What is personal financial planning?

what is personal financial planning

Financial planning is exactly what it sounds like, coming up with a plan for your money, whether you are spending, saving, working on financial health, or investing. These areas of finances are just the tip of the iceberg when discussing financial planning. There is a lot more to know and learn, and you’ll get some of those basics right here. 

Continue reading to learn more about the ins and outs of financial planning. 

An Overview of Financial Planning

Financial planning is an important thing to be aware of and to start doing; regardless of where you are in your life or what kind of relationship you have with money, financial planning can help you out.

As mentioned above, financial planning will touch on things like savings, investing, debt like installment loans, spending, and financial health, but these are just the major categories that have much more to them, and so they encompass a few different things:


Saving is a huge part of financial planning, without it, it can be challenging to reach any short-term or long-term financial goals. Here are some of the different areas of savings you will likely come across when navigating personal finance:


Budgeting involves making a plan for your money. Having a financial plan can also help you manage your budget during times of inflation. These plans can be as short as a few weeks or as long as a year. To begin budgeting successfully, you will need to track your income and expenses. Then you can devise a plan for your money based on your financial goals. For example, some people may want to focus on savings, while others may want to focus on paying off debt. There are all kinds of budgeting plans that can hone in on those goals; here are some examples: 

  • The 50/30/20 Budget 

The 50/30/20 budget is fairly simple; you divide your income into different increments. 50% of your income should go towards your necessary expenses, 30% should go towards the things you want, and 20% should go towards savings. This is a great method for beginners who are trying to organize their income. 

  • The Pay-Yourself-First Budget

The pay-yourself-first budget involves putting your money towards savings and paying off debt before you spend money on anything else. It is up to you how much you want to allocate towards savings or debt payments, but that is the first thing you should do when you get paid. Although this may seem like a lot of freedom, for some people, it is hard to prioritize these critical parts of their finances, and this budgeting method helps with that. 

  • Zero Sum Budgeting

With this budgeting method, you will have to allocate all your income until you hit zero. This doesn’t mean spending all your money; it means taking that extra after necessary expenses and making good use of it. This method will force you to prioritize leftover funds into something beneficial like savings or paying off debt—which many people have trouble with. 

  • The “No” Budget

Another popular budget is the “no” budget. With the “no” budget, you will have to automate your necessary expenses. For example, you would automate your savings and all minor and significant bills (rent, utilities, car payments, phone bills, installment loans options, credit cards, subscription services, etc.). And then, once that money is allocated, you can use the remaining funds however you like. This can be a great budget if you want to have a hands-off approach!

  • The Envelope Method

The envelope method involves labeling actual or digital envelopes into different categories, setting limits, and allocating your income based on those. Once that money in the envelope runs out, that is it for the month. It will be up to you how much you want to add to each category, but it will be helpful if you have a goal in mind. Examples of categories include rent/mortgage payments, debt payments, groceries, savings, fun expenses, etc. 

Creating An Emergency Savings/Emergency Fund

An emergency fund is an essential part of any financial plan. Creating an adequate savings fund—ideally a minimum to cover three months of expenses—will be crucial to financial success; especially in case your income changes or an unexpected expense comes up. Starting savings is pretty easy; all you have to do is take some money out of your income and allocate it into a savings account. You can add as much as possible, but if you don’t already have the minimum amount that many experts advise, you may want to prioritize savings! 

Retirement Savings

Although most retirement accounts are technically investment accounts, they also overlap with savings because you will need to put money aside actively to get the best use out of it. Many employers offer their employees a 401k plan in which they may match deposits up to a certain percentage and amount. Roth IRAs are individual retirement accounts you can set up independently.


Investing can be a great source of passive income. Essentially it is letting your money earn on itself. There are kinds of investments out there; a few include real estate, bonds, CDs, stocks, and bonds. Some investments are riskier than others, but sometimes those risks can pay more than safer ventures. 

