Personal Financial Planning Example To Help You Build Your Own Financial Plan

Day-to-day money consists of two items: Your income and day-to-day expenses.

It does not take into account investments, savings, debt payments, or insurance.

Income consists of all income you receive such as salary, dividends, interest, etc...

Day-to-day expenses consists only of items that you need/incur on a monthly basis.

Spending on items such as rent, food, utilities, gas, clothes, etc should be included.

In our financial planning example, Conor has about 50% of his income going to day-to-day expenses.

The third category is one of the most overlooked parts of building a personal financial plan. However, its one of the most important.

Your future goals take time to achieve. What if you don't have time because of disability, death, health care expenses, etc...?

This category focuses on protecting yourself and your financial plan, i.e. risk management. 

It consists of money for insurance premiums such has health insurance, life insurance, car insurance, and disability insurance.

In our financial planning example, after completing these steps, Conor had $371 in Vacation/Fun Money left over each month.

Your financial goals consists of two categories: Big picture and short-term. 

Big Picture Financial Goal

Your big picture goal is the primary financial goal you should be focusing on. This is also the part most people get wrong so its extremely important.

Doing it right is key and highlights why you need to budget your money the way I described above.

What you focus on is what you'll continue to have in the future. Most people are focusing their money on day-to-day expenses which means they will get more of that in the future. Its called lifestyle creep.

For example, Conor currently has 50% of his income going to day-to-day expenses and 34% to money for future self. 

Most people leave these percentages the same their entire lives even after they get a raise.

What your long-term goal should be is to flip-flop these percentages. In our financial planning example, this means Conor should focus on increasing the 34% of his income going to money for future self to 50% or more. The faster you do this the faster you'll become financially free.

Short-Term Financial Goal

Those that focus become financially free faster. Therefore, you should focus on one short-term goal at a time.

Turning our focus back to our financial planning example, Conor decided to tackle his goals in the following order: Save an emergency fund, save for the wedding, then pay off his student loans, then save for a house, then pay off the mortgage, then save aggressively for retirement.

Therefore, he put what we at FitBUX call minimums towards his investments. This means he put enough in his employer retirement plan to get his employer match and put $50 a month towards his Roth IRA.

Then 100% of his money went to his his first short-term goal which was to focus on his emergency savings. Then after that, he'd save 100% towards his wedding and then keep going as he accomplished each of his goals.

One big mistake is that people and financial advisors try to do too much. Focus on achieving one short-term goal at a time.

This is were the majority of financial plans fail. 

The key here is to evaluate if your financial plan allows you to meet both your big picture goal and short-term goals.  

In our financial planning example, Conor would have failed in the long-term because the financial planner he paid skipped this step. 

By using the steps above to set up his financial plan and simulating it using FitBUX's technology, Conor was able to:

• Save for a wedding and get married;

• See exactly how he could pay off his student loans in 3 years;

• Buy a house;

• Have 3 kids, and

• His wife would have ability to stay at home if she wanted to! 

If they followed this plan, by retirement, they'd have between $2.9 and $3.6 million dollars!

Your life is not static. Therefore, in order to achieve your goals and stay on track, you must have a way to implement your plan.

There are two keys to implementing your financial plan:

• Making it easy; and

• Avoiding mistakes most people make.

Making It Easy To Implement

Most people look at absolute dollar amounts which makes life very stressful. For example, they stress about overspending on restaurants. This is wrong!

Instead, look at what percentage of your money went where and compare that to the percentage you set in your financial plan. 

In our financial planning example, one of Connor's short-term goals was to put 25% of his total income to student loans each month/year.

At the end of the month, all he has to do is see if he put 25% to loans, if he did great. If not, see why and make sure it doesn't happen again the next month.

He also shouldn't worry about investing or retirement at this point because he has his emergency savings, is achieving his other goals, plus he has the minimums set to his 401k and Roth IRA.

If Connor missed his goal of putting 25% towards his student loans, then he would need to go back and review his budget to see why. If he hit it, then move on and worry about other things in your life besides money.

One item to note. Your plan is not a static document.

However, you shouldn't have to change it often. The only time you need to do anything is if you have a life event like buying a car and need to make a major change to your financial plan or you achieve one of your goals.

Avoiding The Mistake Most People Make

The biggest mistake people make is life style creep. Tracking what percentage of your money is going to which of the three categories we discussed in step 1 helps you avoid this.

In our Financial planning example, Conor had about 34% of his total income going to the 2nd category i.e. future goal money. He had about 50% going to the 1st category, i.e. day-to-day money.

Over time, your biggest financial goal is to switch that. For example, 50% of your money should be going to future goal money and 30% to day-to-day money. 

Doing so would mean you are investing in assets at a very rapid pace or quickly paying off high interest debt such as credit card debt. This will accelerate how quickly you achieve financial freedom.

Most don't do this.

Instead, as their income increases life style creep happens and they keep putting 50% towards day-to-day expenses.

This is why we see people who start contributing $100 per month to a Roth IRA ten years ago and today they still are contributing $100. They were focused on absolute dollar amounts and they will never hit their retirement goals.

They should've been focusing on what percentage of their total income is going where.