how to create a financial plan (and why you need one)

Disclaimer: I am not an accountant or financial professional in any capacity. The following is based on my personal opinion and experience. Please seek the advice of a professional for a definitive answer about your particular situation.

I’m very happy with where my family is now, financially speaking. Are we don’t-worry-about-money rich? No. But we’re comfortable with what we have, where we’re at and where we’re going. We have a solid financial plan based on what’s important to us.

We have three teenagers, one of whom is in university, who are involved in school and in sports. We’re planning on retiring within the next ten years (8.5 years, if you want the exact number!). Because we’ve prepared (and followed) a financial plan, we’ve been able to update our older home, we’ve paid off our mortgage and we’re saving towards our kids’ education and towards our retirement. As we reach individual goals, and as life changes, we update our plan and redo our budget. I am secure now but I wasn’t always.

I remember the days of not having lunch because I couldn’t afford it. Choosing tuition over outings. I remember. It’s taken me years to be okay with spending money on anything non-essential. I got over my fear of spending by having a plan and by trusting in that plan. We have very well-defined financial goals, and I don’t worry about money now.

In this article, I will first tell you why a financial plan is important, then explain what it is and how to prepare one. Lastly, I’ll give you some idea of what your goals could be and encourage you to figure them out.

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Do you have goals?

Do you know where you’re going, financially speaking? Is there a plan?

Do you dream that someday you will own your own house, mortgage free? How about travelling the world? Perhaps you’re stuck just hoping to have enough money for groceries this month?

Have you ever pulled your credit or bank card out to pay for something and wondered if it’ll be declined?

Are you going from one month to the next, trying to make the money last? Are you hoping next month is better?

If you are sick of getting by while feeling like you’re working so hard, read on!

What you need, my friend, is a plan. A financial plan. Now, don’t run away! Stay with me. It sounds so intimidating and it’s not the most comfortable topic for many people. But you will feel so much better if you stick with me and do this!

You will feel more in control, more energised and more secure.

Take a breath and be brave. Take a long, hard and honest look at your finances. Even if you’re poorer than a church mouse (I’ve been there, I know what that’s like) knowing where you are, where you want to be and having a plan on how to get there is like taking the shackles off.

In order to break out of the “where did all my money go?” cycle, you need to have a plan.

How to reach your financial goals

What is a financial plan?

A financial plan defines your short-term and long-term financial goals and how you can reach them. It is the roadmap between where you are today and where you want to go in the future.

If you’re on your own, skip to the following section.

Please, for the love of everything you cherish, make sure both you and your partner are involved in the financial planning process.

Even if one of you does the everyday stuff, you both need to be aware of, and have access to, everything financial.

For instance, my husband takes care of our everyday banking and I do the investments (retirement, savings and kids’ education). But we both know where we stand short-term and long-term in all areas. We have regular sit down review sessions. THIS IS NOT STRESSFUL BECAUSE THERE ARE NO SURPRISES!

Not being sure if you afford something necessary is undoubtedly the biggest source of stress.

Why having a financial plan is important

  • In order to reach your goals.
  • Because you want to stop worrying about money!
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Things to figure out (earnings, possessions, debt, spending):

The following is easiest to do a month at a time, otherwise, it can feel overwhelming. Figuring out what you earn and what you own is often easiest, so start with that.

What you earn : grab you paystubs. CAUTION: Be careful how you calculate things if you get paid every two weeks!

What you own : house, car, investments, etc. In other words, anything the bank would consider an asset.

What you owe : mortgage, credit card debt, line of credit, etc. Gathering these statements and making this part of the list can sometimes feel discouraging. Don’t give up. Knowledge is power!

Acknowledging your problem is the first step towards solving it.

What you spend : your monthly bills such as utilities, groceries, birthday gifts, everything else you spend money on. CAUTION: annual and occasional expenses can throw your budget off! Add you annual expenses in. Remember to divide by 12 for a monthly amount. Think about off-season expenses (lawn-care and snow removal, for example)

If you have no idea at all of your spending habits, it’s an interesting exercise to take your best guess and from that day forward keep all your receipts every time you spend or earn a penny. Write everything down in a notebook or on a spreadsheet. At the end of the month, see where your finances stand after a month. Compare that to what you thought your budget was. Were you close? How far off were you?

That is all a budget is, it’s a snapshot of your current financial situation. Above all, a budget allows, or forces, you to have a truly honest look at your assets, obligations and habits. Once you know where you are, it’s easier to stay the course or to make necessary adjustments.

Are you falling short at the end of the month?

If you’re short money at the end of each month, you’ll need to cut back your spending in the areas that don’t matter as much to you. This is where knowing your priorities comes in.

Think about where can you cut back. For instance: eat at home (stop eating out); bring you lunch (stop eating out!); price match where you can; make a list and stick to it (no impulse purchases); pay off your credit cards. I wrote an article on how you can make coffee at home and save lots of money!

If cutting back is not an option, if you’re down to the wire in every aspect, start thinking about ways you can add more income. How could you earn more money? Can you work more hours? How about asking for a raise? What about a side-hustle?

Do you have a surplus?

You can start allocating money towards your goals right away!

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Things to think about (dreams and goals):

Think about how you feel about where you are in your life. Are you content? Do you wish for…

  • A vacation?
  • A house or a different appartment?
  • A car?
  • A career or a different job?
  • A child?
  • No mortgage?
  • More fun?

Do you have an emergency fund?

Any or all of the above could (or should!) be your goals.

spend what is left after saving: Warren Buffett

How to decide what your financial goals are :

Financial goals should be realistic and based on your current financial situation. In other words, as your life changes, so should your goals.

How much you can afford to save towards you goals may help you decide which ones are most important to you.

5 questions to ask yourself :

  1. How soon do you want to reach each goal?
  2. What is the cost of each goal?
  3. How much can you afford to save towards each goal?
  4. What will you gain or lose by putting one goal first?
  5. What choices will improve your quality of life today or in the future?

Examples of well defined goals are:

  • Pay off credit card debt within the next 6 months.
  • Save a $15,000 emergency fund within the next 2 years.
  • Save $5,000 towards next year’s vacation within the next 8 months.
  • Retire at 58 with an income equivalent to 75% of your current salary.
  • Save $30,000 for your kid’s education by the time he turns 18.

When is a good time to start?

Now! The sooner you start, the sooner you will feel good about yourself because you have goals and, most importantly, a plan. There is no better time to start than right now.

How to reach your financial goals

Your next steps:

  1. Create a budget
  2. Prioritise
  3. Save
  4. Stay focused on the bigger picture
  5. Keep papers organised

Knowing for sure how you’re doing financially and having a clear plan will do wonders for your peace of mind. As a result of having a financial plan, you will feel secure about your finances. You will see that it is an amazing feeling. It’s addictive!

I would love to hear about your biggest budgeting struggle. Send me an email or comment below!

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