A financial plan is a strategy to help people with their savings, spending, and investing. Instead of winging it, as many people do, those who have a financial plan have structure with their money. A financial plan will likely include financial health—which can consist of credit scores/credit history and debt—along with savings, spending, and investing strategies.
Continue reading to learn more about financial plans, what they cover, and how to get started with one.
Different Aspects That a Financial Plan May Cover
Here are some of the aspects that a financial plan will likely cover:
Spending and Monthly Cash Flow
Spending may seem pretty straightforward, but it is more than the amount you spend in relation to your cash flow. This category can include things like the interest you are paying on loans or credit card debt, along with your general spending habits. When it comes to spending, most of the time, it will be helpful to look at things on a monthly schedule because it can help with both short-term and long-term finances.
Savings
The action of saving is putting money aside so you can have the best financial future in case your income changes. Savings can encompass several different financial topics, including but not limited to the following:
- An emergency fund/savings account.
- Retirement accounts.
- Estate plan.
- Financial goals.
Investing and Wealth Management
Investing helps your money grow and is usually done through specialized savings accounts or through other types of investment accounts and products. And so, when learning about investing, you will sometimes see topics that overlap with spending and savings.
Investing can include:
- A retirement plan and accounts.
- High-yield savings accounts.
- Investment products/accounts.
- Wealth management.
- Investment portfolios.
Wealth management can go hand in hand with investments when it comes to your financial/ investment portfolio. Your financial portfolio will include all the different places you have your money. And by managing those accounts, you are managing where your money is kept. Ultimately, you want to optimize investments based on your goals.
Financial Well-Being/ Financial Health
Your financial health covers things like your credit score, credit history, debt-to-income ratio, credit utilization, etc. Your credit score encompasses your credit history and will give whoever checks it a good idea of your financial habits. Your credit history includes all your actions related to borrowing money. A debt-to-income ratio measures how much debt you have compared to your income. And your credit utilization measures the amount of available credit against the amount of debt you have. These are just some of the key indicators of financial health. You may notice that a financial plan may focus on one or more of these aspects when trying to improve a financial situation.
Your credit score will likely be one of the first things you may hear about and likely deal with when it comes to your financial health. Below is more information on that.
What Are the Different Credit Score Ranges?
The most commonly used credit scoring models are a FICO score and a Vantage score; here are what the ranges will look like for them.
FICO Score Ranges:
- 800 to 850: Excellent
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- 300 to 579: Poor
Vantage Score Ranges:
- 781 to 850: Excellent
- 661 to 780: Very Good
- 601-660: Good
- 500-600: Fair
- 300-499: Poor
How Do Credit Scores Impact You?
Your credit scores will impact several aspects of your finances, and they can also impact other parts of your life. Good credit can help you get the best interest rates and access higher loan amounts. Along with that, good credit can mean easily securing places to rent, buying a home sooner, and it may even impact your job prospects.
How Can Someone Go About Improving Their Credit Scores?
There are several things you can do to improve your credit score; here are some tips:
- Make your monthly bills time.
- Get all your payments reported.
- Keep your credit utilization under 30%.
- Pay off your debt.
- Diversify your credit accounts.
These are just some of the things you can do; learn more about improving your credit score on your own to come up with a personalized approach to improving your score.
How To Create a Financial Plan
Everyone’s financial plan will likely be different because not everyone has the same long-term or short-term financial goals. However, there are a few steps that may be similar to most personal financial plans:
Figuring Out Total Income, Expenses, And Net Worth
The first step of the process for many people may be tracking their total income and expenses. When it comes to income, it may be most useful to use pre-taxed income. For expenses, most people know their essential living expenses each month, like rent, utilities, car payment, phone payment, etc. however, they may not be aware of exactly how much they are spending on other things every day, every week, or every month. Knowing both of these things can help establish a good starting point for a financial plan.
Another part of this process may include knowing your net worth, which can help you set goals and like income and expenses; it will be helpful to know about this before starting your financial plan. Your net worth includes your income and all of your assets.
