Six tips for creating and following a financial plan
By Mindy Charski
Will you have enough money to achieve the financial goals that are important to you? It can be an overwhelming question, but writing out a financial plan can make it less daunting and set you on a path for success.
Certified financial planner Nancy Coutu likens a financial plan to preparations you would make for a cross-country road trip. In addition to short-term goals like how far you’ll drive each day, you’d consider the money you’ll need for food, gas, and lodging.
“You need a lot of data and you need to take baby steps to accomplish a big goal,” says the co-founder of the registered investment advisory Money Managers Advisory in Oak Brook, Illinois. “A financial plan is the same exact thing. Someone might say, ‘I’m 45, and I want to retire when I’m 65.’ So what do you need to do between where you’re at today and where you’d like to be to make sure you can accomplish this goal? You start with, typically, a written plan.”
You won’t be able to plan perfectly—the future is filled with infinite variables, and you’ll tweak the plan along the way—but a well-researched strategy on paper can be not only useful, but also crucially revealing.
“You can see the outcome 30 years in advance of what you’re doing today. Is it a good outcome or a bad outcome?” Coutu says. “You can see it so that you can make changes before you make mistakes.”
So how do you create a financial plan and stick with it? Here are some tips.
Identify your objectives
“Be crystal clear on the goals you want to achieve—and when you want to achieve them,” says Mary Wheeler, financial coach at Abundant Wealth Solutions in Houston. “That creates a strong foundation for the long journey ahead.” Some goals may be short-term, like paying for a wedding or establishing a healthy emergency fund, and others will have a longer time horizon.
Being as detailed as possible is important so you can understand the resources you’ll need to reach your goal, Coutu says. Take retirement: it’s not enough to say you want to save for it; you need to narrow down what that retirement looks like.
Coutu has clients who wish to maintain their same lifestyle after they stop working and others who want to change things up. Some may seek to move to a different part of the country and live in a smaller home, for instance. Some may plan to travel more. These desires have financial ramifications that need to be considered in addition to inflation.
Online calculators can help you get an idea of what you’ll need to save for specific goals. A number of tools are available on Bankrate.com, for instance, including calculators for retirement, college savings, and auto loans.
Create a budget
It’s important to have a good understanding of your current financial situation.
In addition to considering your savings, you need to evaluate your current budget, which is a snapshot of all your income and where you’re allocating your money.
“[Clients] need to know based on what they’re doing today if they’re actually going to make [their goal] or not,” Coutu says. “If they’re not going to make it, what types of things are they willing to change to make this goal a reality?”
That could mean diverting more money to savings, for instance, or cutting back on expenditures.
Coutu likes the idea of keeping a journal for three to six months of everything you buy. Carefully tracking spending can help you find trouble spots. “When people see what they’re spending and wasting, that is motivation to change their ways,” she says.
Personal finance apps such as Mint and EveryDollar can help you identify where your money is going.
Find the right investment vehicles
You may be saving a significant amount but not putting the funds to work as well as you should. Though your money will earn interest in savings accounts, for example, you’ll likely need to find a more growth-oriented approach to earn enough to pay for college, Coutu says.
“You have to take on more risk and put funds in an investment that has the potential to grow, which usually means the stock market,” she says. “Over an 18-year period, if you put funds in a moderate growth mutual fund that’s fluctuating and you’re systematically adding, you have a very strong possibility you’re going to average 6 to 8 percent a year.”
The time span you have to invest is crucial, which is another reason planning is so important. “A person should never venture into anything related to the stock market, whether it be individual stocks, mutual funds, a 401(k) even, unless they have five-plus years because of the volatility of the market,” Coutu says.
Squash your debt
Paying down the money you owe to credit card companies and other lenders is a good goal in itself, and it can also help you boost your credit score and achieve other aspirations.
“It’s hard to see your financial future if you have a mountain of debt blocking your view,” Wheeler says. “Before you can even begin to build wealth, you need to eliminate what’s holding you back.”
Develop financial habits that work for you
Consider the options that will best help you stay disciplined with your finances.
Wheeler, for instance, only uses cash, which she says helps her hold herself more accountable. “I’ve had the credit card, and the debt was out of control,” she says. “Because I don’t have credit cards now, I have financial peace, and that helps building for my future as well.”
Embracing the power of automation could prove useful. You may be able to have a portion of your paycheck directly deposited into a savings account, for instance. You can also schedule regular transfers from your checking account into your brokerage account. This autopilot approach will save you time and mental energy and eliminates the temptation to spend the funds.
“I was very surprised when I started setting up automatic allotments to move money over—it’s almost like something you just set and forget,” says Lacey Manning, chief executive officer and owner of the insurance and financial agency LTG Financial in Ocala, Florida. “If you’re not actually going through the motions to do it, it just gets done.”
Find someone to help you
A financial planner and financial coach can be invaluable. Wheeler also sees a role for a friend or family member to serve as an “accountability partner” to help you stay on track with your monthly goals.
“It’s so easy to lose motivation and to be mentally drained, especially when you’re trying to cover everyday expenses as well as build your financial future,” Wheeler says. “If you know you have to check in, you’re going to make sure you’re doing the right thing. Maybe you won’t get the Starbucks.” DW
Mindy Charski (@mindycharski) is a Dallas-based freelancer who specializes in business journalism.