How to Create a Financial Plan and Achieve Your Financial Goals
Is your money life a mess and you want to know how to create a financial plan? Are you feeling left behind, because everyone else seems to be doing better with their money than you are?
I know at tax time you’ve probably thought I really should be doing better with all this money. Or, I earned all this money and where did it go? Yep, me too!
By creating a financial plan today, you are able to have an entirely different result next tax time.
If you want to stop living pay check to pay check and have a more comfortable life, you can’t leave your financial future up to chance anymore.
Creating a financial plan is the key to achieving your financial goals and can truly change your financial destiny.
When you know what your financial priorities are, you can make smarter decisions with your money and make sure you are allocating your funds where they will be the most effective.
This post will take you through the step by step process required to create your own simple financial plan.
Let’s get started.
Why Create a Financial Plan?
A plan is a step by step guide from how to go from point A to point B.
So if right now you are newly married and want to own your own home in 5 years, a financial plan can help you achieve this.
A financial plan is kind of like going on holidays. If you don’t know where you are going, how are you going to book your plane ticket and whether to pack your bikini or your ski jacket?
Creating a financial plan however, is no guarantee you will achieve these goals, as you need to be disciplined and committed to staying focused as well.
However, a creating a financial plan is better than no plan. You’ll find once you invest in taking action on your financial goals, your chances of succeeding increase greatly.
Identify Your WHY
Knowing why you need to create a financial plan is the first step in getting started.
Your ‘why’ will keep you on track and will save you from getting distracted when things get hard.
There are many reasons to create a financial plan, some of which are:
- A comfortable retirement
- Become a homeowner
- Get married and start a family
- Travel the world
- Start a business
It’s really up to your imagination.
Having a strong financial plan is the driving force behind every financial decision you will make.
By creating a financial plan, you are deciding ahead of time what your priorities are, rather than leaving them up to chance.
You therefore have a much better chance of achieving them.
Creating a financial plan tells your budget where the money needs to be allocated each month. It guides your decision to stay home on Friday night and save your $100, it even sends you on holidays from time to time as well!
If you create a financial plan and stick to it, you will be able to achieve your financial goals. It’s really that simple.
What is in a Financial Plan?
A financial plan covers a range of things relating to a person’s financial position and goals. Things like Income and Expenses, Financial Objectives, Debt Management, Savings, Taxes, Investments, Retirement Planning and Estate Planning.
I studied Financial Planning at university and can tell you, they are all critical to your future financial health and growth.
Keep it Simple to Start With
You can see why a professional is required, as each of these areas involve a high level of complexity and specialized knowledge.
In order to set up a framework to achieve your financial goals, it isn’t always necessary to start with a high level of financial planning. In fact, it is much better if you can make a start yourself and then hire a professional later. You’ll find you get a lot more value out of their services.
By being more involved in your finances you will learn so much. You’ll then be able to identify where a financial planner may be able to help you grow your wealth even more. It’s helpful to them if you are able to set and achieve basic financial goals as well. You will save so much money on financial planning fees doing it this way.
Steps to Create a Financial Plan
To make a start on creating a financial plan yourself, you can start with the following:
- Set your financial goals
- Cost financial goals
- Identify your free cash flow available
- Paying off any consumer debt (this could be one of your goals)
- Budget to set aside money to achieve them
- Assess level of debt (risk) prepared to undertake
- Get insurance to protect income required to pay debt
- Be responsible and estate plan
So the process is, decide on your financial goals, find out how much they are going to cost, clear out any consumer debt and start putting money aside in your budget to achieve them.
This is enough financial planning, if your goal is to save a lump sum of money or to go on a holiday.
However, if your financial goals involve investing, such as purchasing a rental property, stocks or a business, then the following may also apply to you.
More Advanced Tips for Creating a Financial Plan
You may decide to use other people’s money to pay for these investments or purely rely on savings. That depends on the level of risk you are comfortable undertaking.
If you are awake at night worried because the stock market dipped today, then borrowing to pay for these stocks may not sit right with you.
