How to Write a Personal Financial Plan

Financial plans are written, organized strategies for maintaining financial health and accomplishing financial goals. Whether or not you employ a professional financial planner, it is your responsibility to contemplate and develop your own financial plan, centered on your unique circumstances, desires and objectives. Follow these steps for how to write a personal financial plan.

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1)                Set goals. Personal financial planning revolves around goals. Consider what you want your lifestyle to be like in the present, near future and distant future, then create an outline of your goals that is comprehensive enough to cover every facet of your life:

o                  Intellectual goals. Furthering your education, participating in leadership retreats, sending your children to college and attending seminars are types of intellectual goals.

o                  Occupational goals. Personal financial planning requires that you produce a stream of income, and you need to consider the ways in which you plan to produce income, whether it be earning raises at work or switching careers altogether.

o                  Lifestyle goals. This category encompasses the things you do for fun and entertainment, and the things you feel are necessary to the quality of life you aim for.

o                  Residence goals. Your financial plans should account for any desire you might have to move to a new location.

o                  Retirement goals. Consider the lifestyle you want when you retire, and set personal financial planning goals that will provide for a retirement that is comfortable to your standards.

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2)                Organize your financial records. Create a filing system of your tax returns, bank account statements, insurance policy information, contracts, receipts, wills, deeds, titles, bills, investment plan statements, retirement account statements, pay stubs, employee benefits statements, mortgages and any other type of document that is related to your financial life.

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3)                Create a preliminary budget. Your budget is a starting point for determining how you will reach your financial goals, as it allows you to identify and assess your spending habits. Write out all of your current monthly expenses, as well as your current monthly income.

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4)                Determine which spending habits you need to change. Using your budget as a reference, identify unnecessary monthly expenses so that you can redirect any wasted money into accomplishing the goals outlined in your personal financial plan.

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5)                Estimate your projected income. Take into account your future plans for increasing your income, as well as your timeline for those projected changes. Consider the following 3 income-producing methods when forecasting your income, and decide which you intend to employ:

o                  Career. Traditional employment under an employer, either salaried or hourly, constitutes career income.

o                  Business. If your financial plans include starting a home business or profiting from a hobby or interest, then that income would be classified under business.

o                  Investments. Investing is an activity that leverages money to produce a return, and includes things like stocks, bonds, real estate, money market accounts and certificates of deposit.

o                  Inheritance. In addition to active forms of income production, be sure to include any anticipated inheritance money to your projected income.

o                  Unexpected income. There may be circumstances in your future where you find yourself with an unexpected lump sum of money (i.e. lottery winnings, gifts, bonuses and/or property value increases). Plan for this possibility by deciding how you will use that money. For example, you may allot 50 percent to your retirement account and the other 50 percent to growing a business, or you may choose to put the entire amount into an interest-bearing savings account.

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6)                Set a time frame for accomplishing your goals. Separate goals into categories, starting with present goals and dividing the rest into immediate future (within 1 year), near future (within 5 years), extended future (within 10 years) and distant future (onward to retirement) goals.

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7)                Create an extended budget. This budget is different from your preliminary budget in that it uses your projected income and takes into account what your future goals will cost you. Be sure to include necessary expenses as well as luxury expenses.

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8)                Devise an income strategy that will sustain your goals. Taking your projected income, time frame and goal expenses into account, calculate how much of your income you need to dedicate toward each goal category on a monthly and yearly basis. This amount may fluctuate in correlation with your future income projections.

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9)                Commit to your financial plan. It is not enough just to write your plans on paper. You must commit to adhering to the steps you outline for yourself if you want your personal financial plan to be effective.

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10)           Reframe your financial plan as necessary. Remember that personal financial planning is a goal - not a process - and that you may need to update it as your life's circumstances change. If you find that your income is not enough to accommodate your goals, then formulate a plan to create more income through career, business and/or investments, or reset your goals within a more realistic framework.