Personal Finance Plans: What They Are and Why You Need One

Tara Seboldt
Feb 01, 2022

Financial situations change often. In just the next year, you could move to a new city or get a promotion at work. Maybe you or a child needs dental work, or you've been eyeing a new car. Keeping your finances on track as your situation shifts can be difficult. Luckily, you can use a personal finance plan to help you set and reach your financial goals.

What is Personal Finance Planning?

Consider a financial plan as your roadmap to financial success. It’s customized to fit your unique financial goals and needs. Following your plan should help you make sound financial decisions, and be better able to handle emergencies.

Many people think only high-net-worth individuals need financial planning, but that’s not true.

Everyone can benefit from planning out their financial future. Also, financial planning doesn’t have to be complicated.

A good personal finance plan example for beginners is a simple monthly budget and a list of financial goals.

Of course, financial planning can be more complicated. Some personal finance plans include everything from investing strategies and life insurance to career goals and debt repayment.

The best part of making your own financial plan is that you can make it as simple or as complex as you need.

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Do I Have to Hire Someone?

There’s a whole industry of professional financial planners and financial advisors.

Their job is to provide financial advice and money management services—for a fee.

These valuable services are great for helping you manage complicated money situations. A financial planner will also help you stay on track.

However, you don’t have to work with a professional financial advisor to have a successful financial plan.

There are plenty of free tools, tips, and resources available so you can craft a strong plan on your own.

You can even create accountability by joining financial planning groups on social media or asking a friend to be your accountability partner.

Using Personal Finance Apps

Your smartphone could be one of your biggest financial planning assets. Fintech (finance technology) companies have developed a full range of personal finance apps to help both beginners and personal finance veterans. These range from budgeting planners to credit score monitors.

Personal finance apps are a great place to start and manage your financial plan.

They also won’t cost you much, if anything. Many personal finance apps have a free version that lets you use features without paying a monthly fee.

When to Hire a Professional Financial Planner

Paying for professional financial planning doesn’t make sense for everyone. Depending on how your advisor charges, it could be too expensive to justify.

However, a financial planner could be worth it for someone with a complicated financial situation and no time to manage it.

For example, a small business owner works long hours and has two rental properties.

They’re trying to save for retirement and their children’s education funds. They also have several investment accounts and bank accounts for their various incomes.

They may have too much going on to successfully manage their financial plan on their own, and may even want to create separate plans for each part of their life.

How Much Does a Financial Planner Cost?

There are three ways financial advisors get paid:

  • Fee-only, such as an hourly rate or flat management fee
  • Commission-based, who earn money on the investments they sell
  • Fee-based, who earn fees and commissions

A common way that financial planners charge is a percentage fee for all of the assets they manage for you.

If you have $10,000 and your advisor charges a 1% annual fee, you pay them $100 a year.

Note that there are also organizations that work to provide financial planning on a sliding scale or even for free. Many also offer free consultations.

It's a great idea to do some research in your area if you're struggling to make sense of your financials. (You're not alone!)

How Do I Know I Need a Personal Finance Plan?

If you have finances, you should have a financial plan—even if it’s simple.

Whether you’re living paycheck to paycheck or can save thousands a month, it’s a good idea to plan where your money’s going.

A financial plan is even more important when you’re struggling with debt or overspending.

That’s because your plan will help you budget your money and set financial goals to get out of bad money habits.

It should also help you see where you may need to consolidate debt or trim things from your budget temporarily.

As you follow your plan, you’ll be able to pay off debt, prepare for emergencies and build wealth for the future.

Setting Financial Goals

Your plan should include both short-term financial goals and long-term financial goals. Be sure to make your goals realistic so you don’t burn out trying to reach the impossible.

A good short-term goal, for example, is to pay off credit card debt. A long-term goal could be to have a certain amount saved up by retirement.

What Your Personal Finance Plan Could Look Like

You’ll want to know what goes into a personal financial plan before you create your own.

Remember that you can make your plan as complicated or simple as you want.

It’s more important to have a plan that you can stick to than one that details every financial step in your journey.

The Basics of Financial Planning

  • Paying off debt: Getting out of debt should be one of the top priorities of your plan. Start with high-interest debts like credit card balances or medical bills. Once those are paid off, you can focus on the debt with lower interest rates, such as student loans. Remember to keep making your minimum payments on all debts.
  • Improving cash flow: Your cash flow is how much you earn, minus your expenses. Having good cash flow means you have plenty of money left over after paying your monthly bills. This is usually done by cutting expenditures each month or earning more money.
  • Saving for emergencies: An emergency fund is a must-have when working to improve your finances. Most people create a bank account specifically as an emergency fund. Try to save up at least 3-6 months of living expenses in your emergency savings account.
  • Savings goals: Once you have an emergency fund, you can start saving for other financial goals. Common things people save for include a down payment on a house, a new car or a vacation.

Advanced Financial Planning

  • Investing: Many people build wealth using investment brokerage accounts. This type of account lets you invest money into stocks, mutual funds and other types of financial investments. Investment accounts aren’t guaranteed to earn money and can lose money if the stock market goes down.
  • Retirement planning: Social Security payments aren’t usually enough to cover your living expenses after you retire. You usually use tax-advantaged retirement accounts to maximize your retirement savings. For example, an IRA could help you reduce your tax liabilities. Talk to a tax advisor to learn more.
  • Estate planning: Estate planning is the process of making an end-of-life plan. Life insurance is a big part of estate planning. When you pass away, your loved ones receive funds from your life insurance policy to safeguard their financial wellbeing.

Personal Finance Plan Example

Feeling overwhelmed by financial planning? Let’s go through a basic finance plan to give you an idea of how one could look:

Joe makes $3,000 a month.

He currently has $2,500 in monthly expenses like health insurance and rent.

He’s dealing with $5,000 of credit card debt and has no emergency savings.

His financial goals are to get out of credit card debt, save three months’ worth of living expenses and buy a house within 10 years.

Joe’s first step in his plan is to improve his cash flow. He negotiates with his landlord to lower his rent, saving him $500 in expenses each month.

His cash flow is now up by $500, giving him $1,000 per month to put toward his goals.

He commits to paying $500 per month toward his credit card balances because the high interest rate is costing him a lot of extra money.

He puts $300 per month into an emergency fund and uses the remaining $200 for a down payment fund.

Planning for Your Future

Creating and following a financial plan sets you up for long-term financial success.

Take the next step toward comprehensive financial literacy by making your financial plan today.

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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