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Whether you鈥檙e far along in your career or wondering how to manage your first salary, you need a personal financial plan.

鈥淢oney is a resource, and we are stewards of it,鈥� says Wilson Muscadin, financial coach and founder of a personal finance blog. A financial plan, he says, allows you to be thoughtful and proactive about how you use that resource.

Creating a financial plan on your own can seem overwhelming, but like any big project, breaking it down into smaller parts makes it easier to tackle.

So, what is the first step in financial planning? Before we introduce you to the first step of creating a financial plan, let鈥檚 explore what a personal financial plan is. Then we鈥檒l explore the remaining four steps to follow as you solidify your plan.

What is personal financial planning?

A personal financial plan is a written overview of your financial situation, combined with strategies to achieve short-, medium- and long-term financial goals in the future, Muscadin says.

鈥淚t鈥檚 figuring out where your money is, where it goes and where you want it to go,鈥� says Sophia Bera, CFP^庐, founder of a personal finance blog.

The process of creating a personal financial plan can be broken down into a series of steps. Let鈥檚 start with the first step of the financial planning process.

Step 1: Take an inventory of your finances

What is the first step in financial planning? It鈥檚 a fact-finding mission as you take an inventory of your finances.

While that can feel intimidating, there are ways of organizing your financial inventory that will make the next steps in financial planning easier, the experts say. To get started, take out some paper or open a document and list out your:

• Major assets, such as an estimate of the equity in your home, car, checking accounts, savings accounts, retirement accounts, and investment accounts
• Recurring income from your job and any side hustles you do as ways to make money on the side
• Debts, such as your mortgage, auto loans, personal loans, student loans, credit card debt, and medical debt
• Recurring expenses, such as your utilities, rent, phone bill, subscription services, and any other recurring costs

Finding this information can take some digging, Bera says, but it will make your calculations easier in the following steps. You鈥檒l likely need to log in to your various bank accounts, check your latest pay stubs, and review emails and paperwork as you work through each category.

However you decide to gather the information, being detail-oriented at the beginning can pay dividends over time.

鈥淵ou don鈥檛 have to become a spreadsheet nerd,鈥� Muscadin says. 鈥淏ut if you鈥檙e trying to get a handle on these things, spend more time upfront.鈥�

As you conduct your financial inventory, Bola Sokunbi, who is an author and the founder and CEO of a personal finance platform for women, recommends documenting where you found each piece of information alongside the amounts. Don鈥檛 include sensitive information like usernames or passwords, but you can include bank names or URLs to accounts. That way, Sokunbi says, you can more easily reference and update your financial plan in the future.

Once your financial inventory is complete, Bera says you鈥檒l likely see some things pop out right away that you can 鈥渟implify, streamline and automate.鈥�

These housekeeping tasks鈥攕uch as rolling over old 401(k)s into an IRA, automating payments, or taking care of small, lingering debts鈥攚ill help you organize your finances. Bera recommends doing what you can before moving on because it will help you focus on the big picture as you progress through the next steps in financial planning.

Step 2: Create a net worth statement

Bera calls the net worth statement the foundation of financial planning because it gives you a concrete number to build from.

Figuring out your net worth boils down to a simple equation: Add up what you own (your assets) and subtract what you owe (your debts). A net worth calculator can help walk you through it, and because you already have these numbers handy (thanks to the first step in creating a personal financial plan), it should be a breeze.

It can be a little nerve-rattling to boil your financial situation down to one figure, but the experts agree that the number itself isn鈥檛 the point.

鈥淲hen looking at your net worth, the trajectory from month to month is much more important than the absolute number,鈥� Muscadin says.

Your trajectory won鈥檛 be clear to you yet, but it will reveal itself as you move through the steps in financial planning.

Step 3: Get a handle on your cashflow

Your cashflow is the money that flows in and out of your accounts over a given period of time. To understand your cashflow situation, you鈥檒l need to look at your recurring income and expenses (which you already calculated in the first step of the financial planning process). In this step, you鈥檒l also need to factor in your discretionary expenses鈥攚hat you spend on things like food, entertainment, and clothes.