Wealth Management

Wealth management is keeping track of where all your money is (different investments and savings) and trying your best to optimize it via strategic accounts and actions. 

Your Investment Portfolio

Your investment portfolio is made up of the different types of investment and savings accounts you have; it goes hand in hand with wealth management. 


Spending may seem like the most straightforward category of financial planning, but it covers more than just what you actively spend: 


Spending goes hand in hand with income because how often you get paid and how much income you have will determine what kinds of ventures you can pursue. Tracking your monthly cash flow is a good place to start. 

Loans, Credit Cards, and Other Debts

Another thing that can be categorized under spending is any debt, including loans, credit cards, etc. According to the credit reporting agency, Experian, the average American has a debt balance of $101,915.1 

When you borrow money, the original amount won’t be the only thing you’ll be responsible for paying back; you will also have to pay interest—which you probably already know if you’ve taken out any loan before. Personal financial planning will definitely take into consideration debt and will probably include some type of debt management plan.  

Financial Health

Your financial health is a crucial part of your life and can help with financial security. For many people, improving poor financial health or maintaining a positive state will be a part of their financial plan. Financial health can cover things like credit scores, credit history, credit utilization, debt-to-income ratio, etc. Here is more information on some of the topics that will fall under financial health:

Your Credit Score and Credit History

Your credit score provides a quick snapshot of your financial habits, including your payment history on different debts, how much credit you use, the type of credit accounts you have, and more. Credit history is a more detailed view of this information, which you can access via your free credit reports. Having positive credit will be extremely helpful with finances and beyond that as well. 

Your Credit Utilization

Your credit utilization compares the amount of credit available vs. the amount of debt. A credit utilization percentage under 30% may be extremely helpful with your score and general financial health. 

Your Debt-to-Income Ratio

Your debt-to-income ratio measures the amount of income you have vs. the amount of debt you have. Most experts recommend keeping your debt-to-income ratio below 36%. 

Why Is It Important To Have a Financial Plan?

There are several reasons why it is important to have a financial plan to take control of your personal finances; here are a few: 

It Can Help You Reach Your Short-term or Long-term Financial Goals 

Almost everyone has financial goals and they are important, even if you don’t actively think about them as such. For example, wanting to buy a car requires saving money, paying for it upfront, or financing it, which all deal with finances. No matter what your financial goals are, saving, taking a vacation, retiring early, having a dream wedding, or buying a house, a lot of the time, these goals won’t be accomplished without a plan in place. 

Personal Financial Management Can Help Your Financial Future

You will rarely find a personal financial plan without tackling a savings plan. And so another way that planning can help you is it can assist you in the immediate future if your income changes or if an unexpected expense pops up. With adequate savings, you don’t have to worry about falling behind on bills, which can destroy your credit and really derail your life. And you don’t have to worry about taking on high-interest debt like credit card debt or payday loans. Along with adding security to your immediate future, financial planning can help you build savings for later in life.   

Financial Planning Process Can Help You Build Wealth

Another important thing that the process of financial planning can help with is building wealth. With the right savings and investing, you could really work on a plan to grow your net worth through income that you already have. 

Getting Professional Help for Personal Financial Planning

Coming up with a financial plan on your own can be difficult and overwhelming. The good news is that there are professionals you can pay to help you and tons of resources you can look into. Here are some places you can find help with a financial plan:

Personal Financial Advisors

Financial advisors, also called financial planners, are professionals that can help with managing personal finance. They can help you with every part of personal financial planning and develop a comprehensive plan for saving, investing, and spending. Some advisors may focus on specific areas of specialization, so consider that before booking an appointment with one. Along with the basics of financial planning, here are some areas of specialization you may find: 

  • Risk management 
  • Step-by-step guide for money management
  • Financial markets 
  • Cash flow management
  • Investments
  • Retirement planning
  • Tax plans
  • Wealth management
  • Personal finance education

Financial Literacy Through Personal Finance Classes

If you want a more visual or hands-on approach to personal financial planning, you can look into classes or workshops. Sometimes you may be able to find classes for free; start your search online! Overall a class can be a fun way to learn more about financial planning. 

