How to Make a Personal Financial Plan: A Step by Step Guide

It’s time for a fresh start.

The beginning of each year is the consumer’s chance to renew their efforts in the areas where they’re weak and, according to everything we’ve learned over the past 12 months, most of us are struggling to manage our finances.

I find myself facing this struggle. As a husband, dad of a toddler and a freelance journalist, I’ve got all kinds of bills, income, tax nuances and health insurance costs I have to deal with every month. It’s really hard to keep track of everything!

However, my better judgement tells me that, no matter how crazy life gets, we have a responsibility to manage our money or our money will end up managing us.

Let’s start the new year with a sense of control over our finances; nobody likes to be the hostage of their credit cards or checking account.

In the next few minutes, I’m going to avoid New Year’s resolution talk at all costs.

While I think analyzing why we fail and how we can succeed is an important discussion, I’m more interested in giving you actionable steps you can take this year to keep your financial ship afloat.

1. Do a Credit Card Audit

“Audit” isn’t the awful word you think it is, so take a deep breath and sit back down in your seat. An audit is, basically, doing a top-to-bottom examination of something, whether it’s your taxes, finances or fantasy football team.

To audit your credit cards involves writing down the following information:

  • Balance for each card
  • APRs for each card
  • Itemized balance list for each card
  • Ending dates for promotional APR’s on each card
  • Points/rewards accrued on each card

Writing down your balances is pretty straightforward. Log into your website or app and write down the current balance. The rest of the tips on this list need some explanation.

APRs for Each Credit Card

Most of us think of our credit card APR in terms of one number, but we’re making a big mistake when we do that. Why? Because there are multiple APRs on your card based on the type of transactions you’ve made.

These transactions usually fall into four categories: purchases, cash advances, balance transfers and promotional APRs. In some cases, some of the APRs will be the same.

You can find this information on your credit card statement, along with an itemized list of your credit card debt.

Itemized Balance List for Each Credit Card

Your balance on each credit card is categorized just like your APRs, and is printed as a table somewhere on your credit card statement. The table will show you what your balances are for purchases, balance transfers, cash advances and promotional purchases/transfers. 

Ending Dates for Promotional APRs

I have several promotional APRs on my credit cards, and it can be really hard to keep tabs on when those periods end. A promotional APR is usually a 0% interest rate given when you sign up for a card or offered at certain points throughout your card membership.

Your credit card statement will tell you when these promotional periods end and, if they don’t, you can always call your credit card customer service line to find out.

The reason why knowing these promotion end dates is important is because once they’re finished, you’ll pay interest on the entire promotional balance if it’s not completely paid off.

Points/Rewards Accrued on Each Card

Because there are so many different rewards programs integrated into credit cards (travel and cash-back are the big ones), consumers tend to have rewards points or cash-back credits they don’t know about.

Go through each credit card you have and find out what your rewards balances are.

The Results of Your Credit Cards Audit

Once you have all this information written down – it’s a lot, I know! – you’ll have a clear picture of where your credit card finances stand.

In some cases, the amount of debt you have will put a smile on your face. In other cases, you’ll be in disbelief on how much damage the holidays did.

Whatever the case, you’ve got to realize that finishing your in-house credit card audit sets you apart from millions of consumers who are, in most cases, too afraid to see the hard truth about their credit card debt.

If you find yourself in the red after your audit – the average debt for someone with balances is more than $16,000 – it’s time to take a look at your budget. But before you do, take a moment to do some self-examination.

Why do you have credit card debt? In some cases, it’s unavoidable – a big life emergency pops up, you get laid off unexpectedly or your income drops drastically without warning.

In other cases, it’s simply a matter of spending what you don’t have. As someone who’s fallen into both categories, I encourage you to take responsibility for your spending and commit to paying down your debt. No excuses.

2. Review Your Budget and Adjust for New Income and Expenses

Based on conversations we’ve had with credit bureau Experian, we know that about half of Americans don’t have a budget. We also know that about 40% of us have credit card balances. When you put those two facts together, things can get real ugly, real fast.

When I was single, I had a loose budget for about six months when I got my first salaried job. My credit card debt crept up around $11,000. I wasn’t too concerned about it – my budget included the total monthly minimum payments I was making.

When I got married, however, our combined credit card debt hit $22,000. We were faced with a pretty huge financial mountain to climb.

To tame that beast, I did a credit card audit and created a detailed budget that listed exactly how much we could spend in certain areas and how much we were making.

Knowing the difference between what was going out and what was coming in helped me see how long it would take to pay off our debt.

Do you have a budget? If so, you’re headed in the right financial direction.

If not, all you need is a couple of hours to write things down and a good app – or even just a piece of paper – that includes the categories (groceries, gas, utilities, etc.) where you spend and how much you’re allowed to spend in a month.

