Past, Present, Future: Full-Circle Financial Planning

As you gear up for the new year, it’s time to think about financial planning! This handy guide takes you through your financial past, present, and future to make a rock-solid DIY financial plan and start the year off right!
Financial Planning

If you’re wondering how to make a financial plan, it’s important to look at where you’ve been, where you are now, and where you want to be in the future. Auditing your past and current financial situation can help you set yourself up to create and enact a get-out-of-debt plan, get a better handle on your day-to-day finances with a solid budget you can stick to, and start making progress on your future financial goals/savings.

While it can feel intimidating at first to create a DIY financial plan, it will set you up for success all year long, and the steps below will help you get there. By taking some time now, you’ll feel more calm and confident—and you just might discover that the process is empowering, and even fun!

This guide will walk you through the financial planning process step-by-step, with simple action items along the way. We’ll look at the past (to audit your finances), the present (to see what you need now), and the future (to set intentions and work toward them). Let’s dig in!

DIY financial planning materials

Pick a place to write down your plans—grab a big piece of paper or a fresh new document, and divide it into three sections: past, present, and future. You’ll also want some scratch paper or an area to take notes. If you want to get creative, feel free to go wild with posterboard and markers, but you don’t need any special materials to create a solid plan! Whatever helps you feel organized and in control.

Throughout this article, the items you should write down for your financial plan are marked with this symbol: ➤

The past

First, audit your financial past. At the end of this section, you’ll have a handy inventory of all the money you have (“assets”) and all the money you owe (“debts”), plus a calculation of your current net worth.

Step 1: Know you have and what you owe

Most people have money in a variety of places—like money stored in multiple 401(k)s from prior jobs or multiple digital wallets—and you may also have multiple debts. Creating a financial plan starts with gathering up this basic info; plus, it’s helpful to have everything written down in one place for future reference. You’ll also need this information to calculate your current net worth.

Start by making a list with two sections: money you have (“assets”) and money you owe (“debts”). Give each asset or debt a name (don’t write down account numbers or passwords—it can compromise your account security!) and write down the full amount you have or owe (not just the monthly payment for debts). For savings accounts with special withdrawal rules, like a 401(k), it may be helpful to jot down a note for future-you about the restrictions.

Below are some common assets and debts. You probably won’t have all of these, and you may have some that aren’t on this list!

Regular spending money

  • Cash
  • Checking accounts
  • Balances in digital “wallets” (like PayPal, Venmo, GooglePay, etc)
  • Money in flexible or health savings accounts (HSAs and FSAs)
  • Pre-paid debit cards or gift cards

Savings/investments

  • Savings accounts
  • Money market accounts
  • Certificates of deposit (CDs)
  • Retirement accounts (like a 401k), IRAs, and pension funds
  • Investment accounts
  • Cash (if you keep any savings as cash, like in your house or a safe deposit box)

Debts

  • Credit cards
  • Car loans
  • Mortgages
  • Student loans
  • Personal loans
  • Bills in a payoff plan (aka, if you are paying down a balance through an arrangement with an individual entity, like a hospital or the IRS)

➤ Write down your assets and debts (account names and full amounts).

Step 2: Calculate your net worth

Now that you know your assets and debts, you can discover your financial net worth. Your net worth—and whether it rises or falls over time—can help you evaluate your financial health. Net worth is just one aspect of your financial health, and it’s not an indicator of your worth as a person—so don’t fret if it’s not where you’d like it to be!

To calculate your net worth, look at the inventory you created in Step 1 and total up your assets and debts. Then it’s just simple equation:

Assets
- Debts

= Net Worth

Or use this NerdWallet calculator that does the math for you.

If you have more debts than assets—whether it’s student loans, medical debt, credit card debt, or something else—you may have a negative financial net worth at the moment. Net worth calculations don’t take your income into account, so even people with high incomes can have negative net worth, while people with relatively lower incomes may have high net worths.

Your net worth reflects where you are at the moment—the culmination of the assets and debts you’ve accrued up to now, and a good starting point for deciding what goals you want to focus on first.

➤ Write down your current net worth.

