Financial Planning Basics (A 7-Step Guide For Personal Finance)


A calculator and balance sheet, the start of financial planning basics.

The hardest part of any journey is getting started, but, when it comes to personal finance, getting started sooner rather than later is not just good advice, it is somewhat necessary.

Don’t worry, we’ve got you covered.

In this article, we’ll review seven financial planning basics that you can incorporate into your daily life right now. 

These financial planning basics are meant to empower you and motivate you to take charge of your financial destiny. Not only will you reap the rewards in the immediate term, but also, these practices will bear huge dividends down the road.

Whether you are at the start of your working life or you have more than a few years under your belt, there is no better time than the present to set the course towards a brighter, well-planned future when it comes to personal finance.

1. Getting Started (Take Initiative To Understand Your Finances)

For most individuals, the hardest part of personal finance is getting started. And no matter hard it might be, the first tip of financial planning basics is to get started now, no matter how difficult it might be.

Financial planning involves more than making sure you save money, invest wisely, and live below your means.

It is also about discovering what you want out of life and how you think you can get there.

If you spend too much money on certain things, this will become readily apparent. If you don’t save enough, this will also become obvious.

When you start the process, you begin to see a picture of yourself that you might not have known existed.

In terms of actual items you need to start, you should gather all of your financial records and recurrent expenses in one place. You might want to get a notebook or ledger to keep track of these things as well.

Why a physical item instead of using an electronic method? 

It’s up to you, really, but something physical like a notebook makes you actively participate in the recording and inspection of your financial activity.

Similarly to how many people prefer to keep a notebook of their workouts at the gym, a financial planning notebook can help keep you on track.

2. Making A Budget

Once you have gathered your income and expense statements, you can start the second step of financial planning basics, beginning to make a budget.

You will want to start with recurrent expenses such as mortgage or rent as well as utilities. Eventually, you will work on down until you get to things such as food expenses and gas.

The concept here is to take the most concrete numbers, or fixed payment amounts, and list them first. Then you want to list recurrent but variable payments made for services or lifestyle expenses.

This first phase is all about getting the numbers down. It isn’t about making goals just yet.

Once you have broken everything down into a list, you can then begin to categorize and organize them by class. Category classes could include examples such as house expenses, car expenses, and lifestyle expenses.

Remember, do not leave any transaction out of tally.

If you place most of your purchases on a credit card, for example, you can factor in the credit card payment in a universal sense. Then, later, analyze your statement transactions for specific areas to cut on the credit card.

The goal of this exercise is to find where you spend money, find out how much, and see what you can do about it.

Another reason you should start with fixed amounts such as your rent or mortgage is that these amounts are typically non-negotiable. They are items that have to be covered every month.

The items listed after that, however, need your attention and should be in a scale of variability as well as your ability to control them.

3. Cutting Expenses

The third step of financial planning basics is beginning to cut expenses. This is the fun stage of financial planning because you start to empower yourself to take control.

Often, rent payments and mortgage payments are fixed and you should pay these debts off aggressively.

However, when you are looking for ways to cut expenses, unlike the above, start with the smallest expenses and work your way up.

Do you spend too much going out on a monthly basis? Cut it in half and see what kind of results you have in terms of liquid cash in 30 days.

Or perhaps your smartphone bill is through the roof? Call your provider and see if there’s a better plan out there, or even consider switching providers to a cheaper option.

The same can be said for you internet and cable services.

At this step in financial planning basics, the idea is to begin to change your mindset towards spending money.

Too often, consumers see bills and expenses as some kind of eternal tax that is levied upon them just for trying to enjoy life.

However, you as a consumer, need to consider the power you have because you spend money with certain organizations every month.

Determining what matters to you, and what does not, will help give you the strength you need to ask for discounts, cuts in the monthly rate, and even re-negotiate contracts entirely.

For example, if you decide you cannot live without your morning coffee from Starbucks every day, then you need to find a way in some other area of your expenses to accommodate that.

Budgeting isn’t about giving up what you love, it’s about getting rid of what you don’t need and saving money in the process. 

If you simply can’t fathom saving for investing and the future, then think about how much more you can buy if you simply spend wisely.

4. Eliminating Debt

Don’t just cut expenses to free up cash for spending.

The cash you have freed up by cutting expenses should be used for running down debt and keeping the amount of your income that you spend on interest payments to a minimum.

