Imagine if one in three Americans went on a road trip without knowing how to read a map or use a GPS.
This scenario describes the current state of navigating personal finances.
A recent NerdWallet survey, conducted online by The Harris Poll, finds that around a third of Americans (32%) aren’t confident in their ability to make a financial plan.
A financial plan is an ever-evolving document that captures your current financial situation, financial goals and strategies to achieve those goals.
It’s a guide to your financial future
For those who have little or no experience with financial planning, the process might feel complex, expensive or irrelevant. But a financial plan can be simple and free. You don’t need a lot of money or a high salary to start. Instead of thinking of wealth as something you need before you create a financial plan, think of a financial plan as something you need to build wealth.
Like directions on a map, a financial plan begins with your starting point. That means your plan should list savings and investments (assets) and money owed (debts). I keep a simple spreadsheet that lists every account I have and its balance.
Your plan should also include monthly income and typical expenses. To do this, I use a free budget app to track all my purchases. I can view monthly and yearly averages for each spending category.
These pieces of information reveal financial health factors, both positive — you spend less than you earn, for instance — and negative. For example, perhaps the types of debt you have are keeping you from moving forward financially.
“Taking the first step in the financial planning process — understanding your current baseline — is often the hardest,” says Sean Pyles, a certified financial planner, and co-host of NerdWallet's “Smart Money” podcast. “You might have to confront your emotional financial baggage, or spending habits that have been preventing you from achieving your financial goals. But getting clear on where your money stands now can be a hugely motivating factor on your journey to achieve your life and financial goals.”
After these foundational pieces of information are in place, a financial plan should outline your money goals, like buying a home, saving for a vacation or setting aside money to start or grow a family.
Finally, the plan should outline how you’ll go from where you are now to achieving your goals. A financial strategy is highly specific to each person’s situation. It may contain a mix of actions to take place immediately, like cooking at home more often instead of eating out, and actions that may take years to accomplish, like gaining the education or experience needed for a new, higher-paying job.
To be honest, this part of planning has been difficult for me the past few years, in part because of many life changes — having a kid and moving multiple times, to name a few. While my plans lacked specificity, I knew that the imminent unpredictability would benefit from financial flexibility. As a result, I prioritized cash savings, which allowed me to take on those change-related expenses without taking on debt.
Professional financial planning vs. DIY
Even if you are convinced a financial plan is a good step, who should make it may be less clear.
A DIY approach may be a solid option for those with a good handle on their finances, and it doesn't cost anything. On the other hand, while working with a financial advisor may sound intimidating at first and comes with a cost, having professional help could add some much-needed insight and knowledge for those who don't have a clear sense of their finances.
Instead of pitting these two approaches against each other, consider a two-phase approach: DIYing at the outset and opting for a professional later.
A basic financial planning template works well for many people, and it’s something you can put together yourself, with a little effort. A good planning template will address the most common factors in play: budgeting, planning for retirement, paying down debt, etc. Over time, taking ownership of your finances should build confidence as well.
At some point, you may encounter more complex questions. This may happen weeks into your DIY approach, or it may take years. Whenever it does, seeking professional help can give you the confidence that your financial plan is still on track.
“Pointing out the areas where you don’t know what you don’t know is one of the most valuable insights that a financial planner can provide,” Pyles says. “While you might be saving dutifully for retirement, you might also be underinsured, or have a gap in your estate planning. This is where a certified financial planner shines: showing you the holes in your financial life that could leave you vulnerable and providing a path to resolve them.”
Taking the next steps with your plan
If you spend time developing a plan on your own, you’ll have some advantages when it’s time to work with a pro:
- Getting started should be a breeze. Most financial advisors will want to start by reviewing your assets, debts, budget and goals. You’ll already have this information ready to go in your DIY plan.
- You’ll be prepared to find a good match. Your search to choose a financial advisor will be shaped by the specific issue that led you to look in the first place. If you’ve never made your own plan, you may not know where you need the most support from an advisor.
- You’ll get the most value as a client. Financial advisors can teach financial basics to clients who need the information. But if you have a good baseline understanding, you’ll spend more time on a higher-value service — their expertise.
The biggest hurdle to building confidence is just getting started. Delaying or avoiding thinking about your financial future can lead to missed opportunities and cause small problems to grow into large problems.
“The ultimate goal of having a financial plan is to ensure your money is working hard so you can build the life you want,” Pyles says. “And time is often your greatest asset here. Since many financial goals take years or decades to achieve, the decisions you make today will have lasting impacts on your finances down the road.”
Financial confidence is built incrementally. Reviewing my spending, monitoring my retirement contributions and setting an annual budget are all routine for me now, but there was a point where each of those felt like leveling up, and rightfully so. Wherever you find yourself today, decide on your next step, and take it.
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