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Personal Financial Plan: How and Why You Should Write It

No matter what personal budgeting book you open or which podcast host’s ideas you find the most appealing, the absolute majority agree financial planning is an absolute necessity for anyone who wants to have control over their finances. Sure, you can just collect all the money that’s left in your wallet at the end of the week and put it away – that’s still better than not saving at all! – but having a proper financial plan to begin with will allow you not only to ensure there’s more money left over every week but also to have a much better understanding of where the rest of it actually goes.

a financial plan and a calculator

If you’ve never written a financial plan before, getting ready to write your first one might seem tricky. Where do you start? What should the plan involve, and how should you make sure you follow it? Don’t worry: a financial plan isn’t an official document that has an exact structure and must-include points. It’s much more like personal guidelines – and in this article, the team of your favorite passive income app Honeygain will explain how you can make them work in your favor.

What is a financial plan?

A financial plan includes detailed information about your income (salary, investments, passive income, scholarships, gifts, etc.), expenses (rent, transportation, groceries, entertainment, attire, health, etc.), and financial goals. Basically, it is a breakdown of how much money you receive and how you manage it to make sure it suits your needs and wishes.

Isn’t financial planning a thing for the rich?

a financial plan and a bag of money

Not at all! The thing is, everybody has finances – and whether they’re rich or poor, everybody has their own daily challenges. By shaping the financial plan around your personal capabilities, needs, wants, and goals, you can gain a lot more control over your money and get closer to the objectives you have set for yourself and your family, be it buying a house in the Bahamas or finally paying off your student debts.

Of course, a lot of rich people do make financial planning one of their priorities – simply because there’s a lot they need to plan: next to high income, they usually also have a ton of financial commitments and operate a lot more financial instruments than your average Joe. However, a financial plan is easy to adapt to anyone’s situation: even if you don’t need to manage a massive portfolio of investments and bonds, you might want to, let’s say, keep an eye on your spending so you could put more money away for a down payment of your dream home.

How far ahead should I be planning?

Honestly, this is extremely individual. Think about:

  • How experienced you are: the straightest way to failure is being overambitious and starting with a 3 or 5-year financial plan! If these are your first steps into financial planning, warm up by planning a week or two ahead. Once you get comfortable with approximating your expenses and dividing your budgets, you might go for a month or three.

  • How stable your income is: it’s nearly impossible to plan very far ahead when you have no idea how much money you’re going to receive next month! If your only income is a salary that’s fixed, you will find it a lot easier to plan for, let’s say, a few months than a person whose pay varies according to their monthly results or someone who relies on passive income sources that can’t really be predicted exactly.

  • How stable your everyday life is: if you look over your expenses for the last few months and see it’s basically the same cycle repeating, you’re going to find financial planning a breeze. However, if you experience a lot of unplanned expenses like travels or house repairs, you won’t be able to plan for long periods of time (unless, of course, you simply designate a certain sum for unplanned expenses and call it a day).

  • Whether your goals are short-term or long-term: think of how long you’ll probably have to keep putting money away to achieve your financial objectives. If your plans are small and change every few months, you certainly don’t need a 5-year financial plan – it certainly makes a lot more sense for someone who’s striving to buy a house to prepare a long-term financial plan than for someone whose current goal is to get a pair of new boots!

a financial plan, a pen, and a calculator

What should I prioritize?

When starting your financial plan, begin with what’s set in stone, i.e., what will certainly not change. List the income you will surely get (don’t speculate on whether your mom will give you $20 for your birthday instead of buying yet another pair of socks!) and the expense you will definitely not avoid (e.g., rent or phone bill). This will allow you to see the real financial situation you’re dealing with and not miss any important payments before the deadline passes!

Next, think about your financial goals. Once you’ve got those in check, you can estimate how much money you might need to put away every week or month to be able to achieve it in time. Some experts use the SMART formula to remind their clients how a good goal should look like:

  • S – Specific (precise and exact)

  • M – Measurable (can be defined by a certain quantity)

  • A – Achievable (i.e., realistic)

  • R – Relevant (actually impacts the way you feel)

  • T – Time-based (can be defined by a certain milestone or a deadline)

Let’s say you want to save up for a summer trip that costs $500. It is a precise goal (S) that has a set financial value (M). Think of how much time you’ve got left and split the cost between the weeks or months: if you can set aside this much money on a regular basis, it’s a realistic goal (A). Since it will boost your spirits after a long school year, it’s undoubtedly relevant (R), and the date your vacation starts at is a clear deadline (T) – which means you’ve got a SMART goal on your hands!

To help you get a better idea, here are a few examples of how a badly shaped financial goal looks like:

  • To get rich (not specific, not measurable, not time-based)

  • To save $10,000 every month (not time-based, and most probably not realistic, either)

  • To make more money at your job (has nothing to do with the way you manage your finances)

Following the simple and easy-to-memorize SMART formula, you can shape short-term or long-term goals and stay motivated in working towards them!

What about a financial plan for the entire family?

financial plan: a calculator, a calendar, and some money

If you’re in a serious relationship or have a family, you might find it easier to take up financial planning for the entire family. After all, you probably have:

  • A joint budget or account

  • Shared future goals

  • Similar financial values

Writing and following a financial plan together might start a lot of meaningful discussions in the family – which can be a great opportunity to identify your priorities, recognize areas of unnecessary spending, and even teach your kids to manage their finances smartly from a young age.

Here are a few tips to help your family succeed in financial planning:

  • While everyone should be responsible for tracking their own expenses, it’s best to nominate a responsible and detail-oriented adult family member to keep track of the entire family’s situation. This helps to notice issues in time and find solutions before it’s too late.

  • When it comes to long-term financial goals, discuss them in advance and make the decision together – this way, everybody will feel equally motivated and eager to reach them. For example, if the goal is to have a summer trip abroad, don’t just leave it at that: pick a destination that everybody (not just kids or one of the parents) finds appealing and can’t wait to visit!

  • Saving up for an emergency fund is a vital plan of any financial plan, but it’s especially important when you’ve got children. Not only does having kids go hand in hand with unplanned expenses (e.g., school trips), but it also means higher monthly expenses – which translates into needing a bigger cash cushion in case of a job loss or a medical emergency.

a financial plan, a calculator, and some money

Statistics say that almost 2 in every 5 US households could not come up with an amount as low as $400 in case of an emergency. This is alarming: even if no actual emergencies happen, always being one bad day away from bankruptcy puts a massive amount of stress on the entire family and harms both your mental and physical health. Consciously managing your money and regularly putting some of it away for savings relieves you of worrying about the future and helps you achieve your financial goals without imposing very strict regulations on yourself or your family.

If you wish you could save more money every month – why not look into passive income ideas? While it’s true that some of them do require you to invest quite a bit of time or effort, you can also find ways to make money nearly effortlessly with apps like Honeygain. All you need to do is run the app on your Windows, macOS, Linux, Android, or iOS device while it’s connected to the internet: the app will share your extra bandwidth with a crowdsourced web intelligence network and generate your passive income based on your shared traffic.

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