7 steps to my personal finance planning

If you want to achieve financial freedom, you must create a plan. Without a personal finance plan, you will never know if you are deviating from the track.

Why do you need a personal finance plan?

A plan empowers you to take action and improve your financial situation. Additionally, a plan can make your life more organized and meaningful, benefiting everyone.

According to a survey by CNBC, 75% of Americans improvise when it comes to financial planning. Not having a crisis is the biggest crisis. Are you one of them?

Creating a personal financial plan is an investment in yourself and your future. And you don't need to consult expensive Certified Financial Planners.

If you follow these 7 steps diligently, you can quickly create your own personal financial plan.

The 7 steps to create a personal financial plan are:

1. Write down your goals

2. Calculate your net worth

3. Establish an emergency fund

4. Determine a realistic budget.

5. Eliminate bad debts.

6. Take advantage of tax incentives.

7. Start investing.

1. Write down your goals.

Personal financial planning is similar to solving a puzzle. These puzzles represent aspects such as expenses, shopping, debts, investments, and other aspects of your financial situation. Each puzzle piece represents your goals.

To solve this puzzle, you need to accurately piece together each part.

This is the right mindset for personal finance. I have already explained the S.M.A.R.T. goals in a more extensive way in an article about wealth creation, now let's break it down here briefly:

Personal finance plan S.M.A.R.T. goals

S represents specific goals.

The more specific your goals are, the more likely you are to achieve them. Don't just say, "I want to become wealthier" or "I want to pay off my mortgage." For example, "I need to increase my monthly loan payment by X dollars so that I can pay off my debt in 5 years."

M represents measurable goals.

A measurable goal is a clear definition of success. Whether you want to cut expenses by $1000 per month or invest an additional $5000 next year, make sure you can measure your progress in numbers.

A represents attainable goals.

When your personal finance plan includes your partner or family members, you are more likely to stick to your goals. Getting support from your family gives you a sense of responsibility. Both of these factors contribute to your personal financial pursuits.

R represents realistic goals.

If your goals are unrealistic, then you are preparing for failure. The difference between a realistic goal and an unrealistic goal may be a small adjustment. For example, if you cannot pay off your mortgage in the next 10 years, then set it for 15 years. Be true to reality.

T represents the time frame of the goal.

By setting goals with a time frame, you can create a sense of urgency. Deadlines can motivate people to use their time efficiently.

2. Calculate your net worth

Personal financial planning is like creating a roadmap to success. So in order to get to where you want to go, you must know where you're starting from.

First, list all your assets - including money in your bank account, money in your investment portfolio, property, personal belongings, and cars. Each asset is important when calculating your net worth.

Then list your debt, including your mortgage, credit card debt, and loans.

Subtract your debt from your assets, and you have your net worth. If it is a positive number, you are already ahead of many Americans. If it is negative, there's no need to worry, as it is normal. It simply means you have more work to do and can't take your personal finance plan lightly.

3. Establish an emergency fund.

After calculating your net worth, you need to set aside some money for unexpected expenses. You probably don't want a medical bill or car repair bill to derail your financial plan.

According to a Bankrate survey, nearly one-fourth of Americans have no emergency savings. Not having an emergency fund is very risky. With an emergency fund, you won't be burdened with debt when unexpected expenses arise, such as car troubles, home maintenance, or medical hospitalizations.

In general, an ideal emergency fund is about 3 to 6 months' worth of living expenses. Financial experts recommend saving 20% of your monthly salary into a savings account.

Ideally, you can set aside a small portion of your salary as a separate emergency fund. This way, you can avoid using your savings account or going into debt for unexpected expenses.

4. Determine a realistic budget.

A realistic budget is crucial. The actual rule for budgeting is the 50/20/30 rule. Senator Elizabeth Warren introduced it in her book "Your Worth It: Lifetime Financial Planning."

Necessary expenses.

50% of your income should be used for loan repayment, rent, food, insurance, medical care, and other necessary expenses.

Savings.

20% of your income should be used for savings. Saving is key to financial management.

Wants.

The remaining 30% of your income can be used for other non-essential items, including movies, clothing, electronics, and other non-necessary items.

5. Manage and eliminate debt.

Not all debt is bad, some debt is beneficial, such as a mortgage loan. If you can repay your mortgage loan on time, it can improve your credit score. High-interest debt, such as credit card debt, should be avoided.

When you have high-interest debt, it is best to pay it off as soon as possible. To manage your high-interest debt, try the 28/36 rule. Use 28% of your pre-tax income for housing expenses and do not exceed 36% of your income for other debts.

Mortgage lenders often use this rule to assess someone's ability to repay a loan. If you can comply with the 28/36 rule, you have a better chance of getting a mortgage loan and other lines of credit.

6. Take advantage of tax benefits.

Tax law is not only very complex but also constantly changing.

For example, the Tax Cuts and Jobs Act of 2017 changed the number of tax deductions, lowered tax rates, and expanded tax credits for 2018 and beyond. This law has affected the tax situations of many Americans.

You can review your year's withholding tax, estimated tax, and any tax credits you may be eligible for.

In addition, if you live in the USA, utilizing tax-advantaged accounts like individual retirement accounts and 401(k) can help you defer Uncle Sam's taxes for a longer period.

If you want a deeper understanding of your tax situation, you can consult an accountant.

7. Accumulating wealth through personal financial planning.

The purpose of personal financial planning is to accumulate wealth and even achieve financial freedom. Another aspect of personal financial planning is to avoid losses. If you work hard to reduce expenses and save money, you certainly do not want to lose money.

A low-risk but stable investment strategy is to invest in high-quality dividend stocks.

Companies typically pay dividends to shareholders quarterly. Therefore, investors building a dividend stock portfolio can gain stable returns.

Our Chief Income Strategist, Marc Lichtenfeld, always provides excellent insights into the dividend investment field.

Final thoughts on personal financial planning.

You don't need a financial planner to plan your finances. Investing can help you achieve your personal financial goals.