No matter the size or scope of your financial goals, a financial plan can help you achieve them.

Financial planning is about looking at the current state of your finances and developing a step-by-step plan to get them where you want them. This might mean devising a plan to get out of debt or figuring out how to save enough money for a down payment on a new home.

This process can include many aspects of personal finance, including investing, paying off debt, building savings, planning for retirement, and even buying insurance.

Anyone can engage in financial planning – it’s not just for the rich. You can start setting financial goals for yourself, and if you want, you can work with a finance professional to help you design the smartest plan to make those goals a reality.

5 steps to creating a financial plan

A financial plan is made up of smaller goals or tasks that will help support you through your financial journey. Create a financial plan in five steps:

1. Identify your financial goals

By identifying your financial goals, you will have a clear idea of ​​what you need to accomplish to achieve them. Your goals should be realistic and achievable and include a timeline for when you want to achieve them.

Setting a goal to pay off credit card debt by a certain date, for example, would be an appropriate financial goal that will set you up for success.

2. Set a budget

Having a clear picture of your finances will make it easier for you to achieve your financial goals. A budget can help you understand where your money is going each month. It can also help you identify where you might be overspending, giving you the opportunity to cut back and allocate that money elsewhere.

One of the easiest budgets to start with is the 50/30/20 budget. This budget plan divides your monthly income into three brackets: mandatory spending (50%), savings and debt repayment (20%), and discretionary spending (30%). This is just one of many types of budget plans that exist.

A budget should be a guide to help you understand your monthly finances and design smaller goals that will bring you closer to your long-term financial goals. You probably won’t always follow your budget down to the last penny; keeping this in mind will help you stay on track, rather than getting discouraged and giving up on budgeting altogether.

There are apps that make budgeting a whole lot easier by helping you visualize your spending and saving choices each month. Some budgeting apps even give you the option to enter your financial goals directly into their platform to help you stay on track. A comprehensive budgeting app lets you track expenses, manage recurring bill payments, set savings goals, and manage your monthly cash flow.

3. Build an emergency fund

Building an emergency fund will help ensure that a financial emergency does not turn into a catastrophic financial event.

Experts generally recommend saving six months of living expenses to protect yourself in the event of the unfortunate unexpected, such as losing a job. But six months worth of cash can be out of reach for those who struggle financially or those who live on tight financial means each month.

You can start building an emergency fund by setting aside a few dollars for each paycheck. You can start with a small fund goal of $100 to $200 to establish your fund. From there, you can create other smaller goals that will add up to a bigger financial cushion. Some budgeting and savings apps also give you the option to round to the nearest dollar in transactions and funnel that currency into your savings.

4. Reduce your debt

Having to pay off your debts each month means that you will have less money to allocate to your purchasing goals. Plus, having credit card debt can be expensive; each month, you accrue interest on your balance, which can lengthen the repayment time.

There are a variety of debt repayment methods. Two of the most popular are the snowball and debt avalanche methods. With the snowball method, you will first pay off your smallest debts, then move on to those with the highest balances. The avalanche of debt, on the other hand, starts first with debts with higher interest rates.

5. Invest for the future

Although risky, investing can help you grow your money, even if you’re not wealthy. You can start investing by enrolling in your company’s 401(k) plan or by opening a low-cost or no-fee account through an online broker.

Keep in mind that investing always involves some risk; you could end up losing the money you invest. There are also robo-advisors that automatically recommend investments based on your goals and risk tolerance.

Conclusion

A financial plan is made up of a series of smaller goals that will help you achieve a larger financial goal, such as buying a home or retiring comfortably. A solid financial plan includes identifying your goals, creating a budget, building an emergency fund, paying off high-interest debt, and investing.