Personal Finance Planning Process | Step-by-step Guide (2024)

Personal finance management is key to reaching your financial goals. It involves detailed planning early on, much like choosing the ideal route for your trip.

Imagine you are traveling by road from Chicago to Los Angeles and you want to pick the fastest route. Prior to setting off on your trip, calculate the travel time from all conceivable directions, and the quantity of fuel needed.

Without careful personal financial planning, it’s highly unlikely that you’ll be able to meet your intended financial goals and objectives.

Different things might have an impact on a person’s personal goals and ambitions. For instance, some people may want to travel and buy luxury automobiles in the future, while others may only want to save enough money for retirement so they can spend the remainder of their lives worry-free.

What is Personal Financial Planning?

Personal financial planning refers to the process of organizing and controlling one’s own financial actions, including earning money, spending it, saving money, making investments, and purchasing insurance.

A financial plan or budget can serve as a summary of the process of managing one’s own finances. The frequent and significant facets of personal financial management will be examined in this guide.

What are the 5 Areas of Personal Finance?

Personal finance is primarily concerned with income, spending, saving, investing, and protection.

#1. Income

Income is a source of money that a person receives and utilizes to provide for themselves and their family. It serves as the foundation for our financial planning procedure.

These are typical sources of income:

• Salaries
• Bonuses
• Hourly pay
• Pensions
• Dividends

These revenue streams all result in money that a person can utilize for investing, saving, or spending. The first phase of our personal financial roadmap might be thought of as income.

#2. Spending

All costs incurred by a person to purchase products, services, or anything consumable are considered spending (i.e., not an investment). There are two types of expenditures: cash (paid for with cash on hand) and credit (paid for by borrowing the money). The majority of people spend the majority of their income.

Typical sources of spending include:

• Rent
• Mortgage obligations
• Taxes
• Food
• Entertainment
• Travel
• Paying with a credit card

The amount of money a person has available for saving and investing is all but eliminated by the expenses mentioned above. An individual has a deficit if their spending outweighs their income. In general, people have more control over their discretionary costs than their income, making cost control equally as crucial as income generation.

For effective personal financial management, one needs to have appropriate spending habits.

#3. Savings

Savings are surplus funds set aside for upcoming purchases or investments. If a person has more money than they need and less than they spend, the extra can go toward investments or savings. Savings management is a crucial component of personal finance.

Typical methods of saving include:

• Physical money
• Savings bank account
• Looking up a bank account
• Money market instruments

To manage their financial flow and the short-term disparity between their income and expenses, the majority of people hold at least some savings. However, as savings provide little to no return in comparison to investments, having excessive amounts of savings might actually be considered a negative.

#4. Investing

Buying assets with a projected rate of return on them is what is meant by investing. The goal is to eventually get back more money than you put in. Investments are risky, and not all investments actually end up earning a profit. Here is where the correlation between risk and return may be seen.

Typical forms of investment include:

• Stocks
• Bonds
• Mutual funds
• Real estate
• Private businesses
• Commodities
• Art

The most complex aspect of personal finance is investing. It is also one of the topics on which people seek expert assistance most frequently. The risk and rewards of various investments vary greatly, and most people look for assistance with this aspect of their financial strategy.

Protection

Personal protection refers to a broad range of items that can be utilized to prevent an unanticipated and unfavorable incident.

• Common protective gear includes:
• Life insurance
• Health coverage
• Estate planning

Another area of personal finance that tends to attract professional counsel and can be rather complex is this one. To accurately determine a person’s insurance and estate planning needs, a variety of analyses must be performed.

Learn How To Make Money From Property

Importance of Personal Finance Planning

By giving you the freedom to attain your financial objectives, personal finance enables you to take control of the situation. By using sound financial judgment, it enables you to maximize the use of your revenue.

Here are a few of the advantages that make personal finance an important part of daily life. There are many advantages to personal finance, and listing the endless list would be exhausting.

Helps in Budgeting – The Balance of Expenditure and Savings from Income

Even if you may be earning an amount each month that is more than enough to sustain your quality of living, you still might run into financial difficulties before the month is out. Someone making less money than you might be leading a financially stable existence, and the reason for this would be budgeting.

You may save more money and attain long-term financial stability by managing your spending according to your needs, saving money according to your financial objectives, staying within your budget, and organizing your taxes.

Helps build financial security – Save your money and your money will save you

Planning your finances allows you to maximize the amount you can save to create a financial security net for your requirements in the future.

