Financial planning is much more than picking stocks and investing.
It's an evolving process who's goal is to continuously align your money with your personal goals and values.
For example, you may have a current goal of traveling the country before you settle down with a family.
But over time your goals will most likely transition into buying a home, saving for education, and prioritizing retirement savings.
Money management will change a lot during those periods and a financial plan keeps everything aligned & on track.
A lot of people don't like worrying about the math and the financial side of things. They'd rather focus on living their life and have peace of mind knowing that it's being done right, which is why they hire a financial planner to take care of these things.
When you're self-employed, hiring outside help can be viewed more as an investment rather than an expense. Mistakes are costly but financial mistakes can be devastating.
But not everyone works with a financial planner, so this article walks through what you need to know about managing your personal finances & how to create a personal financial plan:
If you want to do something long enough to see progress, you have to find a deeper meaning than surface-level goals.
Trying to save money because you want to "retire" one day isn't enough.
Personal finance is a lifelong game. As Nick Maguilli said in a recent podcast, "your financial life is a journey about finding yourself".
So you need to figure out why money is important to you and what your true values are. This is listed as the first step, but it's probably the most challenging and it's always a work in progress.
But let's say that in this example, you value family & flexibility.
Once you know that, you can then align financial actions with your values.
For example, your financial actions should then map to:
Spend some time on this step and frequently revisit it, your values will most likely change as you go through this exercise more and more.
Also read: Finding Your "Why" For Setting Financial Goals​
After you've figured out what's important to you, it's time to start setting tangible goals.
In this phase, dream big.
Don't place financial limits on your goals yet because from what I've seen firsthand, a lot of people underestimate what's possible financially.
When you have a plan and time to work on it, a lot can be accomplished. For example, I've gone from having $2,000 to my name after graduating college to now having 3 businesses and multiple streams of income. If you've followed me since the beginning, you know I've done nothing special. I had a goal, created a plan, saved money, and stuck to the plan - that's it.
Here are a few examples of what you could be working towards financially:
Whatever your goals are, they're unique to you and only you can figure out what you want to accomplish in life.
In a few steps, we'll begin to prioritize those goals so that progress can be made.
After you've got some of the mental exercises in motion, it's time to start getting tactical.
If you don't know your net worth, this is the first step to tracking & making progress.
For starters, your net worth is a financial metric that takes what you own (assets) and subtracts what you owe (debts) to give you your "net worth".
I recommend calculating it manually first by adding up your assets (bank accounts, investments, etc) and your liabilities (student loans, credit card debt, etc) and then subtracting liabilities from assets.
If you had $5,000 in your bank, $20,000 in investments, and $10,000 in student loans, your net worth would be $15,000.
An easier way to calculate it is by using an app, such as RocketMoney or Personal Capital.
After you figure out your net worth, track it regularly.
Write it down in a notebook or keep track of it within an app, but update it quarterly or annually so that you can see your progress over time.
Note: It's okay if your net worth isn't always going up each year. Sometimes you'll be investing in your business, or you'll have a down year — don't stress over it. Your net worth numbers are only one metric - not your entire life.
Before taking any actionable financial steps, you need to have an understanding of where your money is going each month.
If you have an established business, you should be tracking all income in an accounting software.
For your personal finances, there are a few key numbers to know:
My favorite tool to use is RocketMoney and I wrote a review of the app awhile ago, but the most important thing to focus on is spending less than you make.
If you're spending more than you make, you can begin taking steps to reduce spending or increase your income.
By taking the time to go through your monthly income and spending, you can then determine if your spending is aligned with your previously defined goals and values.
✅ An action item in your financial plan may be as simple as "create a RocketMoney account and link bank accounts"
Then the next step could be "review last 2 months of spending and choose one category to cut back $100"
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Once you have an understanding of your cash flow you can then set a savings rate, which is the percentage of your income that you're able to set aside each month.
If you make $10,000 and save/invest $2,000, your savings rate would be 20%.
Your savings should generally belong in three different areas:
A general recommendation is to aim for a 15-20% savings rate which means if you make $5,000 per month, you should aim to save about $1,000/month and allocate those dollars towards whichever of those three areas is a priority for you.
In my opinion, almost all of your savings should first go towards your cash reserve. As a creative, you may have slow months and having cash on hand is a blessing during those times. You don't want all of your money tied up in investments that you can't easily sell and access.
But going back to the second step, this is where you'll also begin to prioritize your savings goals.
It would be difficult to save for several things at the same time and make good progress so to get the most mileage out of your money, define your most important goals, begin saving towards them, and adjust & reprioritize over time.
✅ An action item within your financial plan may be "set an automated $500 monthly transfer to high-yield savings account to begin building $10,000 cash reserve"
If you have any form of debt, you need to have a pay off plan.
I typically recommend paying down the highest interest rate debts first (7%+) as you'll save yourself the most amount of money, and then moving your focus to the lower interest rate debts after the others are paid off.
Also read: How to Stick to Your Debt Pay Off Plan
✅ An action item within your financial plan may be "pay off all credit card debt in 6 months with surplus from monthly cash flow"
A not-so-flashy, yet very important, part of financial planning is risk management - which is a fancy way of saying insurance.
You want to have enough insurance so that you're financially protected, but you don't want to have so much that you're wasting money.
Some of the most common types of insurance to have:
✅ An action item may be "get additional long term disability coverage to fill the gap from employer-provided disability insurance"
No matter your goals or values, some form of investing will need to take place.
Investing allows your money to grow over time so that one day, you can use the income generated from your investments to fund your lifestyle rather than needing to earn income from a job.
The nice thing about long term investing is that once you get an account set up and build your portfolio, it's a fairly hands-off experience. You contribute money to the account, it gets invested, and you let the stock market do its thing over time.
Of course, there are more tactical strategies and things to be done when managing investments but at the core, long term investing should be a passive activity.
Read: An Easy Way to Invest as a Creative​
The goal of tax planning is to reduce the amount of taxes you pay over your lifetime.
This is different than tax prep & filing, which is what happens each April.
Tax planning takes into account your overall financial picture and there are many, many strategies that can be used to reduce your lifetime tax bill.
Whether it be funding certain investment accounts, using certain deductions, or selling off certain assets, tax planning is a highly personal, very detailed process that involves many moving parts. I recommend working with an advisor or CPA so that you have accurate and appropriate action items.
Also read: How do I know if I have to make estimated quarterly tax payments?
Estate planning isn't fun, but it's a necessity.
It's believed that you need to be old or ultra-wealthy to have an estate plan, but this couldn't be farther from the truth.
Some basic pieces of an estate plan include:
Read: 5 Reasons You Need To Get Your Estate Planning Done as A Millennial​
✅ An action item may be "create a living will within the next 6 months. Review beneficiaries on insurance policies, investment accounts, and estate documents annually"
We walked through a lot of information and unfortunately, we only scratched the surface.
Financial planning takes into account every aspect of your life and everyone's situation is unique, which is why having a custom financial plan for your own life is so important.
Whether you decide to create your own or work with a financial planner, you need to have one so that you can make the best financial decisions for yourself.
Your future self will thank you.
If you have a question about anything or would like to learn more about a certain topic, submit your feedback here.
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