Creating a financial plan is essential for anyone looking to achieve financial stability and success. A well-structured financial plan helps you set clear goals, manage your resources effectively, and navigate unexpected challenges.
Picture this as decluttering your life; while it might feel overwhelming at first, beginning with small steps and steadily making progress leads to financial rewards that boost your mental well-being and bring a sense of accomplishment!
However, financial planning isn’t just about numbers; it also involves understanding your relationship with money and unpacking any unhelpful behaviours that may hold you back. Here’s a comprehensive guide to creating a financial plan that considers both the practical and psychological aspects.
First, let’s get the practical advice out of the way—the stuff you’ve probably heard a million times. After that, I’ll dive into why 80% (Klontz et., 2016) of us find it so hard to follow through and what can be done about it. It’s not that we don’t know what to do; it’s that our ability to actually do it is often hindered by various psychological factors.
1. Assess Your Current Financial Situation
Before you can put together a financial plan, you need to have a good understanding of your current financial situation. Think of it like this: you need to know where you are right now to figure out where you want to go. Without a clear destination or goal, how can you tell if you’re on the right track? This lack of clarity often makes us feel anxious and stuck, like we’re living the same day on repeat and just coasting through life on autopilot.
So, here it is:
- Track Income and Expenses: Give this a try: Use apps or spreadsheets to jot down your income and monitor your spending for at least a month (though, ideally, you should keep it up for a year, but let’s not stress about that just yet). Studies indicate that we tend to underestimate our monthly expenses while being more accurate with our yearly ones. Make sure to sort your expenses into three categories: needs, wants, and savings.
- Evaluate Assets and Liabilities: List your assets (savings, investments, property) and liabilities (debts, loans) to understand your net worth.
- Review Financial Statements: For a comprehensive view, check your bank statements, credit reports, and investment accounts. One free app I use to consistently monitor my credit score is Credit Karma. Monitoring your credit is a healthy financial habit.
Here are more fun things to think about:
2. Define Your Financial Goals
Establishing clear financial goals is crucial for guiding your planning process.
Goal Categories:
- Short-term Goals: Saving for a vacation, building an emergency fund, or paying off credit card debt.
- Medium-term Goals: Buying a home, starting a business, or saving for a major life event.
- Long-term Goals: Retirement savings, education funds for children, or creating a legacy.
And here are some goals that not many advisors talk about (yes, these are actually goals that take years to achieve!!!). The relationship you’ll have the longest in life is with money (Klontz & Klontz, 2010), so it’s important to make sure it’s a positive one. How you interact with money can really affect both your emotional well-being and your physical health.
- Money Scrip Goals: Understanding what shaped money beliefs and changing money scrips.
- Marital Satisfaction Goals: Improving communication with a partner about finances and increasing marriage satisfaction.
To ensure clarity and accountability, make your goals SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). Choose your accountability partner wisely – would it be your spouse, friend, or trusted financial planner?
3. Create a Budget
A budget is a handy tool that lets you direct your money towards your goals and needs. Many people think that budgeting feels restrictive, but I often say that’s not true! In reality, a budget is freeing. By cutting out unnecessary expenses, you gain more time and money to spend on what really matters to you.
Steps to Create a Budget:
- Choose a Budgeting Method: Consider options like the 50/30/20 rule (50% needs, 30% wants, 20% savings) or zero-based budgeting (allocating every dollar).
- Set Spending Limits: Determine how much you can spend in each category based on your income and goals.
- Adjust Regularly: Review and adjust your budget monthly to reflect changes in your financial situation.
4. Build an Emergency Fund
An emergency fund is like your financial safety blanket, giving you peace of mind when life throws a curveball. It’s not a question of if these situations will happen, but when. Trust me, things not going as planned is actually part of a smart financial strategy. Whether it’s leaving a job to start your dream business, getting laid off, having a baby, going through a divorce, or any other big life change, one thing’s for sure – life is full of surprises.
How to Build One:
- Set a Target Amount: Aim for three to six months’ worth of living expenses.
- Automate Savings: Set up automatic transfers to a high-interest savings account specifically for emergencies. If having your money in the same place tempts you to dip into it, consider opening an account at a different bank. That way, you’ll need to take an extra step to access the funds, and trust me, even a minor hurdle can help prevent impulsive spending.
- Start Small: If saving a large amount seems daunting, begin with a small, achievable goal and gradually increase it.
5. Invest for the Future
Investing is crucial for building your wealth over the long haul. Ever wondered why I named my company Sapling? It’s because real investing isn’t flashy; it’s pretty straightforward. Just look at Warren Buffett—it took him more than twenty years to see the incredible growth from his investments. But once you reach that point, financial freedom is within your grasp. Like a sapling that needs care, attention, and time to grow into a thriving tree, your investments require patience and nurturing to flourish and provide lasting benefits.
Investment Options:
- Registered Accounts: Utilize Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) for tax advantages.
- Diversify Investments: To spread risk, consider a mix of stocks, bonds, mutual funds, and real estate.
- Educate Yourself: Take some time to understand the basics of investing, or reach out to a financial advisor for some expert advice. By the way, if you’re considering a financial advisor, I’ve got a whole blog post on ensuring they’re giving you unbiased guidance.
6. Address Unhelpful Financial Behaviours
Financial planning isn’t just about crunching numbers; it’s about understanding how you interact with money. Spotting and tackling bad habits can make a world of difference to your financial well-being. Imagine lugging around a backpack stuffed with things you don’t need anymore. It’s familiar, sure, but it’s also weighing you down and leaves no space for new, more meaningful items that suit the person you are today. So, what’s your strategy for unpacking that heavy load, and who will lend a hand? Your ability to handle past financial baggage is key to your long-term success and peace of mind.