Building on your financial stability and acting as a safety net for you and your family, risk management through insurance, having the correct investment strategy based on financial objectives, and providing liquidity as part of emergency reserves.

Helps in avoiding unmanageable debt – Adjusting your lifestyle

Spending more than you make might result from overspending, impulsive purchases, and spending money on things that are unneeded. Your financial security may also be affected if your way of life involves borrowing money and using all of your credit card limits. If this is the case, you run the risk of getting into massive debt.

By keeping an eye on your income and expenses and adjusting your lifestyle in accordance with your income, personal finance can help you avoid this.

Helps in raising Standard of Living – Cushion for tough times

Having a financial plan in place encourages you to save more, which leaves you with more money to invest. Increased savings and the growth of those savings boost your net worth and improve your ability to handle financial hardships and demands.

Allows to manage to achieve financial goals – Measure of your progress

The purpose of saving is to develop it for attaining your financial goals in a disciplined way, and budgeting, establishing financial security, and controlling debts allow you to do this to the fullest extent possible.

Monitor your discipline and progress by regularly comparing your actual saves to your intended amount, paying off debt, building up surplus reserves, and other similar actions.

Multiple pots of savings

Personal finance can be compared to how you organize your clothes in different stacks so that it is easier for you to find a piece of clothing whenever you need one. For example, if you have a lot of clothes but a small closet, your financial goal can be compared to getting all of your clothes neatly organized in the closet.

We kept a piggy bank for money savings even when we were little. The only thing that has changed is that we now have multiple goals, and trying to save money for all of them in one location can make it difficult to keep track of them all.

The Jam Jar approach, which divides your money into many pots for different expenses, might be utilized as an alternative. By using this approach, you can be sure that your costs are paid for and that your money is going in the direction you intended.

The pot of saves has less to do with crunching numbers on a spreadsheet and more to do with keeping money separate, having a clear image of where it is going, and reaping the rewards of following the rules.

Track and measure your progress

The ability to track your progress and plan future contributions based on the time needed to complete each goal is made possible by having numerous goal-based investments or savings accounts for each objective. Setting priorities for your goals makes them more manageable, and contributions can be rearranged in response to evolving needs and conditions.

A disciplined and systematic approach

Keeping all of your money in one area can make it easier to succumb to temptation and spend more money than necessary. Having multiple savings accounts enables you to withstand these temptations and adopt a disciplined and organized approach to saving for a goal.

Creating multiple pots of savings easily

With the advent of internet banking and investment platforms, it is now simple to set up multiple pots for investments in mutual funds, fixed deposits, provident funds, savings accounts, and other types of investments depending on the purpose.

Personal Finance Planning Process: Step-by-step Guide

Your current and future standard of living will be influenced by the right investment strategy and wise financial counsel. The process of creating a financial strategy and implementing personal money management has six steps.

A licensed financial planner professional walks you through the entire financial planning process while taking into account your present financial condition and economic history.

• Identify your financial situation
• Determine financial goals
• Identify alternatives to Investment
• Evaluate alternatives
• Put together a financial plan and implement
• Review, re-evaluate and monitor the plan

#1. Identify your financial situation

The evaluation of your current circ*mstances and options for improving your financial condition is the first stage in the personal financial planning process. The main areas to consider are:

Household budgeting

This is crucial because it allows you to determine how much money you have left over after subtracting your monthly housing expenses to save or invest.

Family commitment and living expenses

Do you have a spouse? Do you have any kids? What are the costs of their lifestyle and way of life?

Tax standing and strategies

How do you handle filing taxes? Do you work or reside abroad?

Current investments or saving reserves

How much debt or savings do you currently have?

Other financial obligations

These can include some ancillary expenses you’re budgeting for in the future, like:

• Getting married or buying a house
• Reserves for unexpected expenses such as household disasters
• A reserve of money for your family in case something happens to you or your career
• Are you about to enter retirement?

This step provides a solid foundation for creating your plan and a useful starting point for achieving both your short- and long-term financial objectives.

#2. Determine financial goals

According to experts, your chances of success are highest when you have identified your goals. Financial planning includes highlighting the financial objectives as a key component. The following objectives might be included, depending on the stage of life you are in:

• To start a family, get married.
• Invest in real estate or pay it off
• Ensure that your kids receive a top-notch education.
• Prepare your investments and reserves for taxes.
• The ability to enjoy life after retirement by retiring with adequate money.

