5 Steps to Creating a Smart Financial Plan

Through thick and thin, in good times and bad, the people who are successful at setting goals and achieving them  — at least financially — are those who create a financial plan and follow it. Indeed, if you want financial security, having a good plan is the only way to achieve it.

The good news is that it’s not hard to create one — and here are eight simple steps to help you do so.

Step 1: Discover Where Your Money Goes Now

The first and most important step to creating a financial plan is to develop a budget detailing where your money goes now.

All you have to do is get yourself a notebook small enough to fit in a pocket or purse and carry it with you wherever you go. Every time you spend money, make a note detailing what you bought and how much it cost. For a more tech-savvy approach, there are a number of personal finance apps and websites that can keep track of your spending for you, such as Pageonce.com.

At the end of the week, spend half an hour going over your notes and categorizing them. How much did you spend on food? On transportation? On housing, clothing, entertainment, healthcare, rent, mortgage, and utilities? At the end of a month, consolidate your notes. At the end of the next month, do the same, and at the end of three months, add everything up and devote some study time to the result.

Don’t worry just yet about these expenditures, since the job at hand is not to identify — much less rid yourself of — guilty pleasures. The job is only to figure out where your money is going now.

It’s also important to carry on this exercise for at least three months, if not four. You want to capture every expenditure you make, including those you don’t make every month — for example, car repairs.

Step 2: Set Financial Goals

Now ask yourself a simple question: “Where do I want to be 20 years down the road?” But avoid generic answers like, “I want to be rich.” Answer with more specificity: “I want to own a house with the mortgage half paid off, and I want to have an investment portfolio of $500,000, plus a side fund of half that to help my kids get a college degree.”

Be realistic in setting out your goals, and be specific. You want to succeed, not fail, and you can do that only if you start out with attainable, specific goals.

Step 3: Prepare For The Unexpected With Insurance

Do you have a family? If not, purchase yourself some disability insurance to protect your earning power. If you do have a family, you’ll want some disability coverage and lots of life insurance to protect your loved ones. Adequate health insurance, auto coverage, and homeowners or renters insurance are also important. No matter your financial situation, insuring against the unexpected can help keep you on the right track should accidents create a financial burden.

Step 4: Keep an Eye on Your Credit

You can’t get anywhere these days without good credit.  Once a year, check on your score with each of the three big credit agencies, TransUnion (www.transunion.com), Experian (www.experian.com), and Equifax (www.equifax.com). You can also get a free copy of these reports once per year at AnnualCreditReport.com.

Make sure that there are no discrepancies between your records and the credit reports. If there are errors, you need to dispute them with the agency that is reporting them. Instructions on how to dispute errors are included at the agencies’ websites.

Step 5: Start Saving

Here’s where guilty pleasures come back into the picture. The key to any savings plan is not income but outgo. In plain English, this means worrying about your expenditures, not just your paycheck. Even if you earn a high wage, you can outspend your income — lots of people do. But if you control your outgo, on the other hand, it doesn’t matter how much you bring home, because it will be more than enough.

After looking at your list of expenditures, determine where you might be spending too much. Are you splurging on entertainment? What about your car payments, vacations, or food?

Look for ways to save here and there, but don’t be too harsh on yourself. Your goal is not to eliminate guilty pleasures, only to control them so that you can free up some part of your income — say 10% — for a savings plan.

You’ll want to put this money aside and add to it until you have at least three months’ worth of income in a money market or savings account. If an emergency comes along forcing you to dip into this money, don’t feel guilty — that’s what this cushion is for. Just make it your first priority to replace it as soon as possible.

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