If you already have a budget, January is a great time to review your categories, spending, and income. Find areas where you’re overspending and identify any raises or new income you have.

Get a clear idea of how much surplus you have every month. From there, you can set deadlines for paying off debt or saving up for something fun.

Set a Savings Goal for a Vacation or Something Equally as Awesome

The beauty of a good budget is that it gives you control over how much you save. As we wrote in one of our articles about budgeting, your budget is like the bridle of a horse. It’s a small tool that harnesses the power of the beast and uses it to your advantage.

Divide the Cost of Your Trip by Your Monthly Surplus

When you know how much you can save each month, you can plan out a savings schedule that makes cool things possible.

For example, if you know you have an extra $600 a month and you’ve always wanted to take a vacation to Barcelona, estimate how much the trip will cost and divide it by your monthly surplus. The resulting number is how many months it will take you to save up for that trip to Spain. 

However, there’s a good chance unexpected expenses will pop up, so give yourself a little extra time to save up for your trip. Just because you project you’ll have $600 of breathing room each month doesn’t mean you’ll always have that precise amount left over.

Create an Extra Spending Budget

You can take this strategy beyond vacations, too. If you want to make sure you have enough money for the various one-off events that happen every year, make an “Extra Spending” budget that identifies the year’s events that aren’t included in your monthly budget.

My wife and I did this before a recent holiday season. Our Extra Spending budget included two weddings, two birthdays, a cross-country Thanksgiving trip to visit family, Valentine’s Day, our anniversary and a vacation.

This budget accomplished two things. It helped us set a spending limit for each event, and it eliminated the surprises that inevitably come when we don’t plan out our spending. How many times have you realized, mid-month, that someone’s birthday was around the corner and you needed to pick up a gift?

Your Extra Spending budget can cut down on these surprises. How will you keep track of all your spending? Great question.

Sign Up for a Budgeting App

Eight years ago my wife and I bootstrapped our way through a budget using printed-out spreadsheets and budget projections. Each time we spent something, we wrote it down with a pen. These days, budgeting is much more convenient.

Assuming that you’ve decided a budget is a good idea, sign up for Mint or YNAB (You Need a Budget), two of the most popular budgeting apps in the personal finance space. We’ve done reviews on both and we think, based on our research, you’ll be pretty happy with either of them.

The main advantage to incorporating one of these apps into your money management is that transactions are entered into your budget as soon as they happen, either through an automatic or manual entry. Since the app is cloud-based, transactions show up in your app and, if you share finances, your spouse or significant other’s app.

The only complication here is choosing which app is best for you. I use YNAB and have been pretty happy with it, but there are plenty of consumers out there who love Mint. Whichever app you choose, you’ll be happy to know that Reddit features super-active threads for both YNAB and Mint.

With your budgeting strategy in place, those vacations and others savings goals are well within your financial reach. However, you can sabotage your plans if you don’t keep tabs on your credit scores.

3. Check Your Credit History and Scores at Least Once a Month

There was a time when you could only get one credit score for free, once a year. Thankfully, a lot has changed over the past few years.

Consumers can now go to a website like Credit Karma and enroll in a free credit-score monitoring that lets you see your TransUnion and Equifax scores 24 hours a day and gives you access to your full credit history.

We’ve mentioned Credit Karma’s credit monitoring program in many personal finance articles. We don’t do that because we get any monetary benefit from mentioning them. I use their site to keep tabs on my credit history and scores, and that’s why I’m such a big fan.

Your credit scores are updated frequently and you’ll get an email notification any time there’s a significant change to your credit scores.

As we’ve written in the past, not checking your scores on a regular basis can really cost you. A late payment or incorrect information you didn’t know about could drop your scores enough to cost you hundreds or thousands of dollars in interest payments.

A good rule of thumb is to shoot for a score of at least 750, which is considered pretty good and usually shows up when you don’t have any recent late payments and you keep your credit card balances really low.

If your score is lower than that, there are a number of steps you can take to raise your scores. If you’re already past the 750 mark, just keep making payments on time and maintain balances that are less than 30% of your credit limit.

One of the benefits of a great credit score is that you’ll get lower interest rates on mortgages; your score tells lenders you’re less of a risk. Since lenders find you more trustworthy, they’ll charge you less interest because they’re pretty sure you won’t flake out on your payments.

Once you have a home, you’re going to deal with issues that go beyond mortgage rates. One of those issues is homeowner’s insurance.

4. Reassess Your Home Value for Insurance Purposes

We had the chance to talk with John Bodrozic, founder of HomeZada, an app for cataloging your possessions for insurance coverage purposes.