Distinguishing between your necessities and wants is the only goal of this step. Other than this, the goals or objectives could be anything from investing your entire income to creating a long-term investment strategy for future financial security. Choosing which objectives to pursue, though, is a necessity.

#3.Identify alternatives to investment

The next step is the investment choices or specific recommendations from your financial advisor, which comes after a full assessment of your financial circ*mstances and the establishment of the necessary financial goals.

An integrated investment strategy would be created based on your predetermined criteria by carefully considering your short, medium, and long term goals. Additionally, the goals will be reviewed once again, and your progress toward meeting your short- and long-term financial objectives will be evaluated.

A variety of concepts and financial planning options would be provided to you so that you can choose the one that best meets your timeframe, cash flow, risk tolerance, current insurance coverage, tax strategies, and investment goals. This will enable you to make more sensible judgments that you are happy with.

#4. Evaluate alternatives

The suggested changes are then evaluated once more. This is your chance to directly debate the possibilities and take the appropriate steps while keeping in mind your current circ*mstances, financial status, and personal interests.

You can change and update your financial planner’s advice if you have any reservations about it. Depending on your choices, alternatives may be eliminated. Consider this:

Continued schooling is a sign that you are unable to work a full-time job. Decreased opportunities as a result of your decisions should always be kept in mind while weighing your options because decision-making is a continuous process that interacts with both your personal and financial condition.

Risk evaluation

You can develop unsure ideas when weighing your possibilities. Consider the risk involved in choosing your career over your studies. How can you be sure it will be profitable in the long run?

Other financial choices carry a relatively low risk, such as putting your money in a savings account or using it to buy something priceless. In such circ*mstances, the likelihood of losing the object is low.

Therefore, it might be difficult to identify risks and assess them when making financial decisions. You must gather information based on both your own and other people’s experiences. You will need to regularly update your knowledge of politics, economics, and society in order to make educated decisions.

#5. Put together a financial plan and implement

The strategy would be implemented after you were satisfied with the suggestions and felt confident moving forward. This stage of financial planning can be thought of as an action plan where you choose how to reach your short-term, immediate, or long-term objectives. is frequently regarded as the hardest step for some, but it has a significant long-term impact.

The most important thing to remember in this situation is to act as soon as you can. The longer it is neglected, the longer it will take you to build wealth, which will ultimately result in a significant shortfall in your retirement funds.

#6. Review, re-evaluate and monitor the plan

It’s improbable that your financial situation will remain the same throughout your life because financial planning is a continuous and dynamic activity. You must periodically evaluate your financial choices because they will need to be adjusted to match your new circ*mstances as a result of shifting personal, economic, and social factors.

Your financial needs will change as you move through the many stages of life, and the financial process will be a tool to help you adapt. You can prioritize your choices and make the necessary corrections by keeping an eye on your plans. This will help you align your financial needs and goals with your current situation.

Personal Finance Plan Template

Using a template is always simpler and more efficient than starting from scratch when creating a financial plan.

To assist you in creating a financial plan, there are numerous personal financial planning template options accessible. Simply input the information in the appropriate fields. Depending on the data you have, you can also add, amend, or remove fields.

These financial plan examples are a wonderful place to start even if you don’t want to utilize templates because they show you what actual plans look like and what particular funds you need to put in the document.

Here are some sample templates for personal financial planning:

A straightforward form is provided by Daily Successful Living so you may figure out your net worth.

To do this, sum up all of your assets, then deduct all of your liabilities.

You can then move on to creating some personal goals after estimating your net worth.

You can construct a brief personal finance plan using the free financial plan template provided by Smartsheet.

Use it to determine your present financial condition, develop a plan to achieve your objectives, and monitor your progress.

If necessary, you might also include information on life insurance or estate planning.

Financial Planning for Beginners

For those who are just beginning their personal financial planning, keep the following items in mind:

Budgeting

You must first comprehend the significance and necessity of a budget. As without making a statement, you would not be able to track where your money is going. No of how much money you make, you absolutely must create a budget.

A spending plan acts as a guide for how and where to use your money. The benefit of creating a budget is that it allows you to see how much money is coming in and going out each month. You’ll be able to handle your money more wisely if you’ve created a thorough and accurate budget.

With a spending plan, you can more accurately assess your financial situation because it forces you to consider your other expenditures if you find that you have overspent in one area.

A spreadsheet or other budgeting program can be used to establish a budget; you can also create one on paper or on your laptop. As a beginner, you can try a few of the apps or methods and pick the ideal one for you.

