Establish a Financial Plan in 5 Quick Steps


There is a myriad of ways to establish a financial plan for your household. In its simplest form, financial planning consists of assessing your current financial situation, determining where you want to go, and establishing a plan to get there long-term. Here are five quick steps that you can take to put together a simple financial plan:

#1 Perform a Financial Assessment

You don’t know where you’re going until you know where you’ve been. It may seem like a painful process, but it’s important to do a financial assessment. I’m not talking about creating a budget; that comes later. The first step is determining where is your paycheck going month to month? What are your standard expenses each month? What sources of income do you have? The best way to do this is to track all monthly transactions through your credit card statements and checking accounts over the past three months. That will give you a fairly good benchmark of where your money is going and what your margin of safety is.

#2 Determine Your Margin of Safety

Now you know where your money is going. You probably have a good idea of what your margin of safety is (or the level of income in excess of your spending). Hopefully this is a positive number. If not, that’s okay, you’re not alone. Take the expenses that you’ve tracked over the past 3 months and divide them by expenses that are discretionary or mandatory. Discretionary expenses would include items like eating out or entertainment. Mandatory expenses will include rent or mortgage payments, utilities, gas, etc. Now calculate your margin of safety taking your total monthly income and subtract only the mandatory expenses.

#3 Create a Short-term Plan

By now you have a full assessment of where your funds are going and what your margin of safety is based upon your income and household expenses. Focusing on that margin is key as you create a short-term plan or monthly budget. Knowing your mandatory expenses are unavoidable, the only piece of the puzzle is adding your discretionary expenses into a monthly budget at levels that are within your margin of safety. You should be asking yourself, what discretionary expenses are most important to my family? How much of my margin of safety is being spent on certain discretionary expenses? Where can I cut down on the discretionary expenses? Once you’ve built in discretionary expenses to your monthly budget, get ready to stick to the plan month to month.

#4 Create a Long-term Plan

What are your goals in 3, 5 and 10 years? Where do you want to be financially? You now know what your current financial picture looks like month to month and you know what your monthly budget entails. Now, what level of savings, expense reduction, or income increases need to occur to meet your long-term goals? Everyone’s goals will be different. It may be to purchase a home, attain a certain level of emergency savings, or build a certain amount in a retirement account. No matter what the goal may be for your specific situation, at the end of the day you now have an assessment of your finances, you know your margin of safety, you have a monthly budget, and now you need to take these short-term pieces of financial information to develop a road map for your long-term future.

#5 Assess, Revise and Update Your Plan

Whether it be monthly, quarterly or annually it’s important to reassess where you are at financially. Are you on track with your short-term and long-term plan? If not, maybe you need to do a new assessment of your expenses to determine where your current spending and saving levels are not in line with your plan. In any case, personal finance is a continuous process. Financial situations change and when that happens your plans should change accordingly. Continue to assess and adapt.


Photo by 401(K) 2012