When using debt to finance financial goals, you will also need to cost insurance into your plans. Without protecting the income you are using to pay the debt, you can run into trouble very quickly. E.g. if you’re injured at work or while undertaking renovations (for example).
Finally, estate planning may seem strange to factor into creating your financial plan. However, the way you purchase any investments will have a possible tax impact on any beneficiaries in the event of your passing.
You may not care about this once you are gone, but it could mean all your hard work is for nothing. I’m sure you’d be so sad if all that money fell into the hands of the tax office or an ex-partner for example.
Questions to Ask When Creating a Financial Plan
These are by no means the only questions to ask when creating your plan, but hopefully they are enough to get you thinking…
- Is the financial plan realistic and do you have the resources required to achieve these goals?
- What is the level of financial risk you are comfortable with?
- Will you borrow money to purchase financial assets?
- How much time are you prepared to commit to achieving these financial goals?
- Do you have an emergency fund, in case things go south?
- What other sacrifices need to be made so I can achieve these goals?
- Are you prepared to lose any money you have invested? (E.g Stock Market, Bitcoin, Forex etc)
Are the investments you’ve selected high maintenance? Investments like starting a business or flipping houses can be a major undertaking. If you don’t have time yourself, it will require outsourcing, eating into the profits and increasing your level of risk.
Does your financial plan fit with your lifestyle goals? If your main lifestyle goal is to work less and have more balance in your life, then working 80 hours a week to meet your financial goals probably isn’t aligned.
Take the time to write down any others that come to mind while you are reading this, and include them in your planning.
Essential Steps Before You Create Your Financial Plan
Before you create your financial plan you need to know your current financial position.
So you should calculate your net worth to get an accurate idea of your current cash on hand and any debts you may have. If you’re not sure how to do this I cover how in this post here.
You will also need to know your regular monthly income and expenses. If you get paid irregularly then take the average of the last 3 months and use that as your monthly income for now.
Track your spending for a month to get an idea of your current expenses but do note that last month isn’t a representative of all months. E.g if last month is April then your spending is going to be very different than in December around Christmas.
What are your Financial Goals and Objectives?
Here is the fun part, where you get to dream a little!
When creating your financial plan you need to think of things you would like to achieve over a given period of time.
I suggest the following time frames: 1 Year, 3 Years & 5 Years.
Short term goals will give you a sense of achievement and encouragement while you are still saving hard for your long term goals. It’s very important to include both in your financial plan.
There are of course different goals for different stages of life as well, a young 20 year old will have very different financial goals than a 55 year old.
When considering your financial goals and objectives, think about how this will fit in with your lifestyle goals.
A 20 year old may want to be free and travel the world. So buying an investment property that requires a big salary to pay off, would not be a fit.
When setting your financial goals make sure your goals are S.M.A.R.T.
This stands for Specific, Measurable, Achievable, Realistic and Timely.
An example of a SMART goal is:
Build a $20,000 share portfolio in the next three years.
It’s specific, measurable, achievable, realistic and there’s a set due date.
Note: Realistic does depend on your level of income however, so for someone on $15,000 yr this would not be a realistic goal
So now it’s time for action!
Write down 3-5 SMART Financial Goals you want to achieve over the next 1, 3 & 5 years.
Create a Financial Plan – Costing of Financial Goals
Next you need to get a firmer idea of how much these goals are going to cost, before you create a financial plan.
Some of your goals maybe very straight forward such as save $10,000 in 12 months, so you would know how much this will cost obviously!
More complex goals like an overseas holiday, buying an investment property, starting a business or retiring in 10 years, need a bit more work.
Factor in Hidden Costs When Creating Your Financial Plan
Taking the time to figure out all the ‘hidden’ costs in advance, could save you a nasty surprise later on.
Sit down and research all the costs you would pay, to ensure you will have enough money to achieve your financial goals.
For example: Purchase an investment property in my local area in the next 3 years for $200,000 may be your SMART goal.