The present

Of course, if you’re here to figure out how to make a financial plan, you’ll want to know your financial situation right now. When you’re finished with this section, you’ll understand your income, debt-to-income ratio, and expenses.

Step 1: Add up your income

It’s important to understand the difference between your gross and net income. Gross income is all the money you make before any taxes or other deductions come out. Net income is your total income minus deductions. Here’s an example: if your annual salary is $45,000, your gross income every month would be $3750. But your actual monthly paychecks will be less than that, because taxes and other deductions (like healthcare premiums) are taken out before your employer gives you your take-home pay.

Your paystubs can help you figure out your gross and net income. Keep in mind that, depending on your work situation, you could be classified as an employee or an independent contractor, regardless of whether your work is full-time or part-time. Here’s how to tell the difference: employees work directly for a company and receive a 1040 form for taxes at the end of the year, while independent contractors technically work for themselves and get a 1099 form from anyone they work for. If you’re not sure, ask your employer!

Decode your paystub: employee edition

If you’re classified as an employee (whether you have a part-time job or work full-time) your employer will generally withhold money for taxes on your behalf. To see your gross and net income, dig up your paystub. You’ll see your gross income, plus any deductions (for taxes and things like healthcare premiums or retirement contributions). The amount you take home after those deductions is your net income.

➤ Write down your monthly gross and net income from regular employment.

Decode your paystub: independent contractor edition

If you’re a freelancer/independent contractor, you likely receive payments of gross income (no taxes withheld), so you’ll need to set aside money for taxes. When you calculate your income, add up all your gross income, then subtract the money you need to set aside for taxes to see your net income.

Plenty of people earn income as both an employee and an independent contractor (like if you have a part-time job as an employee but freelance on the side). If that’s your situation, be sure to understand your gross and net income from every source.

➤ Write down your monthly gross and net income from self-employment. (If your income varies, estimate as best you can.)

Gather your miscellaneous income

  • Now’s the time to find any other income sources you have coming your way. Here are some ideas for places to check:
  • Interest your money earns (savings accounts, etc.)
  • Cashback rewards on credit cards
  • Settlements from lawsuits or insurance claims
  • Trusts that provide ongoing distributions
  • Investments that provide income

➤ Write down your monthly gross and net income from other sources.

➤ Now, add up your net monthly income from regular employment, self employment, and other sources. Do the same with your gross monthly income, and write both numbers down.

Psst… if your income varies significantly from month to month, here’s an article about managing that.

Step 2: List your expenses

Find your monthly expenses

You know what’s coming in; creating a financial plan that’s balanced means you need to know what’s going out too. Write down all your monthly expenses—the name of each category and how much you spend on it. It can help to cruise through your banking records to make sure you haven’t forgotten anything. Here are a few common categories:

  • Rent/mortgage
  • Transportation
  • Utility bills
  • Food
  • Minimum debt payments
  • Child care
  • Entertainment

Here’s a helpful article on sussing out those budget categories.

Don’t forget the variables

Some bills don’t happen every month, like water bills and seasonal home heating oil. You’ll want to do a bit of math to get the monthly cost for these; if your quarterly water bill is $400, divide by 3 to get a “monthly” cost of $133.

Here are a some common variable costs:

  • Car maintenance
  • Gifts and holiday expenses
  • Personal care services (like haircuts)
  • Clothes and shoes
  • Vet bills and pet expenses
  • Glasses and contacts

Here’s more guidance on figuring out variable expenses.

Remember savings and debt payments

If you have debt, be sure to include at least the minimum payments in your list of monthly expenses (but definitely consider paying more to reduce that debt faster!). Here’s a primer on types of debt.

You also may have savings goals you want to set aside money for every month—an emergency fund, a new (or new-to-you) car, or a trip. You’ll want to make sure monthly contributions to your savings are reflected in your list of things you spend money on each month. (Here’s a guide on creating a savings strategy.)

➤ Write down your monthly expenses in your financial plan!

Psst… Did you know your Simple Account can track your monthly budget for you? Built right into your checking account, Expenses allows you to create budget categories, decide when to fund them, and automatically keep track of what you’ve spent. And with Goals, you decide what you want to save for, how much you need, and by when—then Simple automatically tucks away the money you need a bit at a time.

