5 steps that can help with your first financial plan (2024)

Whether you’re far along in your career or wondering how to manage your first salary, you need a personal financial plan.

“Money is a resource, and we are stewards of it,” says Wilson Muscadin, financial coach and founder of The Money Speakeasy, a personal finance blog. A financial plan, he says, allows you to be thoughtful and proactive about how you use that resource.

Creating a financial plan on your own can seem overwhelming, but like any big project, breaking it down into smaller parts makes it easier to tackle.

So, what is the first step in financial planning? Before we introduce you to the first step of creating a financial plan, let’s explore what a personal financial plan is. Then we’ll explore the remaining four steps to follow as you solidify your plan.

What is personal financial planning?

A personal financial plan is a written overview of your financial situation, combined with strategies to achieve short-, medium- and long-term financial goals in the future, Muscadin says.

“It’s figuring out where your money is, where it goes and where you want it to go,” says Sophia Bera, CFP®, founder of Gen Y Planning.

The process of creating a personal financial plan can be broken down into a series of steps. Let’s start with the first step of the financial planning process.

Step 1: Take an inventory of your finances

What is the first step in financial planning? It’s a fact-finding mission as you take an inventory of your finances.

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While that can feel intimidating, there are ways of organizing your financial inventory that will make the next steps in financial planning easier, the experts say. To get started, take out some paper or open a document and list out your:

  • Major assets, such as an estimate of the equity in your home, car, checking accounts, savings accounts, retirement accounts, and investment accounts
  • Recurring income from your job and any side hustles you do as ways to make money on the side
  • Debts, such as your mortgage, auto loans, personal loans, student loans, credit card debt, and medical debt
  • Recurring expenses, such as your utilities, rent, phone bill, subscription services, and any other recurring costs

Finding this information can take some digging, Bera says, but it will make your calculations easier in the following steps. You’ll likely need to log in to your various bank accounts, check your latest pay stubs, and review emails and paperwork as you work through each category.

However you decide to gather the information, being detail-oriented at the beginning can pay dividends over time.

“You don’t have to become a spreadsheet nerd,” Muscadin says. “But if you’re trying to get a handle on these things, spend more time upfront.”

As you conduct your financial inventory, Bola Sokunbi, who is an author and the founder and CEO of Clever Girl Finance, recommends documenting where you found each piece of information alongside the amounts. Don’t include sensitive information like usernames or passwords, but you can include bank names or URLs to accounts. That way, Sokunbi says, you can more easily reference and update your financial plan in the future.

Once your financial inventory is complete, Bera says you’ll likely see some things pop out right away that you can “simplify, streamline and automate.”

These housekeeping tasks—such as rolling over old 401(k)s into an IRA, automating payments, or taking care of small, lingering debts—will help you organize your finances. Bera recommends doing what you can before moving on because it will help you focus on the big picture as you progress through the next steps in financial planning.

Step 2: Create a net worth statement

Bera calls the net worth statement the foundation of financial planning because it gives you a concrete number to build from.

Figuring out your net worth boils down to a simple equation: Add up what you own (your assets) and subtract what you owe (your debts). A net worth calculator can help walk you through it, and because you already have these numbers handy (thanks to the first step in creating a personal financial plan), it should be a breeze.

It can be a little nerve-rattling to boil your financial situation down to one figure, but the experts agree that the number itself isn’t the point.

“When looking at your net worth, the trajectory from month to month is much more important than the absolute number,” Muscadin says.

Your trajectory won’t be clear to you yet, but it will reveal itself as you move through the steps in financial planning.

Step 3: Get a handle on your cashflow

Your cashflow is the money that flows in and out of your accounts over a given period of time. To understand your cashflow situation, you’ll need to look at your recurring income and expenses (which you already calculated in the first step of the financial planning process). In this step, you’ll also need to factor in your discretionary expenses—what you spend on things like food, entertainment, and clothes.

Most of these types of purchases are made with debit cards, credit cards, and cash. So, to see what your discretionary spending amounts to month over month, you’ll want to consult your debit and credit statements.

