How to make a financial plan in 7 steps

How to make a financial plan in 7 steps

Whether you take the DIY route or seek professional help, creating a financial plan follows these seven steps:

Set goals
Track your budget
Get that employer match (or if you’re a business owner, set up SEP IRA/Solo 401K)
Prepare for emergencies
Attack toxic debt
Invest to really grow your savings
Create a “moat” to protect and grow financial well-being

That’s a good blueprint to use whether you want to make a financial plan on your own or are preparing for your first visit to a financial advisor. Regardless of the path you take, financial planning is important for striking that balance between current needs and long-term goals.

This photo is from NerdWallet.com

Step 1. The first step in creating a financial plan: goals

Understanding what you want comes first. Make your financial goals inspirational — what do you want your life to look like in five years? What about in 10 and 20 years? Do you want to own a car, or a house? Are kids in the picture? How do you imagine your life in retirement?

You start with goals because they will inspire you to complete the next steps and provide a guiding light as you work to make those aims a reality.

Step 2. Track Your Budget

Get a sense for your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan, and can reveal ways to direct more to savings or debt pay-down.

Put a percent of your take-home pay toward your needs, wants, and savings/debt repayment.

Step 3. Get your employer match (or set up SEP IRA/Solo 401K)

If you visit an advisor, he or she will be sure to ask: Do you have an employer-sponsored retirement plan like a 401(k), and does your employer match any part of your contribution? Or if you are a business owner, do you have a SEP IRA, SIMPLE IRA, or Self Employed 401K?

True, 401(k) contributions decrease your take-home pay now, but it’s worth it to put in enough to get the full matching amount, because that match is free money.

Step 4. Make sure emergencies don’t become disasters

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.

Building credit is another way to shock-proof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits. Check the ranges of credit scores ranging from bad to excellent.

Step 5. Tackle high-interest debt

A crucial step in any financial plan: Pay down “toxic” high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

Step 6. Invest to build your savings

Investing sounds like something for rich people or for when you’re established in your career and family life. It’s not.

Investing can be as simple as putting money in a 401(k) and as frictionless as opening a robo-advisor account (many have no minimum to get started).

But starting early is key. For example: Say at age 25 you throw $200 into a savings account with a 1.5% annual percentage yield and keep adding $200 a month. At age 67, you’ll have just over $140,000. Not bad.

However, if you invest the same $200 a month and it earns an average of 8% a year — that’s possible for market returns when your timeline is decades — that could grow to more than $735,000 by retirement.

Step 7. Build a moat to protect your progress

With each of these steps, you’re building a moat to protect yourself and your family from financial setbacks. As your career progresses, continue to improve your financial moat by:

Increasing contributions to your retirement accounts
Padding your emergency fund until you have three to six months of essential living expenses
Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.