Managing your personal finances is a life-long process full of challenges, opportunities and pitfalls. To maximize your chances of success, you need a simple personal finance plan that lays out where you want to go and how you’re going to get there. In this post, the Money Blawg is going to try and help you prepare your own personal finance plan as well as provide a sample plan for you to download and customize.
Making a personal finance plan is a good exercise for pretty much everyone, but particularly for those who manage their own finances because, if nothing, it will make you think thoughtfully about your finances. Even if you already have a financial advisor, or are planning to hire one, going through the exercise of making a personal finance plan will help you figure out what you want from your financial advisor and how your financial advisor can best serve your needs and goals.
So, what goes in this Personal Finance Plan?
Your personal finance plan should be very simple and straightforward – no more than 1 to 2 pages long. It should set out (1) your personal finance goals, (2) a current assessment of your finances, (3) your investing plan and (4) other planning relevant to your situation.
Let’s take a look at each section.
Section One: Goals
First and foremost, your personal finance plan should state your financial goals. After all, how do you know what you need to do if you don’t know where you’re going. If you have a spouse or partner, even if one of you tends to handle the finances more than the other, I recommend that you discuss together your financial goals. Even if you can’t agree on all of the goals, you’ll at least know what you agree and disagree on as a first step of your financial planning.
What you set down as your financial goals is personal to you. Maybe it’s “I want to retire by the time I’m 55 and have enough money to travel internationally 2 times a year” or “I want to pay off all my debt, buy a home in 5 years and be financially prepared to start a family”. Think about the things that are important to you and set those down.
Section Two: Current Assessment
After you’ve written down your financial goals, take stock of where you are currently. Do you feel like you’re on track to meet your goals? Do you even have the tools to make this assessment? Are there numbers that you need to crunch to be able to assess where you are?
I recommend including these three sections in your Assessment:
- Job Income: write down the income you receive from your job and where you think your income may be headed
- Net Worth: calculate your net worth and write that figure down (see my prior post about net worth and the sample net worth worksheet that I provided)
- Spending: calculate your average monthly spending and write that down
If you don’t already know how much you spend in an average month, I encourage you to invest the time to figure this out. Knowing this amount is an important metric for your personal finances. At the risk of stating the obvious, knowing this number will help you figure out how much you save (or don’t) and how much you have available (or not) to invest each month.
If you don’t already track your spending and this seems like an overwhelming task, start with the big ticket items first – your housing and car payments and any other debt repayment amounts. Use your credit card statements to track the other things you spend on. If you use a lot of cash, check your bank statement for a month to see how much you withdrew. Having a ballpark figure for your monthly expenses is better than nothing, but having good data will make any plan you put in place more actionable and easier to track.
So, what do I do with my Current Assessment?
For one, you now have some data that can help you quantify whether you’re on track to meet your goals. Assess what the data tell you and whether you need to make changes. For example, if one of your goals is to save for a down payment on a house in 5 years, but your spending data tells you that it’s going to take 10 years, you now know that you either need to change your goal, increase your income or decrease your spending.
Beyond whatever personal goals you’ve set down, having data about your income, net worth and spending will be useful for analyzing and answering some of the most common personal finance questions – e.g. when can I retire? How much money do I need to retire? How much can I afford to spend? We’ll explore in future blog posts many of these questions and how the data can be used to answer those questions.
Section 3: Investing
Investing your savings is the path for growing your wealth. There are many potential sources for your investment dollars, and your personal finance plan should set out some fundamental guidelines for how you invest.
Statement of Risk Tolerance
Whether you’re a beginner or seasoned investor, the Investing section of your personal finance plan should begin with a statement of your risk tolerance. Think about what would keep you up at night and also how much risk you’re willing to take to reach your stated goals. Ultimately, your need, ability and desire to take risk is personal to you and will be based on many different factors, including your age, income, job stability, level of assets and debt and financial goals.
Asset Allocation
Your personal finance plan should state your target asset allocation, which should be based on your statement of risk tolerance. If you’ve already an investor, you can assess your current investments to see how your actual asset allocation matches your target asset allocation.
If you’re a beginning investor and don’t know where to start, you’ll want to do some homework. It’s OK if you leave this blank for now. The Resources page provides some good places to start, and I plan on blogging about this in the future. The asset allocation you choose is a very important investing decision as this will drive what types of returns you can expect to receive, along with the type of risk (i.e. losses) you may endure. There is no perfect or one correct asset allocation, but choosing one that you are comfortable with is important because you’ll want something you can stick to. Many investors lose money, or don’t earn as much as they should, because they end up selling in panic instead of holding and re-balancing into their selected asset allocation.
Section 4: Other Planning
The last part of your personal finance plan should include anything else relevant to your situation that could have a material impact on you or your family’s personal finances. Below are just a couple examples.
Estate Planning: if you have a family, do you have an estate plan in place? If you have young children, have you determined who would take care of them if something happens to you? If these types of questions are important to you, write down as an action item in your personal finance plan the steps you plan to take to answer them (e.g. Make a will within 6 months after Baby is born)
Long-Term Care Insurance: are you worried about who may take care of you or how you would pay for care if you’re unable to care for yourself? If this is something of concern, set as an action item in your personal finance plan.
Finally, date your plan. Follow-up and review your plan annually. Your goals may change, and your financial needs and desire may change too.
Sample Personal Finance Plan
If you want some help getting started or would like to see what a personal finance plan looks like, here is a sample personal finance plan that you can download and customize for your own needs.