Here’s the silver lining: change is possible for everyone. The catch? It can be a slow process. Change happens in stages, and a dedicated financial advisor’s role is to walk with you, not rush you, guiding you step by step to facilitate change.
Common Unhelpful Behaviours:
- Impulse Spending: Impulse shopping can really throw off your budget. Why not try giving yourself a little waiting period before splurging on things you don’t really need? Also, disable those features that save your credit card details and turn off notifications like “We found something you may like.” Remember, big companies are experts at using psychology to reel you in!
- Avoidance: Ignoring debts or financial statements can lead to stress. Regularly review your finances to stay informed and proactive. Avoidance can lead to more stress and financial disaster.
- Comparison: Always measuring your financial status against others can make you feel like you’re falling short. Instead, concentrate on your own objectives and how far you’ve come. Everyone has unique goals, values, and dreams. So, what do you want to achieve? What truly matters to you? Let’s start by figuring that out.
- Status Quo: Staying in one place can feel safe, but it might actually be holding you back. Sure, the unknown is a bit scary, but being stuck can be even worse. Many people stick with outdated advisors and big institutions that charge high fees just because they arbitrarily deem them “safe.” Safety is a relative concept. Familiarity can be comforting, but it can also be harmful. This idea also applies to staying in a job that makes you unhappy. Seek out a supportive community that will encourage you and help you create meaningful change in your life. Stagnation can be bad for both our finances and our overall mental well-being.
- Loss Aversion: People often prefer dodging losses to chasing gains, a mindset that can be quite counterproductive. Take, for instance, an investor who clings to a falling stock, hoping for a turnaround instead of cutting their losses and selling. This stubbornness can block them from reinvesting in better opportunities, stalling their financial growth. Similarly, opting for GICs (Guaranteed Investment Certificates) to steer clear of market ups and downs might seem safe but can seriously limit long-term financial progress. Read this article on GICs for more information.
Strategies for Change:
- Reflect on Your Money Mindset: Identify beliefs and emotions tied to money. Journaling can help you unpack these feelings and patterns. I’ve written a blog on mindful money, but it is a bit unconventional, I have to admit. Make it a routine to keep an eye on your spending. Educate yourself about finances to challenge any biases you might have. Consider teaming up with a financial coach and/or therapist to help you unpack your financial baggage.
- Set Intentional Habits: Swap out those unhelpful habits for positive ones, like setting up a weekly budget or checking in on your financial goals each month. Remember, your brain needs time to form new connections. Think about when you learned to drive. Were you instantly great at it, or did it take practice to turn that knowledge into a skill you could perform without thinking? For most of us, it definitely took time. The same goes for mastering new financial habits. Don’t get discouraged if you slip up. It’s not a failure—it’s a chance to pause, reflect, dust yourself off, and keep moving forward.
- Seek Support: Consider working with a financial therapist or coach who can help you address psychological barriers. I’ve written a brief blog on what financial therapists do. Seeking help is a strength and not a weakness.
7. Review and Adjust Regularly
A financial plan should be a dynamic document that adapts as your life changes. Remember, the only certainty about a good financial plan is that it won’t unfold exactly as expected. Research shows that setting goals and planning are crucial for financial well-being, but so is the ability to detour and adjust when necessary. Having a professional by your side to help you navigate life’s transitions and steer clear of mistakes is vital for your overall health and wellness.
Regular Check-ins:
- Schedule Reviews: Set aside time every few months to review your goals, budget, and investments. Set quarterly review meetings with your financial planner if you fall under that 80% population needing more consistent coaching and guidance.
- Adjust for Life Changes: Get ready to tweak your financial plans whenever big life events come your way—like landing a new job, retiring, or welcoming a new baby. But here’s a pro tip: don’t rush into major financial decisions immediately after these changes. Stress can cloud our judgment and make us prone to impulsive choices. Instead, take a breather. Focus on self-care, lean on your community for support, or even chat with a financial therapist to get your rational thinking back on track.
- Celebrate Milestones: This is a big deal. We often criticize ourselves for breaking good habits, not hitting our goals, or not keeping pace with our friends. But we don’t give ourselves enough credit for the small wins that, over time, lead to significant progress. It’s time to practice gratitude. Try putting your phone away an hour before bed and think of three things you’re thankful for today. Gratitude is a powerful tool that can rewire our brains for happiness and success. Remember, happiness is a mindset that requires practice (recall the driving analogy).
Conclusion
Creating a solid financial plan is a journey that blends practical steps with understanding how we feel about money. By following these seven steps—evaluating your finances, setting clear goals, budgeting, building an emergency fund, investing, tackling bad money habits, and regularly reviewing your plan — you can achieve financial wellness that not only secures your future but also boosts your overall happiness.
Remember to think of this process like decluttering: it might feel overwhelming at first, but once you start making progress, the relief and sense of accomplishment are worth it. Remember, financial planning isn’t just about hitting numbers; it’s about building a healthy relationship with your money.
Celebrate every small win along the way and be flexible when life throws you curveballs. With patience and the right support, you can navigate your finances confidently. To get other financial planning tips and updates, sign up for our newsletter here.
References
Klontz, B., Kahler, R., & Klontz, T. (2016a). Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists (2nd ed.). The National Underwriter Company.
Klontz, B., & Klontz, T. (2010). Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health. Audible.