Last Updated on July 6, 2020

What is true about personal financial planning?

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Financial freedom is something many of us want to attain in our lives. How amazing is it to be free from financial planning constraints and just enjoy the fruits of our labour? We all want that, indeed. However, it’s not something all of us can achieve without proper planning and management. On top of many other things, financial literacy is the true key to financial freedom.

Thus, this article will inform you about the basics of financial management.

Personal financial planning definition

Financial planning encompasses a wide range of aspects of your finances.

This includes income generation, spending, saving, investments, and other related aspects.

Moreover, it also includes payment debt, saving for retirement, creating trust funds, etc.

Meanwhile, personal financial planning is a person’s financial plan.

This plan is created especially for the person, taking into account his or her financial strengths and limitations.

A financial plan is a strategy you use to accomplish your financial goals.


Creating a budget is just a small part of creating a financial plan.

It goes well beyond tracking your expenses and setting aside a budget for them.

Everybody should have his or her personal financial plan.

However, this is not the case.

Why do you need to have your financial plan?

Now that you know what exactly encompasses financial planning, it’s time to talk about why you need to bother having your own.

Financial planning isn’t a one-size-fits-all kind of process.

It should take into account an individual’s goals, assets, liabilities, and many other factors.

Thus, an individual simply just can’t imitate another’s plans in finance and management.

Doing so would be like shopping for clothes for someone without knowing his or her size.

Here are some situations when you know you need your personal financial plan.

You don’t know where your money is going.

Do you ever just catch yourself wondering how you’re just living paycheck to paycheck?

If you’re one of the many people who have no idea where their income is going, it might be time to reevaluate.

Having no clue where your money is going is a dangerous place to be in.

It could set you up for a huge personal financial planning disaster in the future.

However, if you’re reading this, you’re on the first step to helping prevent that from happening.

You’re saving up for a home or a car.

Do you want to save for a downpayment for a home or a car?

Or are you one of the few people who are saving up to pay for them in cash?

Whatever it is, if you are planning to make a big purchase, creating your financial plan would be extremely helpful.

Making a big purchase is considered as a financial goal.

Goals need adequate time and planning to achieve.

Thus, never make a big purchase without evaluating your finances first.

You’re saving up for retirement.

You don’t have to be nearing your 50’s to think about saving for retirement.

Financial planners even recommend you save up for retirement as early as you can.

They recommend saving when you’re just in your 20’s!

This is because of the power of compounding interest.

Thus, planning your finances is a good idea if you are thinking about how to save for retirement.

You want to go on a trip.

Are you planning on taking some time off?

Is there a holiday coming up and you’re planning on going all-out on your next trip?

Whatever the occasion maybe, if you’re planning on a trip, you should plan your finances, too.

Going on a trip, especially international trips can drain you of your savings.

Don’t get us wrong.

There’s nothing wrong with enjoying your well-earned money from time to time.

However, you have to make sure you’ve properly planned for it.

Thus, you want to make sure you’ve saved enough for your trip.

Furthermore, you also need to create a budget for your trip.

This is to avoid spending beyond your saved money for the trip.

Your budget may vary depending on your destination, duration of the trip, and the number of companions.

If you want to save as much while enjoying, there are certainly ways to do so.

You have to look for great deals to maximize your cash value.

All of this will need some extensive financial planning.

You’re swimming in cash.

Did you just get a large bonus?

Have you been frugal for the past years of your life and have a lot of cash in savings?

Don’t be too comfortable.

Cash is also easy to spend or lose.

That is why you need to be smart with the cash you have right now.

You need a concrete financial plan to help you manage your finances.

Otherwise, chances are you might lose them through poor and impulsive financial decisions.

Moreover, you could also lose the opportunity of further growing your money if you don’t plan.

Keeping all of your cash in your savings account isn’t a bad idea.

However, it’s not the wisest thing you could do with your money.

That’s why you need to create a personal finance plan.

You’re in debt.

Personal finance management is not only for those who are rich.

You need planning more if you have incurred too much debt.

