How to Create Your Financial Plan: Hacks for Proper Budgeting 

Going on vacation, buying a car, or taking out a mortgage are big goals that require money. Sometimes it seems that you can’t save up for such purchases because of the large expenses. Let’s see how to make a personal financial plan to learn how to save and achieve your goals.

What a Financial Plan Is and Why You Need It

A financial plan is a strategy for managing personal finances where the analysis of income and expenses, the amount of savings, the final goal, and deadlines for achieving it are specified.

A personal financial plan will help:

  • Sort out your finances.
  • Manage expenses.
  • Save and save money regularly.
  • Set specific financial goals.

Financial planning plays a key role in turning dreams into concrete actions with specific deadlines.

Types of Financial Planning

Financial planning can be divided into three types, which depend on your deadlines and goals:

  • Short-term planning up to 1 year. For example, this is the formation of a “safety cushion,” a summer vacation, a few dollars on regular live betting, the purchase of equipment, medical expenses, and so on.
  • Medium-term planning up to 2-3 years. Buying or replacing a car, collecting a down payment on a mortgage, renovating a home, and financing major events.
  • Long-term planning for 5-10 years. Building a house, buying an apartment for extra income, or moving to another country.

The first stage of savings is a “safety cushion” equal to your expenses for 3-6 months so that there will be no problems if something happens to your income. For such a reserve, the best tool is a savings account. The main purpose of this money is to be easily accessible. As you accumulate, you will calculate how much money to release to move towards your goals and how much to keep in reserve. As the amount increases, the set of instruments expands: the stock market, precious metals, and real estate. Prepare for the fact that long-term goals become distant, if at a particular moment, it’s more important to fulfill short-term planning. For example, to close a loan.

What to Do to Create a Financial Plan

Creating and working with a personal financial plan consists of the following steps:

  • Analyzing income and expenses.
  • Optimization of expenses.
  • Budgeting for several months.
  • Determining the amount of monthly savings.
  • Defining the financial goal and a realistic timeframe for achieving it.
  • Searching for options for generating additional income.

3 Steps to Creating a Personal Financial Plan

Record income and expenses. You can keep track of expenses and income in a notebook or use apps, like CoinKeeper. Apps are linked to a bank card and analyze expenses in detail.

Excel and Google Sheets are suitable, for example, for those who use cash frequently or just like more conservative tools. Cash transactions won’t automatically go into the analytics in the apps. You’ll have to fill them in manually.

If you are just starting to keep track of expenses, you can also use information from your bank’s app: the app analyzes expenses for a certain period and assigns categories to them.

At this stage, follow two rules:

  • Collect as much data as possible. Accurate information will give a better understanding of the starting point. First, take into account all the money you spend and earn: mortgage, groceries, transportation, or car fuel expenses.
  • Analyze expenses by category. Divide income and expenses into categories and subcategories. For example, into staple foods and extras such as chocolate, sodas, and so on, or meals at home and in restaurants. Once you’ve broken down your expenses, it will be easier for you to see what you can potentially save money on without compromising your needs.

Irregular expenses can pop up throughout the year: vacations, medical checkups, buying new winter shoes and clothes, or car repairs. One way to deal with such expenses is to add an “Unforeseen Expenses” category to your spreadsheet and set aside money for this on a regular basis.

Analyze your budget. You’ve made an expense spreadsheet and see that you can’t yet set aside 20% of your income. At this point, identify potentially unnecessary expenses and figure out how much you can set aside each month. Reduce unnecessary expenses as specifically as possible so you can see the change in the numbers.

Set the final goal of your financial plan and the timeframe for achieving it. Define the main goal and understand how long you will move towards it. The goal should be specific, i.e. with the amount of money you need to save.

When making a financial plan, prioritize properly. For example, you can temporarily cut back on vacation expenses to collect the down payment on an apartment faster.

A financial plan helps you manage your money. With it, it’s easier to control your budget, collect money for important purchases, and be prepared for unexpected spending.

Personal Financial Plan as an Incentive to Increase Income

If your income involves taking too long to reach a goal, a personal financial plan can act as motivation to increase your income:

  • Career advancement or a career change. Consider how you can earn more. It may be worth asking for a raise or taking training to qualify for a higher wage. 
  • Investments. Study information on how to work with investments to buy stocks and bonds. But prepare yourself that this is rather a long-term planning tool. Remember that there are risks built into investments.
  • Supplemental income. Think about how to get money from additional sources: monetize a hobby, sell unnecessary things, or look for a part-time job. For example, if you’re a teacher, you can teach private classes as a tutor, etc.

A financial plan is sometimes scary to show the real financial state. Numbers and math don’t lie, and sometimes it becomes clear that your current income level doesn’t allow you to reach your goals. At this point, it’s important to continue keeping records and calmly thinking about how to earn more.

How to Complete a Financial Plan

Analyze your finances on a regular basis. Record how much you planned to put away and how much you actually put away. If you fail to save the required amount for several months in a row, it’s a reason to adjust your plan or rethink your financial habits.

Prepare for the fact that you may not always achieve your goals the first time. If you spend more than you planned, there’s no reason to give up. Perfectionism is not the best ally here, and financial discipline doesn’t become a habit immediately; regularity is essential.

When to Update Your Financial Plan

If your income has decreased or your expenses have increased, revise your savings goals to reflect the new circumstances.

Then go back to the main goal of the financial plan and adjust either the amount or timing of the goal.

If circumstances have changed that affect the numbers, that’s a reason to at least adjust the plan. Even in hard times, people’s long-term goals don’t change: to be healthy, to raise and educate children, and to ensure their old age. Only the tools change, and decisions are adjusted from time to time.