5 Steps To Creating An Effective Financial Plan

To some people, the thought of sitting down to have a financial plan is scary. Such people prefer to live a day at a time and trust that the future holds the best for them as regards finances. On the other hand, another set of people believe that like all other things we need to have a plan for our finances. They tend to live a relatively peaceful and full life. People in this group know what they earn and have a plan to enjoy and live within their means.

I believe, the benefits of having an effective financial plan far outway the myths and anxieties that are often associated with planning for how to use your money. Having a financial plan often helps you to make the best financial decisions. It inevitably sets you up to win financially and effectively manage the financial resources you have been blessed with. I have shared how being organized puts more money in your pocket. I also shared the best lesson I learnt about money as I entered the corporate world.

Regardless of what you were taught about money, it is possible to have a positive relationship with your money and have it grow and enable you to live a fulfilled life. If you follow these simple but effective steps, you will have in place a financial plan that you can maintain and have peace of mind regarding money.

#1. Know how much is coming in

The first step to having an effective financial plan is to determine what you earn or make from your business. Peter Drucker reminds us that what we can measure we can manage. I have heard of people who say they prefer not to have a number because this limits them. However, even if your income is erratic, having an estimate is a good thing. You can go ahead and get an average of the past 3 – 6 months of your income.

#2. Determine what your expenses are

After you know how much is coming in, you need to go ahead and establish what your expenses are. The first step to financial ruin is for you to be spending more than you are bringing in. This, my friend, is a clear path to disaster regardless of how you try to reason it out. If you spend more than you make you will soon be in debt. This leads me to the next step.

#3. Eliminate your debt

Unfortunately, if you have been spending more than you bring in you are now in debt. Personally, I do not advocate for debt this is how I was raised. Apparently, I am not the only one in this position because people like financial guru Dave Ramsey sing the same tune. Bill Hybels has even gone ahead and coined a definition of debt, to him, debt is “wanting more than God’s current provision for your life and arranging other ways to get it”. 

I understand there may have been circumstances beyond your control that may have resulted in you going into debt. However, going forward, you need a plan to help you get out and stay out of debt.

The most effective way of paying off debt that I have seen is Dave Ramsey’s debt snowball. Here you, list all your debts from smallest to largest. Begin by assigning most money to the smallest debt. This will enable you to pay it off fast and then you can assign the money that was going to that debt to the next smallest debt. You continue this until you have paid off all your debt. The rationale for the debt snowball is as you begin to see wins with the small debts it builds momentum and energizes you to keep going until all your debts are paid off.

#4. Have a Monthly Budget

By now, you know how much you make, you also know what your monthly expenses are and have listed all your debts. The next step is for you to tell your money every month where it should go instead of wondering where it all goes. This is John Maxwell’s definition of what a budget can do for us. Every month, before the next month begins, make a plan for how you will allocate your income. Take care of your most basic needs (housing, food, transport, and modest clothing) first and then make a list of how you will pay your debts.

Initially, living with a budget may seem restrictive especially if you have not been using one. However, like any habit, it will take getting used to so hang in there for at least three months. As you get used to budgeting you will discover that it is very liberating. It allows you to enjoy what you want since you have planned for it.

You can download my easy to use budget sheet and start creating your first budget.

#5. Create a saving plan

My final step to creating an effective financial plan is to have a savings plan. I have shared about how you can develop a healthy relationship with money and that is by always paying yourself first. This in effect is what saving is all about. After you have saved a part of your income, you need to let it grow through investing.

You need to remember that as your family grows, so do their financial needs. Kids will need to go to college, you may get emergencies that require you to spend. This is when having good savings and a nest egg will come in handy. As you make your monthly budget after paying off your debt ensure that you save for the future.

When it comes to saving, the best way you can do this is by setting financial goals. These could be short-term 6 months – 1 year or, medium-term 2 – 4 years or long term 5 – 10 years. Avoid setting audacious goals that will discourage you. Instead, start with small steps and celebrate your wins along the way. For example, you could set a short-term goal of saving $1200 this year. Celebrate every time you are able to allocate $100 every month in your budget towards this goal. Once it is achieved set an even bigger goal. Continue to do this until you have created savings that your family can survive on for 3 – 6 months in case of an emergency.

Finally,

You need to always keep in mind that having a financial plan is a necessity. Regardless of how much money you make, if you are not intentional with how you use it, you will end up spending more than you make. Rabbi Daniel Lapin reminds us that \”financial success is the result of doing the right things\”. One of these right things is having an effective financial plan. Once your plan is in place you need to maintain it and adjust it as your circumstances change. Dave Ramsey cautions us thus, “get in control of your finances otherwise, they will forever control you”.

I would want to know, what does your financial plan look like. Please share in the comments section.