Financial Planning Process: 8 Steps to Build a Personal Financial Plan

Going through the financial planning process is a good way to get your personal finances in order. In fact, few things will end up having as much impact on your financial life as having a financial plan.

The process of planning your finances allows you to immediately assess your current financial picture and prepare for your future financial situation.

A proper financial plan will also cover everything in between the now and retirement. It serves a personalized roadmap to financial security, covering everything from investment goals to ensuring you have the right insurance in place.

Without a financial plan, navigating your financial life can feel extremely difficult and challenging. That’s why it’s in your best interest to create a financial plan and stick to it.

The good news is that building one might be a little easier than you think, and you don’t need a professional financial advisor to help you do it. Here are eight steps to help you get started with the financial planning process:

Step 1: Review Your Current Savings and Spending Habits

Before you get started with the actual “planning” of the financial planning process, the first step you should take is to review your current financial standing.

This is one of those financial exercises that we should all be doing on a frequent basis, but it’s even more important when you’re just getting started.

When we talk about reviewing our current financial picture, the first thing that likely comes to mind for most of us is taking a look at our income, expenses, and current savings habits. Otherwise known as a personal budget or cash flow.

While there are many other areas to explore, they should after these core budget and spending habits:

• Insurance
• Risk management
• Investments
• Estate planning
• Housing

If you’re not entirely sure how to go about examining your budget, start with reviewing anywhere from three to six months worth of bank statements. Make sure you are including everything. All of your expenses, your savings contributions, loan payments, and any earned income. It can be helpful printing off your posted transactions and taking a sharpie or highlighter to this printout.

Categorizing your expenses as you go through can help to point out any trends or areas that stand out. This will allow you to better understand the daily, weekly, and monthly relationship you have with your money. It’s also the first step to creating a budget that you can work with afterward.

There’s a very good chance here that you’ll be surprised at some of the numbers. It’s also very likely that you will immediately find areas where you can trim down, eliminate, or move around your spending habits.

Just like anything else, this is a financial exercise that becomes easier, and eventually second nature, the more you practice it.

Step 2: Set Short-Term and Long-Term Financial Goals

Setting strong goals can help establish a lens of clarity when it comes to our finances.

Despite what some people may have told you, or even think, goal setting is an underutilized and undervalued practice.

Setting goals provides clarity in our financial lives by helping us understand exactly what we are working on (our goals) and by showing us exactly how we can reach our goals.

When you’re setting goals, there are a few key things to consider in order to give yourself the best chance of success:

• Set S.M.A.R.T. goals
• Use short-term financial goals to keep you motivated and making continual progress
• Use long-term financial goals to keep you focused on your financial future
• Continually review your goals every couple of months to make sure they are aligned with where you want to be

Remember, both your long-term and short-term goals should complement one another and play a vital role in the financial decisions you are making.

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Examples of Short Term Goals:

• Build an emergency fund totaling 3 months worth of income within two months
• Improve your savings rate by 2% in the next few months Pay-off your credit card debt (totaling $5,000) in the next two months

Examples of Long-Term Goals:

• Retire with a retirement income replacement of 80% by the age of 65
• Finish paying off the mortgage on your second home in the next ten years

Step 3: Prepare Yourself for Financial Risks With the Proper Insurance

Let’s be honest, aside from insurance agents and brokers, there are very few people who enjoy talking about insurance.

While it might not be the most enjoyable of topics to discuss, it’s a necessary one.

The role of insurance is straightforward: to protect yourself and your family against financial risks.

Insurance, and having the proper amount of insurance, can easily end up saving you hundreds of thousands of dollars. For some people, it can mean choosing between taking early retirement, or having no choice but to continue working and earning an income well-beyond their seventies.

Here are a few common types of insurance that you need to be considering: 

• Term life insurance
• Disability insurance
• Homeowners or rental insurance
• Health insurance
• Umbrella insurance

Step 4: Create a Plan for Current and Future Debts

Debt is such a critical component of your financial plan because it directly impacts your ability to save and invest in your financial goals on a monthly basis.

This can be determined by calculating your debt-to-service ratio which determines how much of your monthly income is currently going towards servicing your current debts. The higher the number, the more of your total income is going towards paying your debt. This typically means less availability and financial resources you have to go towards investing for retirement and building your emergency fund.

If you are in a financial position where you are servicing debt, then you need to make managing your debts a high priority.

Start by creating a list of all of your current debts, along with the type of debt, current balances, interest rates, monthly payments, and the amount of time it would take you to pay off your debts at your current pace.

Next, highlight which debts are directly impacting and getting in the way of your financial goals. It’s likely that these will be high-risk, revolving debts such as credit card debts.

Research your options to determine if you can consolidate these debts or negotiate with your lender to determine the best course of action. The bottom line here is that you need to take action.

Even if you are currently debt-free, you need to make sure that how you manage the potential of future debts is something that you actively plan out and consider in your financial plan.

