1. Start by setting financial goals

A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you — whether that’s buying a house or helping you retire early —  you’ll make saving feel more intentional.

Make your financial goals inspirational — what do you want your life to look like in five years? What about in 10 and 20 years? Do you want to own a car, or a house? Are kids in the picture? How do you imagine your life in retirement?

You start with goals because they will inspire you to complete the next steps and provide a guiding light as you work to make those aims a reality. 

2. Track your money, and redirect it toward your goals

Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan, and can reveal ways to direct more to savings or debt pay-down. Seeing where your money goes can help you develop immediate, medium-term and long-term plans.

Reducing credit card or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.

3. Get your employer match

If you visit a financial advisor, he or she will be sure to ask: Do you have an employer-sponsored retirement plan like a 401(k), and does your employer match any part of your contribution?

True, 401(k) contributions decrease your take-home pay now, but it’s worth it to put in enough to get the full matching amount, because that match is free money. Here’s how much you should contribute to a 401(k).

4. Make sure emergencies don’t become disasters

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on. The goal is to have 3 to 6 months worth of living expenses in your savings account.

Building credit is another way to shock-proof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.

5. Tackle high-interest debt

A crucial step in any financial plan: Pay down “toxic” high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

6. Invest to build your savings

Investing sounds like something for rich people or for when you’re established in your career and family life. It’s not.

Investing can be as simple as putting money in a 401(k) and as friction-less as opening a brokerage account (many have no minimum to get started).

Financial plans use a variety of tools to invest for retirement, a house or college:

• Employer-sponsored retirement plans. If you have a 401(k), 403(b) or similar plan, gradually expand your contributions toward the IRS limit of $19,500 per year. If you’re 50 or older, the limit goes up to $26,000.
• Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings by up to $6,000 a year (or $7,000, if you are over 50). 
• 529 college savings plans. These state-sponsored plans provide tax-free investment growth and withdrawals for qualified education expenses.

7. Build a moat to protect and grow your financial well-being

With each of these steps, you’re building a moat to protect yourself and your family from financial setbacks. As your career progresses, continue to improve your financial moat by:

Increasing contributions to your retirement accounts.

Padding your emergency fund until you have three to six months of essential living expenses.

Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.

Source: https://www.nerdwallet.com/article/investing/what-is-a-financial-planLinks to an external site.