This price needs to include bank loan charges, real estate fees, conveyancing costs, building insurance and pest inspections etc. Prices would probably rise over the next 3 years too, so you would need to build a buffer in for this.
$200,000 may not be enough in this case, so you would need to amend your goal.
Amend any of the above financial goals if you need to.
How to Create a Simple Financial Plan
To create a simple financial plan you will need to:
- Identify your financial goals and determine how much they are going to cost.
- Determine your free cash flow available to put towards your financial goals.
- Create a budget to allocate this money towards your important goals.
- Monitor the budget and adjust according to your circumstances.
- Celebrate when you achieve your goals.
You have already completed step 1 and identified your financial goals and objectives. So next is to figure out how much money you have available to put towards these goals.
Determine Free Cash Flow
Determining free cash flow sounds a little tricky, but is simply your leftover income after all your expenses are paid.
To figure this out you need to do the following calculation:
After tax income – all personal expenses = free cash flow available for investing or saving.
Personal expenses are all your living expenses such as rent, food, medical, entertainment, retirement savings, debt repayment etc.
If you find you have a negative number here, you are probably not in a position to invest or save in any significant way. Hesitating here could in fact save you from a big financial disaster!
Your number one financial goal should be to pay off all debt, then reduce your expenses and / or increase your income. After that you can start saving towards bigger financial goals.
Use this Simple Monthly Budget to determine what your Free Cash Flow is.
Create a Budget to put in your Financial Plan
Our favorite step ha ha. If you need any tips on how to create a budget for beginners please see this post.
Once you have completed the Simple Monthly Budget you will know your free cash flow (FCF) figure.
Next, you need to break the cost of your financial goals into a workable figure you can include in your budget.
If your financial goal is to save $50,000 in 3 years for a house deposit, you would need to break that figure down to a monthly amount you can include in your budget.
$50,000 / 3 years / 12 months = Monthly Budgeted Amount ($1,389)
Include this amount in your budget and run the figures again, making sure you still come up with an amount of FCF to cover emergency fund savings and long term debt repayments.
I find if you pay these savings to another bank account like a bill, it increases your chances of succeeding. As you can’t see this money every time you login to use your transactional accounts, you are less likely to raid them.
Protect yourself from yourself. Pay your financial goal savings first and spend any left over money on entertainment, clothing etc.
Monitor and Adjust your Financial Plan
Don’t just create your financial plan and put it in a drawer and forget about it! Constantly revisit it and see how you are going. Adjust if you set things up a bit tight or increase your savings if you’ve cut back your spending, keep it constantly working hard for you in the background.
Things can and do change, you can’t foresee everything that is going to happen when you sat down and prepared your financial plan. Financial catastrophes happen, cars breakdown, babies are conceived and jobs are quit ha ha.
It’s important that you adjust your financial sails when the wind changes direction. Sometimes your financial goals have to take a back seat while other priorities pop up. That’s ok.
You are in charge here, and checking in with your progress regularly means you are more motivated to stay on target when things are going well. If you are experiencing difficulty, you can identify changes you need to make early on and get back on track.
Each month when you do your monthly budget, check in with your financial plan and see how you’re progressing towards your financial goals. You’ll find it so motivating.
How to Stay Motivated to Achieve Your Financial Goals
Know Your Why
Keeping your why in the front of your mind is a great place to start. Your why was the motivator to get you to create your financial plan in the first place, so I know it’s important to you! You need to frame it in such a strong way, it will easily overcome any temptation that comes your way.
Write a little paragraph on a piece of paper and put in your phone case or your purse so you always have it with you.
Go into great detail and build as much emotion as you can into it. Reading this will trigger these emotions for you again when you are tempted. Before you go to put that sweater on your credit card, pull out your piece of paper and remind yourself of what your real priorities are and why.
Remind Yourself When it Counts
You may write something like this:
“Hey future Beth, I know right now whatever you want to buy right now is really important to you, but remember how worried you were thinking about retirement and the tiny amount of money we will be living on, because you didn’t put enough aside when you were young.
