9 Steps to a DIY Financial Plan

I recently had lunch with a friend who just got an inheritance. She wanted to use it to pay off some student loans, but her husband wanted to buy a four-wheeler. What should they do? I told her they had some much bigger questions to answer first. Because before you can begin to answer a specific financial question, you must first understand what you want it to accomplish. And that has to do with your goals.

You hear a lot about financial goals, but so many of them connect to life goals. What would you like your life to look like in the future, and how will the financial decisions you make now impact that vision? It's important to zoom out and look at the big picture, and to do that, you need a financial plan. You might be thinking a financial plan is only for people with a lot of money or that it'll cost too much. Neither is true.

If you're just starting out, having a plan will help give you a sense of direction, kind of like a roadmap. If you have a spouse or partner, it will help make sure you're in agreement on that direction. Then, when you're confronted with fork-in-the road financial decisions like a job change, what to do with a 401(k), or how to handle an inheritance, you'll have a bigger context to help you decide.

And a financial plan doesn't have to cost a lot. Depending on your situation you could even create one on your own. Here's how.

When my husband and I recently took another look at our financial plan, one of the first things we did was review our goals—both big and small. And it was surprising to find out that we weren't aligned on all of them. Here are some questions to ask yourself:

• What are your short-term goals, the things you hope to achieve in the next one to two years, like paying down debt or establishing an emergency fund?
• What are your plans for the next three to 10 years? Are you saving for a house or starting a business?
• What about things that are 10 or more years away like retirement or saving for college?

It's easy to talk about goals in general, but now's the time to get specific. Write them down, including a target date and how much you'll have to save each month to get there. The more specific you are, the easier it will be to measure your progress toward achieving each goal.

To be realistic about achieving your goals, you need to know what you have today. To find out, first make a list of all your assets—things like bank and investment accounts, real estate, and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your debts from your assets and you have your net worth. If you're positive, great. If you're negative, that's not at all uncommon for those just starting out, especially if you have a mortgage or student loans. But either way, it gives you a benchmark to start from.

Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? Do you often have extra cash you could direct toward saving for your goals?

Your cash flow analysis will let you know what you're spending. Zeroing in on your budget will let you know how you're spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities, and loan payments. Don't forget irregular and periodic big-ticket items such as vehicle repair/replacement costs, out-of-pocket health care costs, and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Is saving a part of your monthly budget? Does how you spend your money line up with what's most important to you, or do you need to make adjustments?

Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can help you build equity and boost your credit score. It's high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28% of pre-tax income goes toward housing including mortgage or rent, property taxes, insurance, homeowner's association dues, etc., and no more than 36% toward all other debt. Look at each specific debt and come up with a plan to help pay it down as quickly as possible.

Whatever your age, saving for retirement needs to be part of your financial plan. The earlier you start, the less you'll likely have to save each year. You might be surprised by just how much you'll need—especially when you factor in health care costs. But if you begin saving early, you'll find that even a little bit over time can make a big difference. Contribute to a 401(k) or an IRA. Save what you can, and gradually try to increase your savings rate as your earnings increase. Whatever you do, don't put it off.

When something unexpected happens—say you lose your job or get hit with an unexpected medical bill—an emergency fund can help you avoid tapping your long-term savings to make ends meet. It's generally a good idea to save enough to cover at least three months'—ideally six months'—worth of essential living expenses (for example, groceries, housing, transportation, and utilities). Save this money in a checking or savings account so you can access it in a hurry should the need arise.

Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner's or renter's insurance. While you're working, disability insurance helps protect your future earnings and ability to save. Employer-provided disability insurance typically replaces about 60% of your salary. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.

At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up to date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

It's not about how much money you have now, it's about seeing the big picture and being prepared to make decisions based on what you want your money to do for you—and how to make it happen. Will it take some time? Sure. Will it be worth it? Absolutely. And in the future, if you decide to work with a financial planner, you'll be that much more prepared to take the next steps.