Real talk: Financial freedom requires self-discipline and robust planning. Your financial stability and goals hinge on a personal finance plan that outlines your income, expenses, savings, and investment goals to help you make informed decisions about how to best use your money. As the foundation of your financial freedom, your personal finance plan can be implemented, or updated, at any life stage.
To learn more about creating a solid personal finance plan, we caught up with finance expert Deevana Palazzalo, a Private Bank Managing Director at J.P. Morgan.
“No matter where you are in your wealth building journey, there are building blocks that I advise all my clients to have in place,” says Deevana. She advises that you start with a roadmap for your goals. “The exercise of putting this infrastructure in place lays a solid foundation for further planning that can become more complex as your wealth grows.”
To get you started on your path toward financial wellness, here are eight steps to creating a solid personal finance plan:
1. Assess your current financial situation and set goals
Start with simply gathering information. Assessing your current financial situation, including your income, expenses, debt, and savings, lets you get a clear picture of your current financial situation. Tools like a budget spreadsheet or a financial app can help you track your spending to trace your habits.
Once you have a clear understanding of your financial situation, you can start setting goals for yourself. It’s important to set specific, measurable, and achievable goals that align with your values and priorities.
“Before my team and I embark on investing a single dollar on behalf of our clients, we spend a lot of time understanding our clients’ financial objectives over the short-, medium- and long-term,” Deevana explains. “For example, some money can be set aside for day-to-day living expenses (short-term), a rainy day fund (medium-term) and some dollars may be for long-term investing — think retirement accounts like 401(k) or IRAs and gifting or opportunistic investments.”
2. Get your documents in order
A will, healthcare proxy, Power of Attorney, and beneficiary designations on retirement accounts like 401(k)s and IRAs are few basic financial documents that will help you create a solid finance plan for any and all circumstances.
A will outlines your wishes for how your wealth is passed on and memorialized. “This is particularly important if you have a family and/or charitable organizations to whom you want to bequeath your wealth,” Deevana explains. “A healthcare proxy and Power of Attorney (POA) can designate financial and health-related decision making to a person who will act on your behalf in the case you are mentally or physically unable,” she says. “Last, wealth in retirement accounts can build up significantly over time and it’s important that your beneficiaries reflect your spouse, children or others in a manner that is consistent with your wishes.”
“Find ways to save money on essential expenses, like optimizing your cable or internet bill — do you really need all the add-ons, or will basic service suffice?” – Nancy Twine
3. Create a budget
A budget is simply a guideline for how you’ll spend and save your money. Your budget should include your income and expenses — both fixed expenses, like rent and utilities, and variable expenses, like food and entertainment.
Keep in mind, a budget isn’t meant to limit your spending, but rather to help you make informed decisions about how to best use your money. The caveat? The most important part of a budget isn’t creating it, but your ability to stick to it. Sticking to a budget requires discipline, which can be more easily achieved if you create an expense buffer to allow for unforeseen expenses.
4. Reduce expenses
One of the most effective ways to improve your financial situation is to reduce your expenses. We know it’s easier said than done, but being intentional about how you’re spending and cutting out unnecessary expenses can make a real difference to your bottom line.
Reducing your expenses makes sticking to a budget a lot more practical. The best place to start is to identify the “nice-to-haves” in your day-to-day spending. These show up as things like subscriptions, daily lunch and coffee orders (as opposed to preparing at-home some days for less cost), and shopping just because something is on sale. Another strategy for spending less and saving more? Find ways to save money on essential expenses, like optimizing your cable or internet bill — do you really need all the add-ons, or will basic service suffice? Or when you need to buy something new, do a quick internet search for discount codes to save some cash or shop through a service, like Rakuten, where you can earn cash back on your shopping.
5. Increase your income
Increasing your income doesn’t always mean packing in overtime hours at work or working a second job. Turning your weekend hobby into a profitable side business can be a meaningful way to increase your income while doing something you’re passionate about. This could mean turning your knowledge into tutoring or turning your love for fitness into certified personal training.
Another great way to build your wealth? Generating passive income. Passive income allows you to make money with little to no effort. Investing in assets like rental properties, affiliate marketing, or creating no-to-low cost items that sell online are a few ways to make money while you sleep.
6. Build an emergency fund
The past few years have shown us that the unexpected can happen. An emergency fund is simply a savings account dedicated to unforeseen expenses that crop up, from a car repair to medical bills. Having an emergency fund can help you avoid going into debt (and panic) when unexpected expenses arise. It’s recommended to save enough to cover three to six months of living expenses.
“There are many types of investments — stocks, bonds, real estate, and more. It’s important to research and find investments that align with your risk tolerance and financial goals.” – Nancy Twine
7. Invest for the future
Investing is one of the most effective ways to build wealth over time. There are many types of investments — stocks, bonds, real estate, and more. It’s important to research and find investments that align with your risk tolerance and financial goals. Ellevest is a great resource to help you get started with learning the basics of investing and creating an investment account.
8. Review and adjust your plan regularly
Your personal finance plan is a living, breathing document. You should review and adjust it accordingly as your income, expenses, and goals change. Reviewing your plan regularly (i.e. weekly, monthly, or quarterly) will help you stay on track with achieving your financial goals.
Your plan should be unique and a reflection of your individual goals. “No two clients are alike. As one’s wealth grows, these objectives may change. This framework of objective setting over time lends itself to being flexible and adjusted to meet a changing [situation],” Deevana says.
Creating a personal finance plan takes time and effort, but it’s worth it (and essential) in the long run. Be patient and persistent — and don’t be afraid to ask for help if you need it! A financial advisor or a financial coach can be a valued resource in helping you create and implement a personal finance plan that works for you.
What’s your approach to creating a personal finance plan? We’d love for you to share your tips and perspective with our community.