Get paid what you are worth and spend less than you earn

Although many individuals are aware of it, it can be challenging to put into practice. By assessing your abilities, work duties, productivity, market rate, and value to the organization, you should always be aware of the market value of your position.

Your budget and savings could be significantly improved by even $1500 annually. Make sure you are being paid the appropriate amount before joining any organization. The second thing you need to watch out for is never overspending because it can result in debt or overburdening in the months to come.

Don’t forget to make a small cost-cutting effort each month and save some money because doing so will enable you to spend when necessary and grow your savings.

Planning for retirement

Compared to a few years ago, retirement preparation is now much more crucial. Many factors have contributed to people’s increased interest in it. To start, life expectancy has increased and people are living longer than in previous generations.

Second, due to their sedentary lifestyles, people today are more susceptible to conditions like diabetes, hypertension, and heart attacks. Since healthcare is very expensive, you need money to treat any kind of illness.

Thirdly, you need money to deal with any other problems that may arise after retirement. Instead of being a last-minute decision, retirement planning should become your preference.

A 401(K) plan is actually something that many businesses offer; under this, your employer would contribute the same amount to your retirement account as you do, up to a point.

As a result, now is the perfect moment to begin planning for your retirement because the earlier you begin, the wealthier you will be when you do.

Getting out of debt

If you don’t handle your debts well, they may consume a sizable portion of your income. Even after creating a sensible budget and reducing your spending, you would still have an outstanding debt that you needed to pay off.

A vicious debt trap could result from improper planning if you find yourself having to take out new loans in order to pay off your existing debt.

Spend more than the minimum amount due each month as your first course of action. Make a schedule for paying off your debts and keep track of who you owe and how much to.

The most expensive debt should always be paid off first, and you should always strive to use debt as a last resort.

Borrowing money on credit is not always a terrible thing, but if you borrow more than you can afford to pay back, it becomes a problem. Therefore, if you arrange your debt payments carefully, it might prevent you from experiencing these problems.

Have a savings plan

Pay yourself first is the first thing you should do after receiving your paycheck. It is never boring to handle your own finances. You should start your financial planning by setting aside money. One of the most effective paths to financial freedom is through it.

By the end of the month, there are significantly fewer possibilities that you will have anything left in your account if you wait to pay all of your expenses and other debts. Decide to save at least 5 to 10 percent of your income before you begin paying your debts.

Saving money enables you to avoid debt traps. For instance, if you wanted to buy a new car, it would be ideal if you already had some savings rather than borrowing it from a friend or taking out a loan for the full cost.

In fact, it’s critical that you understand as a start that disciplined saving can make you wealthy by enabling you to meet your financial objectives on schedule. The easiest approach to saving is to divide up your finances into many categories, such as costs, EMIs, pay for employees you supervise, savings, etc.

Buy insurance

You should be aware that both life and property are subject to risk. It is crucial to insure it as a result. After you’ve made a budget, examined your spending, and stopped making EMI payments, you should consider one crucial factor: insurance.

Everyone works incredibly hard to build a solid financial foundation for their family, so it needs to be safeguarded. These dangers can result in income loss, putting your family’s financial stability at risk.

If you have the appropriate insurance, you will be protected from any potential financial hardship brought on by accidents and mishaps, which occur and can happen.

Because the return on a life insurance policy is so low, you might choose a term insurance plan that provides high-risk coverage for a low cost. Insurance acts as a protective roof over your head, shielding you from all weather conditions.

Make sure to evaluate pricing and pick the finest option based on your needs before purchasing any policy, like health care, lifetime, for any items, etc.

Invest cash wisely

The first thing you should do when considering investing is to put together a portfolio of investments because this might be the start of your journey to financial security. Investments come after retirement plans and savings, so if you still have money after those two considerations, you should think about investing it.

Asset allocation is the process of dividing up your investments among several asset types, including cash, debt, and equities. Although investing in equity is advised because it offers a strong return, it is not advisable to put all of your money into it.

To reap the highest earnings and returns, make sure your investments are long-term. The investment you make should last for at least 10 years. You should be careful not to take on more risky endeavors as a beginning in this sector. If you want to ensure a profit, always strive to choose investments that have relatively fewer dangers.

Plan your estate

We all have various assets, like a car, a house, gold, money, and other things of the sort. Have you ever considered who would take it on after you pass away? Accept the duty now and give it some thought beforehand. Everyone must be sure to properly transfer these assets to the appropriate person.

It’s incorrect for the majority of financial advisers to believe that this is solely for the wealthy. Every person who does not want to risk leaving their possessions in the wrong hands should engage in estate planning.