Once you subtract the money you’re spending on recurring fixed expenses and discretionary expenses from your total monthly income, you’ll see if you’re cashflow positive or cashflow negative. If you have money left over after all your expenses, you’re cashflow positive. If you’re spending more than you’re bringing in, then you’re cashflow negative.

If you’re cashflow negative each month, then Muscadin suggests it’s time to implement a budget. (He prefers the term “cashflow management plan.”) But even if you’re cashflow positive, there’s likely still room for improvement.

Take a close look at where your money is going and reflect on what you can change to come out more cashflow positive each month. Living frugally doesn’t have to cramp your style, Muscadin says, if you’re strategic and intentional about the way you spend. Maybe you’re paying for a subscription you don’t use anymore. Or perhaps you could eat healthier and save money by cooking more meals at home.

As you make adjustments and start generating more extra cash each month, you’ll need to decide what to do with it. To do that, you’ll need a clear sense of your financial goals.

Step 4: Set your financial goals

Muscadin likens setting your financial goals to determining your North Star.

“Ultimately, money is not the goal,” he says. “Saving more, investing more, all that is nice, but to what end?”

Wondering how to set financial goals? To define your goals and why they matter to you, Muscadin offers a simple exercise to help.

Ask yourself: “What is my biggest financial goal?” Write down your answer. Then ask yourself why that goal is so important to you. Write that down, too, and keep asking yourself that question until you’re crystal clear about the underlying motivation behind the goal.

Muscadin says that this exercise not only helps you define your goals, but it also makes it easier to stick to your financial plan. “When the shiny, new object comes along, you can ask yourself, ‘Does this take me in the direction of my deepest ‘why’?’”

It’s not enough to have goals, however. You need an action plan to achieve them.

Step 5: Make a plan to achieve your goals

“Planning is how you meet goals,” Sokunbi says. “It’s how you build wealth. It’s how you weather a life crisis.”

She emphasizes that while it’s important, it doesn’t have to be complicated. The work you did in the first steps of the financial planning process should reveal many of the actions you need to take to reach your goals. (Working with a certified financial advisor is recommended when creating a financial plan.)

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Sokunbi offers these examples of action items that can go into your personal financial plan:

  • Create a budget to generate more savings
  • Schedule percentage increases to your 401(k) contributions
  • Contribute to a Roth IRA or Traditional IRA to maximize your retirement savings and tax benefits
  • Speak to a licensed insurance agent to review your insurance policies and ensure adequate coverage
  • Find opportunities to increase your income
  • Work with an expert to create a will and estate plan

And if you identified any ways to streamline your finances in the first step but tabled them for later, add those to your list, too.

“Your financial plan is there to help when you have decisions to make,” Sokunbi says. “It’s all about giving yourself peace of mind about your finances and knowing that you have a plan for your future self.”

Make time to regularly revisit your personal financial plan

The personal finance experts agree that for your financial plan to be effective, you need to carve out time to review it. That’s because as life changes, your goals will change, too, Sokunbi says.

“Life really sneaks up on people, especially in their 30s,” Bera adds. “All of a sudden, things are more complicated—you’ve got a house, a kid and you’ve changed jobs.”

Bera notes that monthly check-ins can work for some people, but not everyone will see significant progress on a month-to-month basis. If that’s the case for you, schedule a meeting with yourself once a quarter to keep your personal financial plan on track.

So, what is the first step in financial planning? It’s taking an inventory of your finances—but you shouldn’t stop there. Try using this financial checklist for your quarterly reviews as you go through all the steps in financial planning and make progress toward your financial goals.

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

5 steps that can help with your first financial plan (2024)

FAQs

5 steps that can help with your first financial plan? ›

Expenditure, income, savings, investments, and protection are the five areas that are critical to shaping your personal financial planning.