Making the Most of Your Employee Benefits
Many people who are full-time employees may have different employee benefits; some of the most helpful are 401K plans and health insurance coverage. 401ks are retirement savings accounts that employees can contribute to, which the employer may match up to a certain percentage. Health insurance may be paid for completely by your employer and is essential to getting care while avoiding large medical bills. Other benefits may include work-from-home credits, phone benefits, etc. If you aren’t already taking advantage of these, a financial plan may help you take that step of really looking at what benefits you have and start using them.
Researching Specific Financial Accounts/Products
With financial planning, you will quickly realize that a lot of your income will have to be allocated into different accounts, usually for spending, savings, or investing. Here are some examples that really highlight the diversity you’ll find when researching different financial accounts and products:
- High-yield savings account.
- Standard savings.
- CDs.
- Standard bank accounts/checking accounts.
- Bonds.
- Trusts.
- Tax savings investment options.
- Roth IRAs.
- 401Ks.
However, like the average person, you may need to be made aware of the unique kinds of accounts that can help optimize your finances. And so this part of your financial plan has to do with financial education. There are so many different resources online to help you get familiarized with the various financial accounts out there. You can look at online blogs, get some trusted books, or talk to an expert. Knowing about different accounts, their pros, cons, etc., will be essential when trying to develop a financial plan.
Identifying Pain Points and Places for Improvement
Everyone struggles with some parts of their finances, regardless of how much money they make or how high their credit score may be. This is the part of the financial plan that may be the most personalized. At this stage of financial planning, you should really take a look at things like your financial habits, good and bad, account usage, how many times you pull from savings, etc. Once you know what actually needs to be improved on, you can research solutions and add them to your financial plan.
Improving Your Financial Health
As mentioned above, financial health will be a large part of financial planning because even with good financial health, you must be diligent about maintenance. When doing things on your own, it may be helpful to look up different strategies for improvement; the more specific, the better.
Paying Off or Reducing Debt
Most adults have debt; sometimes, it can become unmanageable or simply take away from different opportunities for financial success. And so, for many, taking steps to eliminate debt or reduce debt is usually a part of their overall financial plan. Whether you are tackling high-interest debt like credit card balances, student loans, or any other loan type, all kinds of strategies can help.
Setting Short-Term and Long-Term Goals
Financial goals are so important to have when creating a financial plan. They can help create a direction for your money and help you think about what you want to use it for.
Here are some examples of long-term goals:
- Saving for retirement.
- Increasing your credit score.
- Purchasing an asset like real estate.
- Earning passive income through investments.
Some examples of short-term financial goals include:
- Creating a budget.
- Having a savings goal for a month.
- Emplinating impulse buys.
- Saving for a vacation.
- Saving for a down payment on a large purchase.
Creating a Savings/Emergency Fund
Emergency savings is a huge part of financial stability. If anything unexpected happens and you lose your income, having adequate savings will be a huge help. And so, if you haven’t really paid attention to this part, get ready because this will be essential to every financial plan. With a safety net in place, you can rest assured that you’ll have enough money for a rainy day without having to take out high-interest debt.
Resources for the Financial Planning Process
Coming up with a solid financial plan may be tough on your own. Still, there is expert advice that can really help you sort out your financial life and reach financial security.
Here are some places to start when you need help with financial planning:
Financial Advisors
A financial advisor, also called a financial planner, is an expert who can look at your finances and consider your goals to develop a comprehensive financial plan. Sometimes they can also give you investment advice, tax planning, strategies for reaching financial objectives, estate planning, and more. If you are overwhelmed with the idea of starting the process, an expert can help create a complete financial plan; they will cost you, though.
Online Blogs, Books, and Podcasts
There are sites dedicated to educating people on financial literacy. And many of them have tons of free blogs on several different topics about money management. These blogs can be a great way to learn about the basics of the different spheres of the financial world. At CreditNinja, we have our own financial blog too, which covers everything from loans to retirement planning!
For a more comprehensive look into a topic, find books by trusted authors or podcasts; they may give you unique insight. Chances are your local library has resources you can jump into right away, and many podcasts are free to download and listen to.
Classes and Workshops
For a more hands-on approach to help, you can take classes or workshops. Sometimes you may find free courses or workshops; otherwise, you will have to pay for them. Overall, if you are a hands-on learner, this can be an excellent place to start with the process or learn more about a specific subject.