Having debt can sometimes be unavoidable.

It’s not an entirely evil thing to have.

However, if you don’t have a clear payment plan for any of your debt, that’s when it gets problematic.

If you’re in debt, you need to take action now.

Generate as much income as possible and cut down your expenses.

These are all possible if you create a solid plan.

Create a debt repayment plan.

You can also negotiate the terms with the bank or credit card companies.

You have dependents.

Are you the breadwinner of the family?

Then make sure you’re setting your finances straight.

Make sure you are protecting you and your family from unexpected circumstances.

You could do this by creating a plan.

How to make a financial plan?

The major function of personal financial planning is to know how much you’re making and set an intended purpose for every cent.

Its major function is to achieve whatever financial goals you have set.

Thus, you can’t make a financial plan without having financial goals in mind.

Those two go hand in hand.

Consulting with a financial planner would be the most convenient way to do so.

However, some people might not have access to these services.

Some may also not be comfortable discussing their financial situation with a stranger.

Thankfully, lots of resources on the internet are available for your perusal.

You can make your finance management on your own.

Guide to basic financial planning

Personal finance, as the name implies, is a personal matter.

Thus, everything should be personalized and customized according to your financial situation.

Having a guide is certainly helpful.

However, you want to modify some aspects, depending on what applies to your finances.

Track your finances.

If you want to know where every cent of your income goes every month, would you be able to answer the question?

Most likely, you won’t.

That is why you need to track your finance diligently.

Tracking your finances will greatly help you later in creating your budget.

Self-awareness is one of the first steps to managing your income better.

You will be surprised by the amount of cash you spend on unnecessary things.

At the moment, you may be oblivious to how much you’re spending on little knick-knacks.

However, if you start listing everything you buy, you will get a good idea of what’s eating up most of your income.

Furthermore, this will also help you cut down on your unnecessary spending.

This will greatly aid you in the process of growing your wealth in the future.

Those small expenses tend to add up over time.

If you place the money in investments instead, you will boost your income-generating potential.

Having a simple finance tracker will help you in the management aspect.

There are plenty of free and paid apps on the App Store or Google Play that will do this task for you.

Some of these are Mint, Pocket Guard, GoodBudget, Every Dollar, and many more.

You don’t have to buy them. Free versions will do just fine.

However, if you don’t want to use any apps, you can always use Microsoft Excel or Google Sheets.

It’s a more flexible platform that you can modify based on your preferences.

There are plenty of Excel templates you can download online if you are unsure how to make one.

Make a budget.

Creating a budget is easier said than done.

Making a budget is one of the most widely used pieces of advice in a personal financial plan.

However, not many people stick to it.

Many tend to fall off after some time.

Keep in mind that your budget only works as long as you follow it.

It’s not enough to create one.

You need to follow it as religiously as you can.

That way, you can take control of your personal finance.

When you create a budget, you should first know how much you will get at the end of the month.

However, if you don’t have a fixed monthly income (if you are a freelancer), you can make a low estimate.

From this monthly income, you can begin creating your budget.

Typical budget plans are 50-30-20 or 60-20-20.

The first number stands for basic expenses, the second stands for other personal expenses, and the final number stands for investment and savings.

This means that 50% of net income will be set aside for basic expenses, 30% for personal expenses, and so on.

Basic expenses typically include those that are your necessities.

These include electricity and water bills, rent or mortgage, groceries, etc.

Meanwhile, personal expenses are more of a lifestyle expense.

These aren’t considered necessary but are things you spend on regularly.

These include money for going out to dinner, movies, clothing, etc.

Lastly, investment and savings include your retirement fund, emergency fund, and other payments.

The plans are all just basic guides.

It’s considerably for you to customize this plan according to your goals.

Furthermore, you can always interchange these numbers if you wish to save more money.

For example, you can increase your savings to 40% or lower it down if you have some debt to pay.

Calculate your income.

Your income is your greatest tool to build wealth and improve your financial situation.

Thus, you should be aware of how much is your net income per month.

Also, take note of the income from other sources if you have other side hustles or small businesses.

