Making A Financial Plan

There are many moving parts involved in getting control of your finances. Do you pay off your credit card or start a college fund for your child? Should you raise your 401(k) contribution or start an emergency fund? Can you afford to buy a house? It can be a daunting task for anyone to take on. Luckily, there is a way to make sense of it all that will help you figure out where you want to be and how you can get there. It’s called a financial plan.

As public servants, we plan for everything. At an emergency incident, we call this plan our incident action plan, or IAP. The IAP contains the goals (called objectives) for the incident as well as the strategies and tactics for how we will meet those goals. At a building fire, the objectives are to put out the fire and rescue the occupants. The strategies and tactics call for the engines to put water on the fire, the truck companies to search and ventilate, and the chief to take command. At an active shooter incident, the objectives are to stop the shooting and take care of the victims. The strategies and tactics call for the police officers to clear the building and eliminate threats, the firefighters to triage and remove victims, and the paramedics to treat and transport the wounded.

You can use this same concept to outline your financial goals and decide on actions you can take to reach those goals. Creating a financial plan will give you a roadmap to getting control of your finances.

Setting Goals

Just like an IAP is based around objectives, your financial plan is based around your goals. You first need to identify where you want to be in a given period of time. One of our current goals is to continue contributing to the college fund that we set up for our daughter so that we have enough saved to cover at least half of her expenses by the time she starts college (12 years from now).

Perhaps you want to pay off your car loan by the end of the year. Maybe you want to set aside 3 months of living expenses in an emergency fund. You might also want to have a 20% down payment to buy your first home, or pay off your mortgage before you retire. These are the types of goals you need to identify. Talk to your family to get their input and buy-in. Write these goals down to make them real. Don’t worry – you can add, remove, or change your goals at any time. If you’re just starting, we’ll talk a lot more about what types of goals make the most sense to accomplish first.

Developing Strategies & Tactics

Once you have identified a goal (or four), the next step is to determine which strategies and tactics you will use to meet your goal(s). Remember, the strategy describes how, in general terms, you will carry out an operation. Tactics are the actions taken to achieve the chosen strategy.

If your goal (opening an IRA, for example) requires increasing the amount of money available to you, you can use two strategies to achieve this goal – maximizing your income and reducing your expenses. These two strategies are not mutually exclusive, and you will see awesome results if you use them both together. We’ll talk more about both of these in another post, but an example of a tactic you can use to maximize your income is to work one overtime shift per month. Examples of tactics you can use to reduce your expenses are to cancel your cable and switch to Netflix, or bundle your home and car insurance to qualify for a reduced premium.

Coming Up With Some Numbers

Now it’s time to put actual numbers together with your goals. I said before that one of our current goals is to save for our daughter’s college education. For example, if we want to have $80K saved by the time she begins college in 12 years, and we’ve already saved $20K, we’ll need to save $60K more. That amounts to $417 per month that we’ll need to put into her college fund. To make this happen, we’ve limited some excess spending and contribute to this account every month. As another example, if you wanted to pay off your car loan a year early, and you have an $18K balance with 35 months left at 5% interest, you’d need approximately $200 per month extra to put towards this loan. You could pick up an extra shift per month to help eliminate this debt.

For each of your goals, do some math to see how much you might need per month to make your goal a reality. There are plenty of good financial calculators out there. I like the ones at Bankrate. They have calculators for mortgage, refinances, auto loans, savings, and much more.

Putting Your Financial Plan In Motion

Now that you have a financial plan, you need to implement it. Start with your most important goal (ours is making sure we’re saving enough for retirement), and figure out a way to do it. Make sure your family knows about the goal (I’ll dedicate a full post to getting your spouse on board – I still fight this battle at home!). Once you’ve dedicated yourself to meeting your goal, tell people about it – family, friends, coworkers, the mailman, etc. The more people you have on your side encouraging you, the more likely you are to meet the goal. In another post, I’ll tell you about different options for meeting your goals (Roth IRA vs. 401(k) for retirement, which 529 college savings plans could work for you, where to put your emergency fund, etc.).

Lastly, stick to your financial plan. Results will take time. The most important thing is that you’ve started!