Online Blogs

There are all kinds of online resources that can help you create your ideal financial plan. Look at blog posts from your favorite financial websites. 

CreditNinja has our own blog that covers several topics about financial planning and financial literacy in general! 

How To Start Your Financial Planning Process 

When starting your personal financial plan, ask yourself questions like: 

  • How much debt do I currently have and what are my monthly expenses? – Figure out what kind of financial responsibilities you are currently responsible for. Include debts like cash advance loans, no credit check loans, and credit card balances. Also, calculate all other recurring monthly expenses like rent, utilities, groceries, and other bills. According to the Federal Reserve Bank of New York, the amount of total household debt for Americans has reached a high of $17.06 trillion dollars.2 

Knowing what expenses you are currently responsible for will help you determine how much extra money from your income you have to put towards your financial plans and goals. 

  • What are the interest rates on my current debts? – Interest rates are one of the most costly elements of any kind of loan. It’s essential to be familiar with the interest rate on all your loans to accurately calculate the total cost of borrowing. 
  • What is my current income? – Depending on your financial situation, your income may not be just the paycheck you receive from your employer. If you have any investments, side businesses, etc. those streams of income count towards how much money you bring in on a regular basis. Knowing exactly how much money you make weekly or monthly (depending on how often you get paid) will help you determine exactly how much income you are working with when it comes to paying your current expenses and saving for the future. 
  • What are my long-term financial goals? – Think about where you want to be financially in five years or so. Do you want to have a certain amount of loans/debt paid off? Do you want to save up for a big purchase like a down payment for a house or a car? Figure out how much it will cost to reach these goals and then set a plan based on your current income and expenses to figure out how long it will take you to reach your goals. Setting long-term financial goals for the future can help you prioritize how you spend your money now. If you know you are saving up for a house in a few years, you may rethink potentially draining spending habits like eating out regularly or keeping subscription services you don’t really use on a regular basis. 
  • What is my current credit score? – Knowing your current credit score is important if you want to be familiar with your overall financial health. If your credit score is on the lower side you will want to work towards improving it. You can find out your current credit score by viewing a credit report from any one of the three major credit bureaus. You can also get a copy of your unofficial credit report through most banks and credit card companies. 
  • Do you have any employer-sponsored retirement savings plans? – Many employers offer 401k plans, which are essentially retirement savings plans. The purpose of a 401k is to provide money for someone to use after they are retired/no longer working. Depending on your age, funds from your 401k may play a major role in your current financial plan and retirement planning. 
  • How much money do you have saved? – Your current savings includes how much money you have stored away in a savings account, as well as any other stocks, bonds, etc. You can use money from your savings to pay off loans or cover financial emergencies. That way, you don’t have to use money from your recurring income to cover those expenses. 

Other Elements to Consider When Developing a Personal Finance Plan 

Emergency FundMoney set aside for unexpected expenses or financial emergencies. – Aim for 3 to 6 months worth of living expenses. – Keep it in a liquid account, like a savings account. 
Debt Repayment Strategies to pay off debts effectively. – Focus on high-interest debts, like credit card debt.- Consider debt consolidation options. 
Retirement Accounts Types of accounts used for saving for retirement. – Consider 401k, IRA, Roth IRA.- Take advantage of employer matches, if available.  
Insurance Planning Ensuring adequate insurance coverage beyond just health insurance. – Consider life, disability, and long-term care insurance. 
Estate Planning Planning for the distribution of assets in case of death. – Consider creating a will or trust. – Review beneficiary designations. 
Education Planning Saving and planning for education expenses. – Consider 529 plans of education savings accounts (ESAs). 
Investment Diversification Spreading investments across various asset classes. – Consider a mix of stocks, bonds, and other investments. 
Tax-Advantaged Accounts Accounts that offer tax benefits. – Consider HSA or FSA for healthcare expenses. 
Credit Score Management Managing and improving your credit score. – Regularly check your credit report. – Pay bills on time and manage credit utilization. 
Disclaimer: The information provided in the chart above is for general informational purposes only and should not be considered as financial advice. Individual financial needs and circumstances vary, and as such, it is advisable to consult with a professional financial advisor or planner who can provide guidance tailored to your specific financial situation. The tips and considerations mentioned in the chart are suggestions and not exhaustive or universally applicable. Always conduct thorough research and consider your financial condition and goals before making any financial decisions.

