How and Why to Create Your 2021 Financial Plan
With a very unpredictable 2020 finally behind us, it might seem futile to attempt to draft a 2021 financial plan. How can we possibly predict what’s going to happen? Isn’t this a waste of time?
While plans can and will change, starting the year with a vision for what we want to happen in our financial lives can make all the difference. It’s also always worthwhile to gain awareness of and clarity on how we’re spending and allocating our money.
What’s a financial plan?
A financial plan is a realistic and optimistic plan of your goals for the next twelve months. It includes everything from spending, saving, paying off debt, charitable giving, saving for retirement, investing, etc. It also includes a current snapshot of where your money is and what you owe.
A financial plan is a living document. It can and will adjust over the course of the year, but we’ll cover that later!
Why are financial plans important?
Financial plans give our money a purpose. When we map out our finances (mainly our income, expenses, and what we want to go towards our goals), we can plan for the bigger things we want to accomplish.
What do you want to accomplish this year? Think strategically. In doing so, you can figure out how much you want to (and can) put towards your goals by adjusting your spending and lifestyle.
This plan will reduce spending-induced guilt and provide peace of mind. When we buy something we won’t wonder if we can afford it or if it’s at the expense of other goals. We can feel confident that we’re on track to achieve our long-term goals while simultaneously enjoying the money we’ve worked so hard for!
What does a financial plan look like?
A financial plan uses what I call the “golden rule” of personal finance.
TOTAL ANNUAL INCOME*** - TOTAL ANNUAL EXPENSES = $$$ FOR OUR GOALS
***(the amount that actually hits our bank account)
I like to look at this on a monthly basis with a total for the entire year. You can use this financial planning template to get you started. If your profit (income - expenses - allotment towards your goals) is more than zero, the plan is workable.
How to create your financial plan.
Here’s how to create your financial plan, step-by-step.
First, the inflows.
Start with your income. What do you expect to earn over the next twelve months? If you earn a salary, include the amount that hits your bank account each month. Each source of income can get its own line. If you run your own business, you might decide to give each client its own line item.
Then it’s time for the outflows.
Map out your estimated expenses. Start with reality. What expenses do you currently have? You can look at some recent credit card or bank statements, as well as your money journal to get some ideas.
Then think about if there are any expenses you want to add or any things that happen less frequently that you want to plan for. In 2021, I know there are many who are excited to budget more for travel, for example.
There will always be things we forget, but we can add things over time.
Most important - your goals.
Once you’ve committed to allocating a certain amount of money toward a goal, treat it like an expense. If you’re paying off debt, this money might go towards your goals directly. If you’re trying to save more, it may mean setting up an automatic transfer to a savings account from each paycheck.
Make it workable.
If INCOME - EXPENSES - GOALS yields a negative number, the plan isn’t workable. For many of us, that will be the case at first. That’s okay! From there, you can adjust. You can have your plans reflect your current reality but always keep your goals in mind. If your plans are workable with a raise, go after it.
Keeping it up.
Creating your 2021 financial plan is a big achievement worth celebrating. Hard stop. But no matter how great it is, it’s only helpful if we keep it updated and top of mind.
Set aside time in your calendar to update your plan each month. So at the end of January, update for January “actuals.” Adjust your future plans accordingly.
Make the time you set aside fun by playing music, getting comfy and even lighting a candle. We want to look forward to this monthly ritual. Have an agenda ready to go so it’s clear what to do and where to start.
If you need extra support, get a money buddy or a group of money buddies to support and celebrate with you!