Most of these types of purchases are made with debit cards, credit cards, and cash. So, to see what your discretionary spending amounts to month over month, you鈥檒l want to consult your debit and credit statements.

Once you subtract the money you鈥檙e spending on recurring fixed expenses and discretionary expenses from your total monthly income, you鈥檒l see if you鈥檙e cashflow positive or cashflow negative. If you have money left over after all your expenses, you鈥檙e cashflow positive. If you鈥檙e spending more than you鈥檙e bringing in, then you鈥檙e cashflow negative.

If you鈥檙e cashflow negative each month, then Muscadin suggests it鈥檚 time to implement a budget. (He prefers the term 鈥渃ashflow management plan.鈥�) But even if you鈥檙e cashflow positive, there鈥檚 likely still room for improvement.

Take a close look at where your money is going and reflect on what you can change to come out more cashflow positive each month. Living frugally doesn鈥檛 have to cramp your style, Muscadin says, if you鈥檙e strategic and intentional about the way you spend. Maybe you鈥檙e paying for a subscription you don鈥檛 use anymore. Or perhaps you could eat healthier and save money by cooking more meals at home.

As you make adjustments and start generating more extra cash each month, you鈥檒l need to decide what to do with it. To do that, you鈥檒l need a clear sense of your financial goals.

Step 4: Set your financial goals

Muscadin likens setting your financial goals to determining your North Star.

鈥淯ltimately, money is not the goal,鈥� he says. 鈥淪aving more, investing more, all that is nice, but to what end?鈥�

Wondering how to set financial goals? To define your goals and why they matter to you, Muscadin offers a simple exercise to help.

Ask yourself: 鈥淲hat is my biggest financial goal?鈥� Write down your answer. Then ask yourself why that goal is so important to you. Write that down, too, and keep asking yourself that question until you鈥檙e crystal clear about the underlying motivation behind the goal.

Muscadin says that this exercise not only helps you define your goals, but it also makes it easier to stick to your financial plan. 鈥淲hen the shiny, new object comes along, you can ask yourself, 鈥楧oes this take me in the direction of my deepest 鈥榳hy鈥�?鈥欌��

It鈥檚 not enough to have goals, however. You need an action plan to achieve them.

Step 5: Make a plan to achieve your goals

鈥淧lanning is how you meet goals,鈥� Sokunbi says. 鈥淚t鈥檚 how you build wealth. It鈥檚 how you weather a life crisis.鈥�

She emphasizes that while it鈥檚 important, it doesn鈥檛 have to be complicated. The work you did in the first steps of the financial planning process should reveal many of the actions you need to take to reach your goals. (Working with a certified financial advisor is recommended when creating a financial plan.) 

Sokunbi offers these examples of action items that can go into your personal financial plan:

• Create a budget to generate more savings
• Schedule percentage increases to your 401(k) contributions
• Contribute to a Roth IRA or Traditional IRA to maximize your retirement savings and tax benefits
• Speak to a licensed insurance agent to review your insurance policies and ensure adequate coverage
• Find opportunities to increase your income
• Work with an expert to create a will and estate plan

And if you identified any ways to streamline your finances in the first step but tabled them for later, add those to your list, too.

鈥淵our financial plan is there to help when you have decisions to make,鈥� Sokunbi says. 鈥淚t鈥檚 all about giving yourself peace of mind about your finances and knowing that you have a plan for your future self.鈥�

Make time to regularly revisit your personal financial plan

The personal finance experts agree that for your financial plan to be effective, you need to carve out time to review it. That鈥檚 because as life changes, your goals will change, too, Sokunbi says.

鈥淟ife really sneaks up on people, especially in their 30s,鈥� Bera adds. 鈥淎ll of a sudden, things are more complicated鈥攜ou鈥檝e got a house, a kid and you鈥檝e changed jobs.鈥�

Bera notes that monthly check-ins can work for some people, but not everyone will see significant progress on a month-to-month basis. If that鈥檚 the case for you, schedule a meeting with yourself once a quarter to keep your personal financial plan on track.

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