FAQ: Creating Your Financial Plan

Who is most likely to need a personal financial plan? 

Individuals who aim to optimize their financial situation, manage their spending habits, and enhance their savings strategy are most likely to need a personal financial plan. This includes people who want to manage their bank accounts efficiently, save money, and make informed decisions about their financial assets and discretionary expenses.

Where should I focus my attention when starting a personal financial plan? 

When starting a personal financial plan, focus your attention on understanding your comprehensive financial situation. This involves evaluating your financial assets, managing expenses, and analyzing your spending habits. Utilize financial tools that can help in organizing your financial life, such as budgeting apps that track your bank account and credit card balances.

What are the steps involved in a personal financial plan? 

The steps involved in a personal financial plan include:
– Tax Planning: Understanding your tax withholding allowances and leveraging strategies to optimize taxes.
– Assessment: Evaluating your financial assets, including bank accounts, mutual funds, and other investments.
– Budgeting: Managing expenses by categorizing them into essential and discretionary expenses, and analyzing spending habits.
– Savings and Investment: Developing a savings strategy, seeking investment advice, and choosing investment options based on risk tolerance, such as mutual funds.
Insurance: Considering health insurance and other essential insurances as part of risk management.

Who should be involved in your personal financial plan? 

You should involve financial advisors who offer investment advice, tax planning experts, and insurance agents in your personal financial plan. These professionals can provide comprehensive financial tools and strategies to enhance your financial life, helping you manage bank accounts, credit card balances, and investments like mutual funds effectively.

What information is needed for a personal financial plan? 

Information such as your monthly income, spending habits, financial assets, bank account details, credit card balances, and details about discretionary expenses is essential for a personal financial plan. Knowledge about your risk tolerance is also crucial for investment advice and choosing appropriate financial tools.

How much money do you need to retire? 

To determine how much money you need to retire, consider your expected living expenses, including health insurance, and discretionary expenses. A comprehensive financial plan can help in calculating the necessary savings, considering your financial assets and expected free money or passive income.

How much money do you need to live comfortably? 

The money needed to live comfortably varies based on individual spending habits, discretionary expenses, and the cost of living in a particular area. A well-structured personal financial plan can help in managing expenses and ensuring that enough money is saved and invested to maintain a comfortable lifestyle.

What are your tax withholding allowances? 

Your tax withholding allowances depend on your financial situation, including your income, financial assets, and eligible deductions. Proper tax planning is essential to optimize these allowances, ensuring that you don’t overpay or underpay taxes.

What are the goals of a personal finance plan? 

The goals of a personal finance plan include saving money, managing expenses, optimizing tax planning, and building financial assets through various avenues like mutual funds. It also aims to ensure that you have adequate health insurance and a robust savings strategy to meet future needs, including retirement.

CreditNinja’s Thoughts on Personal Financial Planning 

It’s never too early to start planning and saving for the future. CreditNinja encourages everyone to create a budget and plan expenses to make handling your finances as manageable as it can be. 

You can also check out other financial tools to help with your financial planning in the CreditNinja blog dojo. There you’ll find articles, debt calculators, and other resources you can access any time for free! 

1. Average Consumer Debt Levels Increase in 2022 | Experian
2. Household Debt and Credit Report | FEDERAL RESERVE BANK of NEW YORK
3. What’s a Good Debt-to-Income Ratio & How Do You Calculate It? |

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