Please don’t do that to us! I believe in you and know you will do the right thing, so we can achieve our financial goals and have a fun and carefree retirement. So go and put that thing back on the shelf, and give yourself a hi-five for beating temptation and side stepping all the guilt that comes with it.”
Make sure you actually use it or it obviously won’t work! If your goal is to save more for retirement check out my post here, and it will help you enormously.
Another way to be motivated to achieve your financial goals is to put a picture of your why on your fridge or on your mirror in the bathroom. You can also put a photo as your phone’s home screen too!
Whenever you are quitting a bad habit you need to replace it with a good habit, otherwise you will find the transition too difficult. A good idea is to prepare a list of free or cheap things to do when you get bored ahead of time, so you don’t let circumstances sabotage your financial goals.
Another time you are likely to find prioritizing your financial goals hard, is when you get invited somewhere you will spend lots of money. Concerts, out for drinks Friday night or to a day at the fun park with the kids, are all situations where money just flows out of your hands like a river!
Practice Saying No Nicely
Knowing how to politely decline really helps, as quite often we get dragged into these things because we don’t want to hurt anyone’s feelings.
Think out the perfect way to say no in advance and practice, so it comes to your mind when you need it. Plan to say yes too, but choose those occasions in advance and make room in your budget for them.
Staying away from temptation is wise as well. It doesn’t matter how strong your willpower is, I’m sure you know going to the shopping center is going to lead to spending, so don’t go.
If you don’t want to miss hanging out with your friends, then you need to ask yourself if your future is really with these people after all. They don’t seem to want to improve themselves or do better with their money, if they are spending it on stuff trying to impress each other.
Same goes for the work people who drink every Friday and Saturday nights. That life just isn’t sustainable (or very healthy) and isn’t going to help you achieve your financial goals.
Maybe this is about leveling up for you and it’s time to leave this behind you now.
Instead, hang out with people who are great with their money and are constantly improving themselves. This will encourage you to do better too!
Being distracted is the best way to help time pass quickly, while you are waiting to achieve your financial goals.
Use your time to improve your skills, so you can earn more with your job or start a side hustle. As a bonus this will also help you have more money to save. Start a low cost hobby that is personally rewarding is great too.
Take a course of study and improve yourself. You may want to learn to speak another language on your next overseas holiday if this was your financial goal.
Volunteer and help people less fortunate than yourself. This really puts things in perspective and highlights where the true priorities should lie. You won’t feel the least bit deprived you aren’t out spending money that’s for sure.
In fact, it may motivate you to achieve your financial goals faster. You will have more money and time to give to others, when you are financially stable yourself.
Track Your Progress
There are times where it feels like you are standing still and making no progress towards your financial goals.
Tracking your progress is the best way to stay motivated when achieving your financial goals.
When you created your financial plan you had prepared a budget, be sure to measure your progress back to this and celebrate your wins – no matter how small they are!
You may find my Simple Budget Planner a great way to stay on track.
Be sure you don’t celebrate saving $150 this month by buying a pair of $250 sunglasses 😊
Having someone to report your progress to may also help. Set up an accountability buddy who will help encourage and support you, so you can achieve your financial goals more easily. This could be anyone you trust and I’m sure you’ll find it will help you stay on track.
So by now you should know how to create a financial plan and achieve your financial goals.
You should also know how to stay motivated when things get tough, and how to stay focused on achieving your financial goals, no matter what!
To recap, the process to create a financial plan is:
- Identify financial goals, decide on a time frame & find out how much they cost
- Set aside this amount in your budget
- Measure and adjust your financial plan as you go
- Stay motivated by keeping busy and avoiding temptation
- Celebrate achieving your financial goals
So do your research, decide on a goal and commit that goal to paper. Writing things down has a very powerful impact on your chances of succeeding and achieving your financial goals.
Discipline and commitment are also important. As you know, setting up systems to side step the spending wobbles that come up, will also support you when things get tough.
I hope this helps, I’d love to hear what your financial goals are! Leave a comment for me below and let me know. I’ll be cheering you on.