The fourth step of financial planning basics is to eliminate debt. If you carry a large debt load of any kind you need to focus on paying that off.

You will never borrow your way to wealth through credit cards and expense accounts. 

There are a couple of methods for tackling your debt and what works for one person might not work for another person. 

The first method is consolidation. Where possible, consolidate like debts into one larger debt at a lower rate.

Consolidation gives you the advantages of making one payment and facing one debt pile instead of multiple payments on different loans at varying rates.

The only downside of this is that lower rates are not always available and consolidation is not always possible.

The other popular method that many consumers use is the debt-snowball method.

This means that you tackle your smallest balances first, working your way up to conquering your largest debts last.

It also involves making minimum or servicing payments on your other debts while overpaying on your smallest debt until you eliminate that balance.

Then you move to the next smallest debt until, eventually, you have your largest debt remaining.

Each time you pay off one loan very aggressively, focusing all of your free income on crushing that into nonexistence.

5. Creating An Emergency Fund

Once you feel like you’ve gotten a handle on your expenses and you’re following a budget quite religiously, it’s time to consider the fifth step of financial planning basics, creating an emergency fund.

The experts differ on the amount you should have in your emergency fund, but most recommend that you keep three to six months of expenses stashed away.

This could be in a savings account or another secure, liquid financial vehicle just in case you face major life changes that impact your income.

It’s critical to understand that the emergency fund cannot be invested or otherwise used in something speculative. 

While the performance of a savings account compared to the stock market is not competitive, you will not lose your savings in the event of an economic downturn.

However, there is always a potential for you to lose a substantial portion of any investment, even the ones that are considered low risk.

The other area where there is some debate between experts is whether to start building the emergency fund before or after you have conquered your major debts. Again, this is up to you and what you think is best for your situation. 

For example, consider the context of the debt. Is it a massive mortgage debt, or a several thousand dollar credit card balance?

If your major debt is a mortgage then you should start stashing away a little bit every month as you can until you have built your emergency fund.

However, if your major debts are relatively small and confined to credit cards, then consider paying off those debts immediately. Then, once debt-free, start saving for your emergency fund.

When considering all financial planning basics, use your judgment and act pragmatically.

Keep in mind that the goal is to control your finances. Be sure to reference your own situation and determine what will benefit your financial situation the greatest.

6. Purchasing Insurance

As you mature in your financial journey, you will notice that your thinking becomes increasingly long term. 

Part of this is that you are beginning to understand the myriad of complexities that make up the modern financial world. Furthermore, you see how you can protect yourself and your hard-earned money.

Purchasing insurance is the sixth step in financial planning basics.

Life insurance is one way you can ensure that your loved ones will not suffer from serious financial hardships should something happen to you.

Insurance can cover everything from your car to your health to your home. You have probably had some experience with it in the past.

However, insurance can actually be a bridge between perilous times and security.

Aside from home, car, health, and life insurance, you might also consider purchasing disability insurance in case you are injured on the job and can no longer work.

7. Planning For Retirement

The reward for good financial planning is a well-deserved retirement. Tackling your major debts, conquering them, and returning your accounts to a positive cash flow is not only empowering, it is intoxicating.

The more you save, the more you will want to save. And the more you think ahead, the brighter your future becomes.

When you have successfully followed the previous six steps of financial planning basics and find yourself getting ahead, it is time to start thinking about retirement investments and planning.

Again, this step in financial planning basics is context based and there are a variety of options depending on your field of work.

For example, self-employed individuals have options like a SEP-IRA in the United States which allows them to save up to $19,000 annually (depending on their total income).

Employees of major corporations often enjoy access to 401k plans which are investing instruments managed by brokerages such as Vanguard and Fidelity.

Individuals working for major companies or otherwise also have access to Traditional and Roth IRAs.

These incentivize investing and saving through tax benefits. Furthermore, they also empower you, the individual, to make your own decisions when it comes to retirement investment allocation.

Take the initiative to talk to your HR department about the different options available to you for retirement planning. As discussed above in the first step of financial planning basics, it is better to get started sooner rather than later in all aspects of your finances.


The realization that there are 86,400 seconds each day. What are you doing today, so that tomorrow you are a step closer to where you want to be? If not now, then when?

eightysixfourhundred, make them count


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James

Hi, I'm James! I want to help you make the most of your day by providing helpful tips and informative articles on motivation, time management, productivity, and happiness.

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