Remember, debt includes the following:

• Credit cards
• Line of credits
• Student loans
• Automotive loans
• Mortgage loans

Debt is something that consumes millions of households and keeps them in challenging financial situations. If you make managing debt a priority and you will be more confident and comfortable with the financial situation you are currently in.

Step 5: Create a Plan for Your Estate

Similar to insurance, estate planning is another critical consideration of your financial plan that often gets neglected or left out in conversation.

In fact, it’s one of the major areas of your plan that’s often left out until it’s almost too late. This is because most people view estate planning in stages, and particularly associate it with being a later stage consideration.

A proper estate plan will help you establish peace of mind in knowing that your family will be taken care of when you pass.

Your estate plan should include the following: 

1. Last Will and Testament 
2. Power of Attorney
3. Health Care Directives
4. Trusts

Estate plans may also include separate documents for guardianship nominations or for final disposition instructions, but these could alternatively be incorporated into a comprehensive will.

Step 6: Start Investing to Build Your Wealth (and For Retirement)

Next, it’s time to start building your wealth by focusing on your savings goals and making sound investments.

Investing for retirement over the long-term is one of the most certain ways to make sure you reach your retirement goals.

When you start retirement planning and mapping out your investment plans, there are a few key variables you need to know and pay close attention to your:

• Desired retirement age: The number of years you have until retirement is one of the biggest factors that will determine your final outcome.
• Desired retirement lifestyle: The type of lifestyle you want to live in retirement will also play an important role in determining your retirement income needed on top of social security.
• Current health and expected health: Health is wealth, at least it can influence our wealth. Understanding how healthy you are and expect to be throughout retirement (while understanding your risk of disease) can influence how you prepare.
• Current savings rate: This will ultimately determine whether or not you are on track to retirement based on your desired retirement age and lifestyle. Depending on your current financial situation, you may need to increase your savings rate to reach your goal.

In addition to the above, your financial plan will help you identify and assess the following so that you are optimizing your wealth management and wealth-building opportunities:

• The types of investment accounts best suited for your goals
• The type of investment vehicles such as ETFs, Mutual Funds, or Index Funds you should be putting your money in 
• The frequency of your investment contributions 
• Your risk tolerance to help you build a sound investment portfolio that suits your needs
• Setting up automated contributions to put your investments on autopilot
• Where you invest, such as through Charles Schwab, Vanguard, Betterment, or many other options

Step 7: Start Building Your Emergency Fund

As the name suggests, an emergency fund acts as self-insurance to protect yourself, and your financial assets against unexpected financial emergencies.

Emergencies come in all shapes and sizes, and when one eventually does, you’ll be thankful when you have the means to access an emergency fund. Common financial emergencies include sudden loss of employment, appliances needing repair, your car breaking down, or large medical bills.

While it’s incredibly important for almost everyone to have an emergency fund, it is even more important if any of the following apply to you:

• Your credit score isn’t great
• You generally live paycheck to paycheck
• You have a variable or inconsistent income
• Your family or dependents rely on you

If you’re just getting started with building your emergency fund, start with contributing your first $1,000 to a separate, high-yield savings account. It’s important that this fund remains separate from any other cash with a specific purpose, and that it remains untouched and reserved strictly for emergencies.

Once you’ve successfully saved your first $1,000 in your emergency fund, your next goal should be working towards making it an adequate size. Most financial experts will recommend an adequate fund being anywhere from three to six of pre-tax income. This will provide you with more than enough comfort to navigate through challenging financial situations should they arise.

Step 8: Keep Track of Your Plan and Maintain it

Last, but certainly not least, you need to commit yourself to actively keeping track of your financial plan and maintaining it. The personal financial planning process should be an ongoing process.

To make the most of your plan, you’ll want to check in and update it at least once every three months. A lot can happen in a very short period of time and frequently checking in with your plan will make sure that you remain on track on working towards your goals.

Additionally, whenever significant life events occur or your financial situation changes, update your plan. These events could include:

• Getting married
• Having or adopting a child
• Purchasing a new home
• Finishing paying off debt
• Closing out a credit card

You get the point.

All of these things have a significant impact on your savings, expenses, risk management, and more which ultimately change the trajectory of your financial future. This is why it is so critical to make sure your plan remains up to date.

To make sure you never miss a beat when it comes to actively reviewing and updating your plan, considering setting calendar and phone reminders every three months as a baseline. If you want to make sure you’re reviewing things more frequently, start with monthly reminders. Better yet, create a financial plan with Savology and it will be even easier to manage.

By doing this, you’ll make sure that you are creating a bullet-proof method for reaching your financial goals.

Financial Planning Process: Moving Forward

Very few things come close to the impact that the financial planning process has on your financial life. Your plan provides you with clarity, understanding, motivation, and insight into every single area of your personal finances so that you can navigate your financial journey with confidence.

Ultimately, your financial plan is there to make sure that your financial decisions are aligned with your short-term and long-term financial goals. Your plan will keep you focused and keep you on track so that you reach financial security.

Follow the eight steps above to get through the financial planning process successfully, and use the free help that Savology provides (the best financial planning software I’ve found that is free) as needed along the way.