What is a financial plan?

Whether your goal is to further your education, buy a home, or take that trip you’ve been dreaming of for a long time, a financial plan can be the roadmap to your next financial destination. It can also be a safeguard against unexpected moments in life, flexible enough to evolve as you progress through new challenges and chapters.

Here’s how to start building a financial plan that works for you now and for everything that comes next.

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1. Calculate your net worth

To make a financial plan for your next goal, start by determining where you are.

“Add up all your assets, what’s in your savings and investment accounts, and the items you have of significant value,” says Tom Drake, financial analyst and founder of financial education website MapleMoney. “Then subtract your debts. This net worth number can give you a starting point. You can get a snapshot of where you are, giving you a better idea of ​​what needs to happen to get you where you want to be.

2. Know your inputs and outputs

Next, get an idea of ​​your income and expenses. You can list your sources of income and when you receive them, as well as all of your expenses, says Cassandra Cummings, investment advisor and founder of the Stocks & Stilettos Society, a community for women investors. This exercise gives you an idea of ​​how money flows through your household.

“Start by focusing on the items in your mailbox,” Cummings says. “These are the bills you pay every month. Look where the money is going and determine if it really needs to go there.

Once you know where the money is coming from and where it is going, you can begin to identify areas for improvement and incorporate them into your financial plan.

3. Set financial goals

Then look ahead and figure out what you want your money to accomplish for you. Drake recommends thinking about your financial goals in terms of lifestyle accomplishments. Rather than just thinking about saving more, think of it in terms of building a college fund for your kids, renovating your home to make it more functional for your family, or setting aside enough to visit your friends. parents as often as you would. to like.

“Your financial goals need to have a purpose behind them in order to motivate you effectively,” says Drake. “Think about why you want to save for your child’s college, what it would mean to have a house, or why you want to retire.”

4. Develop your strategy

Now that you know where you are and have an idea of ​​where you want to be, it’s time to put your strategy in place to get there.

“Look at what you need to cover your daily expenses, then work from there,” Cummings says. “Break down how much you need to spend on paying down debt and how much you need to set aside each month to meet your retirement goals.”

You can use an online calculator to help you estimate your needs, as well as determine the types of assets you need in your portfolio. If you’re having trouble mastering the strategy, consider talking to a finance professional who can look at the situation from an outside perspective and provide you with helpful information to create a plan.

Why use a financial plan?

One of the best reasons to use a financial plan is to provide you with a clear, practical approach to managing your money in a way that will help you now and in the future, says Cummings.

“Your financial plan tells where you’re going with your money and gives you a plan to get there,” says Cummings. “You can see everything and visualize your next steps.”

Plus, your financial plan can help you stick to your strategy when the going gets tough. Your plan can be a good reminder not to respond to the vagaries of the stock market, for example. Plus, when you review your plan and track your progress, you can see how you’ve improved and gain motivation as a result.

However, cautions Cummings, it’s important to understand that your financial plan isn’t set in stone.

“It’s really a fluid document that you can edit as life events happen,” says Cummings. “You don’t throw it out the window, but you can make adjustments as needed. Be flexible and know that the plan may change and be comfortable with that.

Next steps

Ultimately, your financial plan is focused on your priorities. When crafting your plan, Drake recommends thinking about what matters most to you and what you hope to accomplish in your life, both in the short and long term.

“A lot of people don’t like to plan,” says Cummings, “but a financial plan is necessary if you want to take control of your finances and put your money where it matters most.”

Once you have an idea of ​​your priorities, you have the framework to create a solid financial plan and you’re ready to start working towards your next goal.

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