Plan ahead of time wherever possible rather than putting it off. Making a list of your assets and the beneficiaries you want to grant this too is extremely simple. You may draft a will that is ideal for the people you love.

This would have the advantage of making it easy for your beneficiaries to inherit your property. If you don’t know how to accomplish this, you can also get in touch with a reputable attorney.

Maintain a personal balance sheet

As this sheet explains your income and expenses clearly, it’s an excellent approach to managing your finances. One of the finest approaches to advance your financial situation is to create two columns for assets and liabilities in this statement. Your net worth can be easily determined by looking at your balance sheet.

Since you are a new employee, it is crucial that you obtain bank statements and other forms of identification before creating the balance sheet. The main items you should list as assets are all of your investments, your bank account balance, the worth of your home, gold, and other priceless possessions.

Add up the price of all your possessions to determine their value. Once you have finished listing your assets, add any outstanding loans, credit card debt, EMIs, and other borrowings to the liabilities column. If the result is positive after deducting obligations from assets, it signifies that you have more money than you owe to other people.

If the result is negative, be sure to make progress toward it by paying off your obligations each month. As a result, the Net value would progressively rise, turning the negative-sum positive.

Plan your taxes

If you don’t keep meticulous records on a regular basis, you might not be claiming all of your tax credits and deductions. Planning your taxes is crucial since it enables you to take advantage of several tax breaks, advantages, and deductions. You could pay less tax in a legal way with its assistance.

But watch out that you don’t engage in tax evasion or avoidance. You can learn about a variety of tax exemptions from Section 80C to 80U of the Income Tax Act.

Making a system and using it continuously throughout the year is one of the finest ways to go about it. It becomes simpler for you because you won’t have to look for everything when filing your taxes; this way, you won’t overlook anything that may have provided you with financial savings.

Expert financial advisors frequently employ equity since it has a short lock-in time compared to other investments and offers tax exemptions.

Best Personal Financial Planners

SoFi Automated Investing

Pros

• No minimum account balance is required, and no administrative costs.
• Setting goals and adjusting your portfolio automatically.
• Other account options are available across the SoFi website.
• For every account, SoFi provides free CFP access.

Cons

• No capturing of tax losses.
• No alternatives for a socially conscious portfolio.

Betterment automated investing

• Pros
• For a regular investment account, there is no minimum.
• Goal-based planning, tax loss harvesting, charity giving, and socially conscious investing are all possibilities.
• Financial planners who are certified to practice.
• App for mobile devices that allows synchronization of external accounts.

Cons

• If you don’t have the premium plan, you’ll need to pay to talk to a live advisor.
• A restricted selection of investments.

Wealthfront

Pros

• Low annual fees for investment accounts; you can invest in cryptocurrency trusts.
• There are options for tax loss harvesting, portfolio lines of credit, and 529 college savings schemes.
• Cash on hand.
• Investing and retirement tools in a mobile app.

Cons

• To use other investment techniques, you must have at least $100,000.
• No access to a human advisor.

Ellevest

Pros

• Automatic investing advice that is personalized and has no minimum investment.
• Discounted access to qualified financial advisers and career counselors is included in monthly plans.
• Rollovers for 401(k)/403(b) and IRA funds are automated.
• Private wealth management for anyone with at least $1 million to invest, including individuals, families, and institutions.

Cons

• There are no active trading opportunities; the majority of the money is placed in stock and bond ETFs.
• Only individual investment accounts may be opened; joint or custody accounts are not permitted.
• No capturing of tax losses.

Blooom Automated Investing

Pros

• 401(k)s and other employer-sponsored plans can be managed automatically and with a personal touch.
• IRA or 401(k) study without cost.
• No minimum balance is required.
• Pricing plans Standard and Unlimited include access to human financial advisors.

Cons

• Only employer-sponsored plans and IRAs are eligible for account management.
• No customer help by phone.

People also search for “What is management in business?“

Conclusion

Not only those with high incomes need financial plans. Anyone can use them to clarify their objectives and develop a strategy for accomplishing them.

You might work strategically toward reaching your life’s objectives if you made a financial plan today.

Where you stand is irrelevant. It’s crucial that you achieve your goals while bolstering your financial stability.

Recommendations

• Yahoo Finance: News, Networth, How They Started, And Api Guide
• Cigna Health Insurance for Small Business
• How To Start An Online Business With No Money
• How Much Is a Car Insurance