Did you know that only 33% of Americans have a written financial plan? And a quarter of Americans have no financial plan at all, written or otherwise (Charles Schwab). Writing out a financial plan is important to building a strong financial foundation. Many people do not have a financial plan because they don’t believe they have enough assets or they think hiring a professional is too expensive. While having an expert look into your finances would be ideal, you can easily lay out a basic plan for yourself. Even the simplest of plans can help you get more organized and provide long-lasting benefits. Here are seven steps you can take to write your financial plan.
1 – Assess your goals and write them down
Get detailed about what you want. Think about your needs for the short term as well as the long term. Where do you want to be financially in 5 years? Ten years? Do you have a retirement plan? How much do you think you will need after retirement? Use a retirement calculator – you may be surprised at how much you need to save.
2 – Determine your net worth
This will serve as a benchmark to mark your progress. Make a list of all your assets – bank accounts, investments, real estate, anything valuable you own. Then make a list of all your liabilities – mortgage, loans, credit card debt, etc. Subtract your liabilities from your assets and there you have it. Don’t stress out too much if you are in the negative. You can use this as a motivator to reach your goals.
3 – Figure out your budget
In order to write your budget, you will need to review your cash flow. This simply means looking at how much you make versus how much you are spending. Then, write out all your expenses starting with your essentials such as mortgage, food, bills, insurance, taxes, and healthcare. Next, you will want to list out your non-essential expenses like eating out, entertainment, shopping, etc. Now you can clearly see if what you are spending your money on aligns with your goals. This will also help you plan better for savings.
4 – Make a plan to pay off your debt
Considering that the majority of Americans are in debt, you are likely one of these people. Analyze what you owe and come up with a smart plan for managing your debt. Keep in mind that not all debt is bad. Examples of good debt could be a mortgage or student loans. Basically, if your debt increases your net worth, like buying a house, or has future value, like an education, then it can be considered good debt. The balances you want to focus on paying off first are your credit cards or any other high-interest debt you may have. Paying off your credit cards not only reduces your debt, but it is one of the easiest ways to increase your credit score.
5 – Get your retirement in check
According to PwC’s Retirement in America Report, about a quarter of American adults do not have anything saved for retirement. And only 36% of adults feel like their retirement savings is on track. In addition, they found that most of those that are saving, are not saving enough. Generally, the rule of thumb is to save at least 15% of your pre-tax income for retirement. If that made your eyes pop out of your head, it is time to examine that budget you wrote and figure out what you can cut out. And if you are in your 40’s and haven’t started saving yet, plan on putting aside even more of your income for retirement. The last thing you want is to reach retirement age and realize you have to keep working.
6 – Understand your insurance and tax situations
Two very important things we deal with in life are taxes and insurance. Having adequate insurance goes a long way in protecting your finances. Most of us will need healthcare insurance, car insurance, and homeowner’s or renter’s insurance. You also need to look into your taxes. You will want to ensure you are taking advantage of all reductions and tax credits for which you are eligible. You may want to consider hiring a tax planner or accountant in order to help.
7 – Create an estate plan
If you don’t already have a will, get one. Especially if you are a parent, you will want to name a guardian for your minor children. Also, make sure the beneficiaries named in any of your insurance policies or retirement accounts are correct. Other things you will want to consider are completing an advance healthcare directive and assigning powers of attorney for both finances and healthcare. If you need assistance, contact an estate planning attorney.
Why should you put the time in to do this? Americans who have a financial plan maintain healthier money habits in relation to saving and investing. Also, a basic financial plan provides you with a roadmap to define your intent and will help you stay focused. In addition, a solid plan can ease stress over finances and help you manage expectations. Your plan can also be a source of motivation to keep you on track and enable you to reach your financial goals.