, you also need to track your expenses for at least a month. This will enable you to see exactly where your money is going on a regular basis.

After you’ve been tracking your expenses, you’ll see that you either have cash flow surplus or deficit. If you earn more income than you spend, you’re in a cash flow surplus. Great! If you spend more than your income, you have a cash flow deficit (which signifies that you are getting more into debt each month).

Either way, you will want to analyze your spending line by line to determine whether your spending on each category is really where you want your money to go. For example, you may find that you’re spending $500 on eating out every month. By lowering that by even $100, you’ve got extra money to save or to put toward travel or another big financial goal.

Learn more about tracking your expenses in mini-class: PF103: Tracking Your Expenses

Step 4: Mitigate your risk

Has it ever happened to you that you’ve been budgeting along, everything going wonderfully until…boom, an unexpected financial expense wiped out your progress? Setbacks are going to happen along the way, and that’s why it’s so important to have an emergency fund and/or cash reserve to fall back on.

Learn about the importance of emergency funds in the mini-class: PF105: Setting Up an Emergency Fund & Cash Reserve.

In addition to your emergency fund, it’s essential to have the proper insurance in place. Making sure that you have the proper insurance in place will help to ensure that a financial emergency doesn’t end in financial disaster.

Nearly everyone needs the following types of insurance:

In addition, if you have significant assets and/or a high income, you also should have in place the following:

Step 5: Use tools to achieve and refine financial goals throughout the year

There are also many big financial tasks that you will need to research and analyze to refine your financial plan and make sure you’re on the right track. These are the bulk of your financial plan and constitute educating yourself about each topic and then implementing it in your finances.

Budgeting

We discussed tracking your expenses as a method of helping to see where you are currently at financially, but by setting a budget of some sort each month, you can proactively tell your money exactly where to go. Budgeting doesn’t have to be a complicated, super-detailed process. There are many simple ways to budget.

Learn more about setting up a budget in mini-class: PF104: Creating a Budget & Cash Flow Statement.

Debt Management

Most people put getting out of debt as one of their top priorities when they set financial goals. It’s difficult to find the motivation to pay for past expenses now when there are so many other things that you want now. However, the freedom from debt will open doors to pursue so many other opportunities. Research the details of getting out of debt, depending on your personal circumstances. There are so many resources out there!  For example, if you want to know your options for student loans, credit cards, auto loans or mortgages you’ll find different places that specialize in information about each type.

Learn the basics of debt and credit cards in the mini-class: DM101: Debt Overview & Credit Cards
Learn how an amortization schedule works for long-term debt in mini-class: DM102: Debt Reduction

Savings/Investing

Learning about online savings accounts, investment basics and utilizing helpful tools will help you to reach your saving goals. A bonus about learning to invest yourself is that you can save literally tens of thousands of dollars in investment fees. It really isn’t that complicated if you follow a simple approach of using index funds and ETF’s.

Learn about savings accounts in mini-class: SA301: Bank Accounts-Checking, Savings, CD’s and TBills
Learn the basics of how time value of money works so that you understand compound interest in mini-class: SA302 Investing Basics: Time Value of Money
Learn the basics of investing in stocks, bonds, mutual funds and ETF’s in mini-class: SA303: Investing Basics: Stocks, Bonds, Mutual Funds & ETF’s
Learn about risk assessment and portfolio allocation in mini-class: SA304: Investing Basics: Risk Assessment & Allocation

Taxes

Year after year, the tax returns always need to be filed. Even if you decide to hire someone to complete your tax returns for you, it will pay huge returns if you learn the basics and understand your own personal tax situation in detail. YOU are the one making day-to-day decisions about your finances and there are big opportunities along the way to reduce your taxes…if you know they exist.

Learn more about federal income taxes in mini-classes: TX301: Income Tax Basics and TX303: Intermediate Income Taxes
Learn more about payroll tax withholding in mini-class: TX302: Payroll Withholding Tax Essentials

Retirement Planning

A recent survey shows a shocking 83% of millennials say that they will never retire. However, this ultimately may not be a choice due to health concerns or other personal situations. It’s crucial that you start saving right now, no matter what your age or income level. A good retirement plan that determines a lump sum need at retirement and the contributions you need to be making regularly will help you reach retirement.

Learn how to calculate retirement needs in this mini-class: RE401: Calculating Retirement Needs
Learn how qualified retirement accounts and IRA’s will help you to reach your retirement goals in mini-class: RE402: Qualified Retirement Accounts and RE403: IRA Account Fundamentals

Estate Planning

The last vital part of your financial plan will be to put a plan in place that will ensure your financial matters are taken care of even upon death or disability. Estate planning can be very complicated, so it’s recommended that you have an attorney help you to put the legal documents in place. It’s absolutely essential that you have help with this process if you have significant assets that will require you to pay estate taxes upon your death (generally if you are over the $5 million exemption).

Essential estate planning documents to put in place now include: a living will, power of attorney and an advanced health care directive.

Learn about these estate planning documents in this mini-class: ES401: Essential Estate Planning Documents
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earn more about estate and gift taxes in this mini-class: ES402: Introduction to Gift & Estate Tax

Final Thoughts

Don’t expect this to be done in an afternoon. Getting through all the aspects of your financial plan will take several months. Realistically, don’t expect your financial plan to ever be “completely finished” because things always change and plans need to be updated regularly. If you create something that is flexible, you can adapt it as you go and always have a current financial plan.

Your financial goals will change and evolve throughout time. Things that may be important to you right now may not seem as essential in the future. Other things might take priority instead.

There may be some areas in your plan that you need or want professional advice. However, if you are able to gather your own information together and create meaningful reports from them, it will be more significant to you than if someone else presents you with a snapshot of your finances and some tasks to complete. Creating  your own financial plan is completely do-able!

What questions do you have about creating your own financial plan?

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10 Responses

  1. My wife and I really need to sit down and create a will and do some estate planning. We don’t have a ton of assets but enough that I’d like to make sure that it’s seamless when my son is old enough to inherit the assets. Hopefully by that time some of the assets have appreciated 🙂 That’s probably my biggest weakness and something I’ve been dragging my feet on. Who wants to talk about death in their 30s, but I know it’s something that I gotta do.

    1. The number one reason you need the will is to name a guardian for your son if you were both to pass, but of course the assets are important as well :). We waited a long time to get a will too, and it was one of those things that didn’t take as long and wasn’t as bad as it seemed for sure.

    1. I feel like there’s always improvements I can make to my plan. Something always comes up or changes and I’m always working on it. I have a great checklist I put together for subscribers as well if you’re interested.

  2. Excellent and in-depth post on how to get it done in personal finance! Taking the first step is always the hardest. Nice job laying out the important steps to tackle first.

    1. Thanks :). There are a lot of first steps in personal financial planning that can be difficult I think (from budgeting to retirement planning). It’s so important though!

  3. We’re about to redo our will. We used one of those free forms back when we had one child and less assets. However as things have become more complex and we had a second son, we decided we need to get a will done by a real lawyer. We have that on our to-do list for the next few months.

    1. We may be due for another look at our will as well honestly! We don’t have complicated wishes for where our money goes after we die, so we aren’t terribly concerned about that part of it. Kudos for keeping up on your estate plan!

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welcome!

I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.

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