Personalized financial planning explained step-by-step

When it comes to life's biggest moments, you probably had a plan. Your family vacation, for example, followed a timeline, a budget—even if you busted it with that fancy dinner on your final evening—and involved compromise and conversation. Smart financial planning follows the same logic.

What are the basics of financial planning? Which steps should you take first in financial planning? Our information and how-to articles (linked below) can help. They take you step-by-step through what you need to know to create a personal financial plan and help get your money in order. From the groceries you need, to the retirement you want, and the car repair bill that’s looming, these ideas help you balance long-term dreams with short-term wants, plus those unexpected events that happen along the way.

This list offers a nice framework you can build on and adjust throughout your life.

It’s OK if you’ve started on some of these tasks. It’s also OK if you haven’t. Just start with one and keep going. (Or tackle the whole thing on a long, rainy weekend with a big pot of coffee and the dog at your feet.)

Let’s get started.

1. Set financial goals.

Goals are crucial to a financial plan. Before calculating how to get somewhere, you need to decide where you’re headed and why. Developing a savings plan based on specific financial goals throughout your life can help you use your money wisely. Do you want to:

• Save toward a down payment on a new home?
• Establish a college education fund for your children?
• Pay down or minimize existing debt?
• Launch a small business?
• Accelerate your retirement investing and savings?

Once you take time to envision the sort of life you want live a few years or many years from now, you can organize your financial goals into three general time horizons:

• Short-term goals (six months to five years): This phase may include many of the initial steps outlined on this list, including budgeting, paying down debt, and building an emergency fund.
• Mid-term goals (five to 10 years): Buying insurance or expanding your investment approach may be part of the mid-term goal planning.
• Long-term goals (10+ years): This is where you dig into detailed retirement planning to combine your best thinking around what you truly value in life with expertise from trusted sources of financial education and insight.

Set a more specific target date for each your financial goals. For instance, if you’re the parent of a toddler who may head to college in the 2040s, that gives you a deadline for your college savings goal.

Organize your goals between needs and wants. Layer in the current state of your savings to see how you can adjust your pace of savings to meet your target dates. Do you have money in a 401(k), 403(b), Roth IRA, or IRA (individual retirement account)? If so, log those numbers as you plan your retirement-related goals.

You can weigh all these options and your financial data at a glance by committing your plan to paper with our financial goals worksheet (PDF).

2. Follow a budget.

Instead of thinking of a budget as way to restrict your spending, use it as a tool to organize your monthly cash flow to help you pay yourself first (savings/investing) and still have room for the fun stuff. Seeing all your sources of income and spending in detail is important to assess your financial options both now (those short-term wants) and for your distant future (long-term dreams). Your budgeting will include both fixed expenses (think housing, transportation, debt, etc.) and discretionary expenses (restaurants, entertainment, gifts, etc.).

Keep in mind the wide variety of digital apps and tools available to help you make and maintain a budget in your daily life. Depending on your preferences and comfort with mobile apps, you can link financial accounts or set alerts to help categorize and monitor your spending. (As a Principal customer you can link accounts and explore budgeting features as part of your personal financial dashboard when you log in through principal.com or our mobile app.)

For the basics, learn how to create a budget that works for you—not against you (downloadable budgeting sheet included).

3. Build an emergency fund.

All the planning in the world won’t help if life throws you a curveball and you’re not prepared financially. That’s where emergency savings comes in handy.

• First, calculate how much emergency savings you may need: The minimum recommended emergency savings tends to start at three months of living expenses—with six months or a year providing a more realistic buffer to regroup after a setback. The flexibility of your cash flow helps determine your ultimate target for an emergency fund and how quickly you can reach it. If you’re self-employed, your emergency savings should be even larger due to your generally greater financial risk (income volatility, unplanned business expenses, etc.).
• Second, pick a tactic that works for your financial habits: Do you want to automate your savings—for instance, divert a small sum from your regular paycheck so it’s deposited into a savings account instead of your checking? Or will you transfer a significant sum—say, a work bonus or tax refund—to kick-start your emergency fund?
• Choose an account: You want a liquid, accessible account for your fund, but not one that’s too tempting for impulsive withdrawals. For instance, a high-yield savings account with a minimum balance may be a good fit. (Compare online bank savings and money market rates.)
• Set parameters for yourself and always replenish the fund: Is the expense unexpected, unavoidable, and urgent? The more your expense meets all three of those criteria, the more it’s likely suited to be covered by your fund. Once you dip into the fund, build it back up as soon as possible.

4. Manage debt.

Understanding and managing debt is a key part of creating a financial plan. Building a positive credit history can help improve your credit score and, in turn, help you qualify for lower interest rates on loans as part of a comprehensive strategy to maximize your incremental savings. It’s important to remember that not all debt is bad: A home mortgage giving you the ability to use the interest paid for a tax deduction can be beneficial. However, a revolving credit card with a high interest rate and ballooning balance doesn’t help your financial plan.

You have multiple ways to help tackle debt: The “snowball method” prioritizes paying smaller loans first to help buoy your spirits with tangible progress in shortening your debt list. Or you can focus on paying off the loans with the highest interest rates so you pay less overall, even if you maintain more loans for longer.