Do you know how much you earn per month?

For more effective financial management, you want to track your cash flow.

Positive cash flow indicates that there is more money coming in.

Meanwhile, a negative cash flow indicates you’re spending or losing more money than you’re earning.

Try to see your cash flow to get a better view of our finance.

Your income is composed of your salary, bonuses, dividends from investments, and other earned cash.

Make sure to track all of them so you can manage your finances better.

Know your assets and liabilities.

Assets are your resources of economic value.

This includes your income, real estate properties, investments.

These investments may include stocks, bonds, mutual funds, UITF, ETF, etc.

Meanwhile, your liabilities are considered financial obligations that don’t bring you profit or gains.

This includes student loans, credit card loans, mortgage, expenses, etc.

Based on your assets and liabilities, you can calculate your net worth.

Your net worth is equivalent to your total assets minus total liabilities.

You might be wondering why you even need to calculate your net worth.

Knowing your net worth will give you a rough view on your current personal financial plan.

Negative net worth maybe a wake-up call for you to change things up.

Set a financial goal.

Your financial goals may vary depending on your age, your career, and whether or not you have a family or dependents.

Moreover, you may also have different financial goals.

These can be short-term, medium-term, or long-term.

When you are in your 20’s to 40’s, your financial goals mostly involve saving up for a house and or a car.

Moreover, you could also be saving up for a wedding, retirement, and future education of your children.

At this point in your life, you still have the privilege of tolerating high-risk investments.

This is because you are still young and in theory, have more potential for higher income.

Meanwhile, during your late 40’s to 50’s, your financial priorities may already change.

At this point, you may stay away from high-risk investments.

Furthermore, you’d also want to invest your money in more steady investments such as bonds.

During your 60’s, you’re to be nearing or at your retirement period.

Thus, you are leaning more on the safer side when it comes to savings and investments.

At this point, you are most likely not to have long-term financial goals.

Whatever period you are in your life, it’s important to discuss your goals when it comes to personal finance.

If you are married, have a chat with your spouse regarding your goals as a couple.

Meanwhile, if you are single, you have the freedom to decide on your goals on your own.

Create an emergency fund.

Nowadays, people are seeing the value of creating an emergency fund more.

An emergency fund acts as your safety net.

This is for cases where you get laid off, or your car breaks down, you get sick, or other emergencies happen.

Never touch your emergency fund if there is no emergency.

If you lack discipline, you can put it in a separate savings account where it could be difficult just to withdraw.

Your emergency fund is strictly reserve for unexpected expenses and emergencies.

Experts recommend saving up at least 3-6 months of your monthly income.

This will serve as your emergency fund.

Others even go as high as 1 year’s worth of income.

It all depends on how willing you are to save.

Thus, if you earn $5,000 per month, your emergency fund should be at least $15,000.

It’s recommendable to save up for an emergency fund before pursuing any investments.

You need to make sure you’re protected before you go into any risks.

Thus, you should prepare whenever a financial emergency pops up.

Remember that these emergencies are always unexpected.

That is why they are called emergencies.

You might feel like you don’t need it now.

But you will thank yourself later for saving up the cash.

Becoming SMART

When setting any goal, even apart from personal financing, you want to follow the S-M-A-R-T rule.

This means any of your goals should be specific, measurable, attainable, realistic, and time-bound.

Unfortunately, you can’t just set any financial goals just for the sake of it.

You need to make sure they are goals you can fulfil.

What should include?

Your financial plan should include all of the following:

  1. Income
    • Income is arguably the most important aspect of personal finance. Without income, you don’t have anything to spend, save, or invest. Furthermore, you have nothing to protect.
  2. Spending
    • This aspect is the easiest part of personal finance. Spending cash is much easier than earning it. However, we want to be responsible for our finance. Thus, we should limit it as much as possible.
  3. Saving
    • Although it may sound trivial, saving is one of the hardest things to do in personal finance. This is especially if you’ve got too many unnecessary expenses that you’re not aware of. Saving is important to make sure you have a safety net.
  4. Investing
    • Many people tend to forget this portion of personal finance. Investing is highly important to make sure you fight inflation. Moreover, it helps you maximize your income’s potential. You don’t want to work all your life, right? Then you need to make sure you’re investing. Having a high salary now doesn’t guarantee your financial freedom.
  5. Protection
    • This includes everything that protects your personal finance. This could be in the form of health insurance, life insurance, income replacement fund, etc.

