How to Create a Financial Plan for the New Year

Looking to improve your financial fitness in the new year? Start by creating a financial plan. Whether you’re well-establish or just starting out, a financial plan is an essential tool no matter where you are in life. We’ll explain what a financial plan is and how you can create one with our simple financial planning guide.

What is a Financial Plan?

A financial plan is a comprehensive overview of your current financial situation. When creating a financial plan, you’ll document what you own and what you owe, calculate net worth, and analyze cash flow to assess your financial health and identify opportunities for better money management—all so you can reach your goals. If it sounds complicated, don’t worry, it’s not: Use our eight-step financial planning guide to create your own financial plan.

Create a Financial Plan In Eight Steps

Take the first step in financial planning with our financial planning guide.

Step 1: Identify assests and liabilities to determine net worth.

Your net worth is the value of all your assets (what you own) minus the total of all liabilities (what you owe). Here’s how to calculate yours:

  • Determine assets: Take inventory of the things you own, include deposit accounts like savings and checking, retirement savings, real estate, vehicles, and any other owned assets. List each by name with its value.
  • Identify liabilities: Outline your debts, include amounts owed on credit cards, vehicle loans, student loans, mortgages, and any other accounts you make payments to. Identify each by name with totals owed.
  • Calculate net worth: With your assets and liabilities outlined, you can calculate your net worth by subtracting your total liabilities from your total assets.

Regardless of your net worth, this first step provides a foundation for the rest of your plan and sets a benchmark to measure progress.

Step 2: Set Financial goals.

Now that you understand your net worth, dig into what you want to accomplish by identifying short- and long-term goals:

  • Short-term financial goals are precise, actionable targets that can be achieved in a year or less: Pay off a specific debt, save for a vacation, or build your emergency fund.
  • Long-term financial goals can be achieved in five to 10 years: Save for a down payment on a home, pay off all credit card debt, or save for college.

Be sure to include a mix of goals. Short-term goals reduce procrastination and keep you motivated—increasing productivity and willpower. With that kind of momentum, it’ll be easier to reach long-term goals.

Step 3: Understand your cash flow.

Cash flow is the movement of money in and out. Examining yours helps you understand your financial patterns—good and bad—so you can adjust and redirect cash toward your goals. Here’s how you can assess your cash flow:

  • What do you earn monthly? Look at all sources of income: List and total each source.
  • What do you spend monthly? Be honest and get detailed—frequent small costs add up: List and total expenses.
  • Compare the two: Are you spending more than you earn? Are you saving any money? Is there extra cash to put toward your goals? What can you cut?

Step 4: Establish budgets to meet financial goals.

Now it’s time to establish budgets with your goals in mind: First, separate essential expenses (mortgage/rent, utilities, groceries, loans, etc.) from your discretionary expenses (entertainment, restaurants, subscriptions, etc.). Then, create categories for each type of expense and set limits to control spending.

For help, use the 50/30/20 rule as a budgeting framework: 50% of your income goes toward needs, 30% toward wants, and 20% toward saving and debt repayment.

Step 5: Establish an emergency fund.

A solid financial plan must contain an emergency fund. This fund prevents unexpected expenses from becoming financial disasters. Set up a dedicated checking or savings account to keep these funds separate from your everyday cash.

Start small and build your stash over time as part of your budget. A solid emergency fund should have enough to cover three to six months’ worth of expenses.

Step 6: Start saving for retirement.

No matter your age, retirement savings need to be part of your financial plan. If you’re employed, find out if your employer offers a 401k. If they do, start contributing with automatic payroll deductions. It makes savings automatic, so it’ll be one less item on your budget. And while it reduces your take-home pay, it offers tax benefits by reducing your taxable income.

If you don’t have a 401k option or you want to supplement your retirement savings, an IRA is another way to help you save for retirement. Learn more about preparing for retirement.

Step 7: Make a plan to manage debt.

Not all debt is bad—so, the way you manage it varies. “Good” debt, like a mortgage, can contribute to wealth or income over time and can offer tax benefits. “Bad” debt, like high-interest credit cards, does little to help your finances. Group your debt accordingly and determine when and how to pay down bad debt and other loans that won’t advance your financial goals.

If you’re struggling to manage credit card debt, consider debt consolidation with a low-rate personal loan or home equity loan. These options can help save on interest, consolidate payments, and pay off debt faster.

Step 8: Invest your savings to grow wealth.

Don’t be intimidated by investing. If you’re contributing to a 401k, you’re already an investor. Investments are another tool to make the most of your money, grow your wealth, and achieve your financial goals.

Investments come in many forms, including CDs, IRAs, employer-sponsored retirement savings plans, 529 college savings plans, and brokerage accounts. It’s important to note that brokerage accounts are not insured by FDIC and may lose value, so consult a financial professional for advice. If you’re not sure where to start, contact us for help finding the best investment tools to improve your finances.

Put Your Financial Plan to Work

With your financial plan established, you’re on your way toward improved financial wellness. Put your plan to work and track your progress along the way to see how far you’ve come. Be sure to update your plan annually or with any major life milestones.

For added motivation, look at our list of financial resolutions so you can make next year your best year! Need help creating your financial plan? At FirstCapital Bank of Texas, we’re here to help you reach your financial goals any time of year. Contact us.

To read more of our latest blog posts, click here!