Learn how to pay off the debt you owe now and build a long-term debt-management strategy (worksheet and calculator included).

5. Protect with insurance.

The routines and norms of your daily life can change in an instant. People with a good financial plan hope for the best but always try to plan for the unexpected. Insurance helps with that. You may not realize the flexibility of life insurance as a financial tool to protect you and your dependents in the wake of a tragedy. Or maybe you haven’t been introduced to how short- or long-term disability insurance can help maintain your lifestyle by protecting your income. Here are two key questions to ask yourself:

• Do you have disability and life insurance at work? Your HR or benefits administrator should be able to help you determine your coverage and basic features such as an “elimination period” (how long you would wait to receive benefits if you do become disabled).
• How much coverage do you have vs. how much you may need? Long-term disability insurance typically replaces about 60% of your income—sometimes less than half after taxes. So, you may want to bundle that coverage with an additional private pay policy, depending on your budget, priorities, and risk tolerance. (Try our disability income calculator.) Your life insurance at work may be a flat rate based on your income, or you may have special benefits such as business travel insurance, advance payments for a terminal illness, or access to life insurance in retirement.

If you buy more voluntary or supplemental insurance through work, premiums often cost less through your employer and can be deducted from your paycheck. (You also may be able to avoid medical underwriting to start coverage, as well as take the policy with you if you leave your job. However, if you buy the insurance on your own, you may be able to buy more coverage and better customize it to your specific needs.)

6. Plan for taxes.

Paying taxes is part of your inevitable financial routine. First, know your tax bracket and how that may evolve throughout your life.

Integrate a more targeted and year-round tax strategy into your financial plan to better allocate your money according to your priorities. Know the difference between deductions and credits and how your plan will incorporate both. You may spot simple deductions or credits you overlooked in previous years. You can learn the importance of tax sheltering through tax-deferred accounts such as employer retirement plans, IRAs, Roth IRAs, health savings accounts (HSAs), and more. You may pursue more specialized moves such as tax-loss harvesting.

If you have access to a benefit such as a HSA and expect to use it to pay for out-of-pocket medical costs, that could help reduce your overall tax burden. If you’re age 50 or older, you may be able to make catch-up contributions with your retirement savings.

Explore ways to save on your taxes next year, using our tax planning worksheet to think through potential income tax credits and deductions. For even more resources, visit our tax center on principal.com.

7. Plan for retirement.

Even if it’s a long way off, think about what you want your money to do for you when you retire. You’ve probably heard the basic recommendation to try to save aggressively for retirement early in your career, so every dollar works harder by compounding for many more years. Or you know the general rule to aim to replace 80% of your income in retirement. But rules of thumb are no match for a direct, specific interrogation of your personal finances and life goals to build a retirement plan right for you.

There are numerous details that depend on your unique circumstances. Will you pay off your home mortgage before retiring? What will be your sources of retirement income? Have you considered the impact of inflation? Have you factored in the costs of long-term care or a nursing home?

As you near retirement, evaluate what will be taxable when you remove money from an account such as a 401(k) vs. what could be tax-free, such as a Roth IRA after a certain number of years. Strategies such as Roth conversions are one way of managing the tax implications over time, so you have a balance of retirement income sources. If you have significant 401(k) savings you may want to consider rolling it over into an IRA to help provide more investment options. Learn how to start a rollover IRA.

In the bigger picture, get started creating your own custom retirement plan to help you take a more holistic approach to retirement. You also can consult our Retirement Wellness Planner to build a more detailed plan based on your specific finances. Even better, work on your retirement planning with a trusted financial professional.

8. Invest beyond your 401(k).

To reach your mid- and long-term goals, take your savings strategy and put an engine behind it. That’s what investing can do. Does your timeline and risk tolerance favor a more conservative approach, with options such as government bonds or certificates of deposit? Or do you prefer more aggressive investing in stocks and private equity? Regardless, diversifying your investments can help you generate more consistent returns over time to withstand volatility. A thoughtful, diversified approach—including regularly rebalancing your portfolio to account for market shifts and life stages—is within reach (especially if you take advantage of the expertise of a financial professional).

Get started broadening your investments with these three steps.

9. Create an estate plan.

You don’t have to be wealthy, old, married, or a parent to need an estate plan, which also lays out who makes financial and health care decisions for you if you can’t make them yourself. An estate plan, ideally including a will (to avoid extra legal costs and confusion among your beneficiaries), enables you to clearly articulate your intentions for your assets after you’re gone. Who will wield power of attorney on your behalf? Will you include a living will in case you’re incapacitated and unable to communicate your wishes?

Learn the basics of estate planning and options for creating one.

Congratulations on working through the steps!

Here’s when to review your financial plan.

Take a fresh look at least once a year or after a big life change, such as:

• Significant change in income
• Job change
• Change in family dynamics like having a baby or adopting, getting married, divorce, or losing a spouse/partner
• Selling or buying a home
• Inheritance
• Unexpected debt
• Change in financial goals