When it comes to your money, are you just winging it, or do you know what you hope to accomplish with the income you earn?

If you're like many Americans, you probably haven't thought too much about your financial future. In fact, a recent study by Capital One found that just 49% of Americans have a long-term financial plan. 

If you don't have one, it will be much harder to make your money work for you. It's difficult to know what to do with your cash without a plan, and it's hard to stay motivated to be financially responsible without clear goals.

If you're not sure where to start in making your financial plan, this guide will help take you through the process. 

Woman putting money into a piggy bank

Image source: Getty Images.

1. Start by assessing where you are

Making a road map for your finances is only helpful if you know what your starting point is. Otherwise it will be impossible to know how far you need to go and what you need to do to reach your final destination. 

You should make a careful assessment of your current situation, including:

  • How much debt do you owe, and what types? For example, do you have a mortgage, student loans, credit card debt, or other loans?
  • What assets do you own? Do you have a house, a car, an investment account, or other items of value?
  • How much do you have saved for retirement? Achieving financial security in retirement must be one of the key long-term goals in any financial plan. Social Security is not going to be enough for you to live on, and most people don't have pensions. So it's up to you to save enough to avoid being broke as a senior. 
  • What is your net worth? Your net worth equals your assets minus your liabilities. If you're doing things right, it will grow over time. If you're spending more than you earn or getting into debt, it will decline. 

Once you have an idea of the big picture financially, you can plan for long-term and short-term goals.

2. Decide what your big goals are

The next step in financial planning is to figure out your destination. Goals you want to achieve within around a year or two are short-term, while long-term goals will probably take around a decade or more to achieve. You probably also have some intermediate goals -- things you want to accomplish within three to nine years. 

Whether your big financial goals should be short-term or long-term depends on your situation. If you're in your 60s, retirement needs to be a short-term goal. If you have a ton of debt, paying it off might be a long-term goal. 

Some examples of goals you may want to include in your financial plan include:

Be very specific when setting goals. For example, don't just say you want to buy a house -- research housing prices in your area, and find out how much you want to spend. For example, your goal might be to save a $60,000 down payment to buy a $300,000 home in five years.

One big issue that trips many people up is uncertainty about how much they should actually save for long-term financial goals -- but you can't let this stop you from making a financial plan. 

This simple guide to determining how much to save for retirement will help you decide what your retirement savings goal should be. And if you're not sure how much to save for your kids' education, try this guide to how much you'll need to cover college.

You can also research auto prices to see how much to save for a car, add up the total you owe to see what you'll need to become debt free, and plan to save from three to six months of living expenses for an emergency fund. 

3. Figure out how much you need to achieve your goals

The next step: Determine how much money each of your financial goals requires.

If you've been very specific in the prior step, you'll know how much you need and what your time frame is. Now it's simply a matter of plugging your numbers into a calculator to find out exactly what you need to save. 

This helpful Bankrate calculator allows you to input your desired goal, the number of years to achieve it, and your projected interest rate. You'll be able to calculate how much to invest daily or monthly to achieve your plan. 

It's safer to err on the side of being conservative when projecting rates of return. For example, when determining how much you'll need to save for retirement, estimate returns a little below the historic performance of the stock market.  

And don't forget to consider the type of accounts you'll be saving in. Your retirement funds should be invested in a mix of stocks and bonds if you won't be accessing the money for a long time. But  savings for short-term goals or for your emergency fund should be invested in safe high-yield savings accounts, even though these accounts provide a low rate of return; you can't afford to put this money at risk. 

4. Create a budget that puts money toward your goals

Once you determine your specific long-term and short-term goals, the next key step -- and the hardest step for many -- is to make sure your spending and saving habits let you achieve those goals. 

By now, you should have details on the amounts you need to save for goals big and small, the dates you want to achieve them, and the monthly savings you need to stay on track. Now, create a budget that takes those savings into account, along with your expenses for needs and wants.

If you have enough to hit your savings targets with money left to live on, you're in good shape. Automate your investments to retirement and savings accounts so money moves over effortlessly each payday, and you're basically done with financial planning. 

But if you have too little to invest for your goals and still pay your monthly bills, you'll need to cut spending -- by moving to a cheaper place, for example, or making lots of small lifestyles changes like giving up eating out. Or you can increase income by taking on a side hustle, asking for a raise, or getting a higher-paying job.

5. Review and update your plan annually or when changes occur

Once your financial plan is in place, stick to it. However, if you notice something isn't working, you'll need to make revisions.

If your life changes, you should also update your plan. If you have another child, it'll be necessary to adjust your long-term goals to account for another college education. If you find out you have a progressive illness, you may need to update your retirement date if you won't be able to work as long.

As soon as any big change occurs, go back to the process of setting your new goals and seeing what must happen to achieve them.

You should also review your plan at least once a year -- even when everything seems to be going well -- to make sure you're still on track. 

Your long-term financial plan can lead you to success

Following these steps makes it easy for you to join the 49% of Americans with a financial plan. By taking the time to set goals and make a plan for achieving them, you'll be taking one of the first and most important steps toward building wealth and becoming financially secure. It's a long road to financial independence, but the destination is worth it.

 

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