Over Half of Americans Make This Serious Mistake With Their Financial Planning

It's stressful when you don't feel financially organized or prepared for the future. Financial planning is the solution to this, but it's becoming a lost art. Americans are spending less time on financial planning, according to research by The Motley Fool Ascent.

To make it even worse, over half of Americans don't engage in financial planning regularly. Just 46% do so, while 30% said they only make financial plans before a large purchase or investment. And 24% go with "crisis budgeting," which is financial planning only when dealing with an unexpected expense or a loss of income.

If you're in the group that doesn't regularly make financial plans, it's worth changing that. This is one habit that can make a big positive impact for you.

Why financial planning is important

A financial plan is essentially a roadmap for managing your money. It includes your short- and long-term goals, as well as how you'll use the money you earn.

There are a lot of common reasons people have for not doing this. It sounds complicated, or they don't have the time, or they don't think that they have enough money for a financial plan to be worth it.

But financial planning doesn't need to be complicated or time-consuming, and it can benefit you no matter how much money you have. Here are a few ways it has been shown to help with personal finances, based on data from Schwab's 2021 Modern Wealth Survey:

• 65% of financial planners have a three-month emergency fund, compared to 33% of non-planners.
• 47% of financial planners never carry a credit card balance, compared to 29% of non-planners.
• 65% of financial planners feel financially stable, compared to 40% of non-planners.
• 71% of financial planners are aware of investment fees and costs, compared to 45% of non-planners.

These are all good signs, and they're much more common among people who plan out their finances. When you don't have a plan, it's much harder to reach your money goals and build for the future.

How to start financial planning

The first time you make a financial plan, it could take a little while. You might want to set aside an afternoon. It gets quicker and easier after that, because you aren't starting from scratch anymore. Here are the steps to follow for successful financial planning.

Review your current financial situation. By seeing what your finances look like right now, you can figure out where you want to improve. Make a list with all of the following numbers:

• Your income
• Monthly bills, divided into essential and non-essential spending
• Any debts you have and their interest rates
• Bank account balances
• Investment and retirement account balances

Set your money goals. Think about what you want to achieve financially in the future. This is different for everyone, and it also depends on your current situation. If you're carrying balances on credit cards, then you should focus on paying off credit card debt. If you don't have any pressing debts, saving for retirement is always a smart goal, and you may also want to save for a down payment on a home if buying one is important to you.

Aim to have a mix of short- and long-term goals. For example, short-term goals could be saving for a vacation next summer, building a three-month emergency fund in the next two years, or shaving $300 per month off your bills. Long-term goals could include reaching a certain amount in retirement savings and in college funds for your kids, to give a few examples.

Decide exactly where your income will go. Now you'll figure out how you're going to spend your money. Here's an example of how you could divide up your income:

• 50% for paying essential bills
• 20% for paying off debt
• 10% for investing in your retirement accounts
• 10% for your savings account
• 10% for fun money, spent anyway you want

Your spending plan will depend on your income, your bills, and the goals you want to accomplish. What's important is being purposeful about how you spend your money so it doesn't get wasted.

Check your progress monthly. You don't need to spend a ton of time on financial planning. Once you have your plan, just do a monthly check-in to make sure it's working and see if there are any changes you'd like to make. As your finances change, you'll also need to adjust your plan with them. You may decide to invest more after you get rid of debt, or temporarily save less if you're dealing with a loss of income.

Financial planning can feel intimidating before you get started. But you'll likely find that you feel better about money after you do it, and especially when you see how you're progressing toward your financial goals.