What are the 5 components of a financial plan? ›

5 Essential Elements of a Comprehensive Financial Plan
  • Investments. Investments are a vital part of a well-rounded financial plan. ...
  • Insurance. Protecting your assets—including yourself—is as important as growing your finances. ...
  • Retirement Strategy. ...
  • Trust and Estate Planning. ...
  • Taxes.
Feb 9, 2024

What are the 5 importance of personal financial planning? ›

Expenditure, income, savings, investments, and protection are the five areas that are critical to shaping your personal financial planning.

What is the first step to financial planning? ›

Assess your financial situation and typical expenses

An important first step is to take stock of your current financial situation. Even if you're not where you'd like to be, be honest with yourself about the income you're currently generating, savings you've accumulated and your general spending habits.

What are the 5 steps of planning? ›

The five steps are:
  • Define the strategic planning process.
  • Conduct a situation analysis.
  • Set strategic goals and objectives.
  • Develop strategies and action plans.
  • Implement the plan and regularly review progress.
Nov 7, 2023

What are the 5 financial life stages? ›

We help you enact a plan that keeps you moving forward through the stages of the Financial Life Cycle so you can ultimately reach your goals.
  • FORMATIVE STAGES - AGES 0-19. ...
  • BUILDING THE FOUNDATION - AGES 20-29. ...
  • EARLY ACCUMULATION - AGES 30-39. ...
  • RAPID ACCUMULATION - AGES 40-54. ...
  • FINANCIAL INDEPENDENCE - AGES 55-69.

What are the 5 features of effective financial planning? ›

The 5 Steps of the Financial Planning Process
  • Financial goals and needs.
  • Priorities.
  • Current financial plan.
  • Family relationships.
  • Earnings potential.
  • Risk tolerance.
  • Cash flow.
  • Insurance coverage.
Jan 26, 2023

What are the 5 components of financial statement? ›

The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.

What are the 7 steps of financial planning? ›

7 Steps of Financial Planning
  • Establish Goals.
  • Assess Risk.
  • Analyze Cash Flow.
  • Protect Your Assets.
  • Evaluate Your Investment Strategy.
  • Consider Estate Planning.
  • Implement and Monitor Your Decisions.
  • AWM&T: Your Choice for Financial Fitness.

What are the 5 areas of financial planning? ›

When conducting your financial analysis, we take a look at the five main areas of financial planning:
  • Protection. ...
  • Estate Planning Strategies. ...
  • Retirement Planning. ...
  • Investment Planning. ...
  • Tax Planning.

What are the 5 points of personal finance? ›

Before delving deeper into the topic, it is essential to point out that there are 5 contours to one's complete financial picture. They are saving, investing, financial protection, tax planning, retirement planning, but in no particular order.

What are the 5 things to take into consideration when making a personal financial plan? ›

Financial planning: Our 5 tips
  • 1- Make a budget. The unavoidable first step: making a budget. ...
  • 2- It's never too late to start saving. ...
  • 3- Set aside an emergency fund. ...
  • 4- Periodically review your insurance coverage with each new life event. ...
  • 5- Call a financial security advisor.

What is the step 5 of financial planning? ›

Step 5: Monitor and evolve your financial plan

Review your personal financial plan every year or so. Start at the first step to get a snapshot of how your finances are doing, and make any necessary changes to the rest of your plan.

What are 5 stages cycles of financial planning process? ›

Life cycle financial planning can be separated into five stages: teenage years (13-17 years old), young adulthood (18-25 years old), starting a family (26-45 years old), planning to retire (45-64 years old), and successful retirement (65 years old and above.)

What are the first 4 steps to financial success? ›

4 Steps to Financial Success
  1. Step 1: Know Your Numbers. Comparing your income to monthly payments will help you budget for savings. ...
  2. Step 2: Protect What's Yours. Insurance is the best defense against the unexpected. ...
  3. Step 3: Fund Your Future. How do you see your retirement? ...
  4. Step 4: Build Your Wealth.

What are the 5 steps of financial reporting? ›

Defining the accounting cycle with steps: (1) Financial transactions, (2) Journal entries, (3) Posting to the Ledger, (4) Trial Balance Period, and (5) Reporting Period with Financial Reporting and Auditing.

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