One of the big mistakes homeowners make is not notifying their insurance agent of increased home value. The classic scenario, John said, is that a home is appraised at, let’s say, $200,000 in 2007. Ten years later, a remodeled kitchen and bathroom have raised the home’s value to $250,000. 

A hurricane comes through and totals the house. When it comes time for a payout, the insurance company cuts you a check based on the 2007 value.

Our advice? Give your insurance agent a call and make sure your policy coverage accurately reflects the current value of your home.

“Most people say they need insurance and they adopt the ‘cheapest option’ mentality,” John said. “You get a policy and go with it and nobody bothers to look one or two levels down.”

Another tip: Catalog all the valuables you have in your home. This list will become crucial should disaster strike your home. John says coverage on these items will raise your premiums a nominal amount every month.

5. Read Over Your Medical Benefits

My last tip for your 2017 financial plan is to review your medical benefits. Much like homeowner’s insurance, there are many different dimensions to your medical policy, and you should know the most important ones before something goes wrong.

You can go as deep as you want with medical expenses, but I like to break it down into two categories: the basics and the not-so-basic.

The Basics

Every consumer should know the following basic information about their medical plan:

  • Monthly premium
  • Co-pays for primary care, specialist, urgent care and emergency room visits
  • Out-of-pocket maximum: The most you’ll pay out of pocket each year
  • Deductible: What you have to pay out of pocket until your full benefits kick in
  • Co-pays for generic prescriptions

These five different categories are the ones which are most often used by consumers, which is why it’s important you know what they are.

The most-used benefit will be your co-pays, so be clear on what it will cost to see your doc or a specialist or take a trip to urgent care or the emergency room.

The Not-So-Basic

The not-so-basic benefits are the procedures that you don’t typically get on a yearly basis if you’re healthy and don’t have a colorful medical history. Knowing these are important because they can help you save money:

  • Imaging co-pays
  • Outpatient facility co-pays
  • Pregnancy coverage
  • Hospital stays

A great example of using this knowledge to your advantage came this past year when I had to go to physical therapy sessions. My primary care doctor referred me to a local university’s health care network. When I called to find out how much it would cost, the customer service rep told me I’d have to pay 30% of the bill.

Considering that most insurance companies negotiate rates around $100 for primary care doctors, I imagined a visit to an outpatient physical therapy facility would cost up to $200 (up to $60 for me). So, I called an in-network physical therapy center that only cost me my specialist co-pay of $25.

How “After Deductible” Works

One thing to watch for when it comes to the categories I listed is the phrase “after deductible.” When a service costs you a certain dollar or percentage amount “after deductible,” that means you’re paying full price for that service.

So, let’s say you have a deductible of $2,500 and you need an MRI of your knee, which your plan says will cost you 30% after deductible. You check your account and find that you haven’t paid any money toward your deductible.

Now, for example’s sake, your MRI costs you exactly $2,500.  You pay it, which means you’ve met your deductible. That’s a good thing because three months later your other knee turns sideways during a soccer game and you need another MRI. Since you’ve met your deductible, you get to pay 30% of that $2,500, which is $750.

Let’s bring this back to your 2017 financial plan. Knowing these numbers ahead of time will equip you to handle spur-of-the-moment medical issues and the associated costs.

If you need a non-urgent procedure like outpatient surgery, knowing your deductible and discounts will help you choose the right facility for the procedure.

Some Final Thoughts About Your Financial Plan

January is a great time to commit yourself to some of the personal finance practices I mentioned above. You can choose one of these or all of them.

My suggestion is to start out with a credit audit, review your budget and calculate any extra spending. From there, download a budget app.

Once you’ve reached those milestones, the rest is pretty easy. Creating an extra spending budget takes less than an hour, as does reviewing your medical insurance’s summary of benefits. The monthly (or weekly) check of your credit score takes a matter of seconds.

Keeping your home values current with your insurance agent is a little bit of a tedious process, but it’s well worth it to protect your investment.

The one principle that ties all of this together is transparency. If you want to have a successful financial plan, you’ve got to be honest about every dime you’re spending (budget) or will have to spend (extra, medical, homeowner’s insurance).

Knowing exactly where your finances stand may not always be pleasant, but it’s the first step in building some financial stability in your life.

» Read Next: How to Find a Financial Advisor You Can Really Trust

J.R. Duren

J.R. Duren is a personal finance reporter who examines credit cards, credit scores, and various bank products. J.R. is a three-time winner at the Florida Press Club’s Excellence in Journalism contest. He is a member of the Society of Professional Journalists and his insight has been featured on Investopedia, GOBankingRates, H&R Block and Huffington Post.

How to Make a Personal Financial Plan: A Step by Step Guide