Personal financial plan template

Below is a basic template for your personal financial plan.

You can modify any portion of the template depending on your current situation and needs.

Cash and Cash EquivalentsValue
Cash on hand 
Life insurance 
Personal Properties
Home equity 
Other real estate properties 
Valuable items 
Mutual Funds, ETF, UITF 
Government bonds 
Retirement fund 
Insurance premium 
Credit card bills or balance 
Home mortgage balance 
Car loan balance 
Personal loans balance 
Student loans balance 
Net Worth (total assets – total liabilities) 
FINANCIAL GOALS (short-term or less than 1 year)
GoalTotal CostMonthly CostDurationExpected Date
FINANCIAL GOALS (medium-term or 1-10 years)
GoalTotal CostMonthly CostDurationExpected Date
FINANCIAL GOALS (long-term or more than 10 years)
GoalTotal CostMonthly CostDurationExpected Date

Other personal finance tips

1. Invest early.

If you think your income is too low to start investing, you’re wrong.

You don’t have to have a huge amount of cash to begin investing.

With proper planning, you can set aside even as little 5% of your income to invest.


Depending on your age, your tolerance risk may differ.

Other factors play in as well as your financial goals and current debt.

However, if you invest early, you will certainly reap many benefits in the long run.

Compounding interest is a phenomenon that will work its magic if you invest early.

You can look up a chart comparing an investor who starts in his or her 20’s to another investor starting in his or her 40’s.

Although the latter’s investment is high, it is the younger investor who will reap higher returns.

2. Pay off high-interest debts.

If you are in a lot of debt, the instinct is to pay them all of as soon as possible.

However, in some cases, you will be better off following your loan terms, especially if the interest rate isn’t too high.

Your home mortgage is an example.

In most cases, it is advisable not to pay off the mortgage as a whole and invest your money instead.

This is because your liquid money can generate you more income.

Thus, it makes more sense to just continue with the mortgage and make your money grow.

However, when it comes to other debt that is considered bad such as personal loans and credit card bills, the story is different.

These are typically high-interest debt, and you want to pay them off as soon as you can.

Not doing this will continue to bury you in debt.

Thus, you want to create a debt repayment program to wipe off these high-interest debts.

3. Not paying off credit cards in full.

Credit cards are not inherently evil.

They can sometimes be beneficial.

However, in the wrong hands, it could be a waiting financial bomb.

If you have a credit card, make sure you’re not only paying the minimum payments.

This is because credit card companies charge you high-interest rates.

In just a few months, you could face a large amount of debt.

If you know you’re not disciplined enough, it may be better to get rid of your credit cards altogether.

4. Don’t invest in something you don’t know.

Investment is a powerful tool to grow your money.

It allows you to let your money work for you.

However, all investments come with risk.

Thus, you shouldn’t just invest just because it is a wise thing to do.

Make sure you know exactly what you’re putting your cash into.

Otherwise, you could fall prey to scams, pyramid schemes, and other similar financial disasters.

It’s also possible to lose all your money in legal investment methods if you don’t know what you’re doing.

Thus, you should educate yourself.

Take some time to research various investment tools.

The internet is filled with free resources that can help build your basic knowledge of investing.


Personal financial planning is an important topic you should focus on.

Your finances don’t end in having a high salary or a high-paying job.

Thus, you need to go beyond this limited mindset.

Think about the future and how you can achieve your goals financially.

However, make sure to create your plan.

Never rely on someone else’s plan just because it worked for them.

Know your goals, plan according to your time frame and assets.

Lastly, educate yourself so you can keep your hard-earned money and possibly allow it to grow.

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