How to Start a Financial Plan

There is a saying, “If you fail to plan, you plan to fail.” Never has this been truer than having a financial plan for your life. Without a plan, your financial future is akin to a trapeze artist, practicing without a net; you have no idea where you are going and even less of an idea on how to get there –neither is a good idea. Thankfully, starting a financial plan isn’t difficult or time consuming.

Step 1: Budget

The first step in any financial plan is to have (and stick to) a budget. Add up your monthly income and subtract your monthly expenses from the total. You can do this using a free online tool like or simple Excel spreadsheet (free templates available for download on the Microsoft Office website).

Of course, just having a budget isn’t good enough, you also need to look at what you are spending and cut back on superfluous over expenditures. Go through your budget with a fine toothcomb at least four times, until you have eliminated and scaled back as many unnecessary expenses as possible. It might be that morning cup of coffee at Starbucks, or the dollar or two you put in the vending machine, but, rest assured, it all adds up.

Step 2: Create Short Term Goals

Your short-term goals are those that you want to accomplish over the next one to five years. For example, you want to have an emergency fund of no less than $1,000 set aside for car breakdowns or unplanned medical expenses. From there, you need to set aside money to begin investing in the long term. Think about what you want to accomplish with your money and write it down.

Step 3: Create Long Term Goals

After you have created your short-term goals, it’s time to focus on your long-term goals. Long-term goals include things like retirement planning, vacation funds, saving for a down payment on a home or buying a new car in cash. Whatever your long-term goals, write those down underneath your short-term goals.

Step 4: The Money Funnel

Now, it’s time to create a money funnel; allocating savings to each of your goals appropriately, but in a time oriented manner. If you are just starting out on a financial plan, allocate no less than 15 percent of your gross (pre-tax) income every payday to savings and investments. From there, funnel 70 percent of that into your short-term goal savings, and 30 percent of that to your long-term goals. Then, once you have crossed your short-term goals off your list, allocate the full bore of your resources to your long term goals. Remember, 15 percent is a guideline; it never hurts to save more, if you can manage it.

Step 5: Banking and Investments

Choose your banking and investment accounts wisely. If you aren’t a seasoned day trader, it’s wise to employ the services of a financial planner at this point, to guide you along the path. This will help you define goals and allocate resources effectively.

Financial plans are as different and unique as every person on this planet, there is no “one size fits all” solution. Providing your financial plan fits your needs and budget, the simple fact that you have one means you are on the right path.