Step 3: Get the deets on your debt

Calculate your debt-to-income ratio

Your debt-to-income ratio is another handy number. Like your financial net worth, it’s just one aspect of your financial health: it indicates how manageable your debt is likely to be. It’s also a number that lenders consider when evaluating loan applications (although it does not affect your credit score).

It’s easy to calculate your debt-to-income ratio: take your total monthly debt payments and divide the number by your total gross monthly income.

Total monthly debt payments

Gross monthly income
= Debt-to-income ratio

The higher your ratio, the more of your monthly income you’re spending on debt payments. If your ratio is over 50%, there’s a good chance that debt payments are squeezing your budget—and an indication that paying down debt could be a good focus for your financial planning.

Here’s a calculator that does the math for you!

➤ Write down your debt-to-income ratio.

Understand the cost of debt

When deciding how to tackle your debt, it’s helpful to understand what it costs to borrow money. The answer to “How much does my debt cost?” is more complex than adding up your monthly minimum payments—you want to take the long view.

Whether your debt is in the form of variable-rate credit cards or a loan with a fixed rate and term, you’ll have to pay back the principal (aka, the amount you borrow), plus interest and any other fees or finance charges. The higher your interest rate, the more it costs you to borrow money. The faster you pay off your debt, the more money you’ll save.

To figure out how much your debt will cost you in the long run, review your loan documents or credit card statements to understand how much interest you’re paying and how long you’ll be making payments. Then use these easy cost-of-debt calculators from NerdWallet for loans and credit cards to see exactly how much each loan or credit card balance truly costs.

➤ For every debt, write down your rate, how long it will take you to pay it off, and the overall cost of the debt (based on numbers you get from the calculators above).

Psst… For more details on how the cost of different types of debt can affect your financial picture, take a look at this post on “good” debt versus “bad” debt.

The future

Take a look at everything you’ve written down so far: these are the pieces that add up to your full financial picture.

  • Your assets and debts
  • Your current net worth
  • Your total monthly gross and net income
  • Your monthly expenses
  • Your debt-to-income ratio
  • The cost and timeline of each debt

Now it’s time to define your financial vision for the future. There are no numbers to calculate here—just space to imagine and choose where you want to take your financial future in 2021! Go ahead and grab that posterboard you started with and have fun with it.

Step 1: Set major goals for the next 3-5 years

Take a look at the work you did in Sections 1 and 2 of your full-circle financial plan. What’s coming up for you as you look at your financial past and present? Do you have ideas about your long-term financial goals?

Here are a few examples of possible goals:

  • Get out of debt faster and spend less on interest
  • Grow your retirement fund
  • Increase your net worth
  • Get better at budgeting
  • Save up for big things like a buying a house, college fund for your kids (or yourself!), your wedding, or moving to a new town

Here’s an exercise to get your future-vision juices flowing in three easy steps.

1. Get comfy in a spot where you won’t be disturbed for 5-10 minutes. Take a moment to ground yourself, and then imagine your ideal life five years down the road. How do you spend your time? Where do you live? What have you accomplished?

2. Come back to the present, and reflect on what you imagined. What are the most important components of your vision? Is it home, family, career, passions, travel, etc.?

3. Next, list the financial changes that would bring your life closer to your vision. Write down 3-5 things (more if you want). These are your long-term financial goals!

Step 2: Set intentions for 2021

You’ve got your long-term financial goals—now it’s time to choose the actions you’ll take toward them in 2021. Narrow it down to the few concrete things you can do in the next 12 months to make progress toward your larger financial plans.

Get specific! In Step 1, your vision was broad; now let’s zoom in. Here are some other examples of specific intentions:

  • Pay more toward your debts each month
  • Consolidate/refinance debt for lower rates
  • Build your emergency fund
  • Save up for something fun in 2021
  • Contribute to a Health Savings Account or Flexible Spending Account
  • Increase your retirement-account contributions
  • Get a handle on impulse spending
  • Create a budget that works for you and stick to it

➤ Write down your 2021 intentions.

Step 3: Put your financial plan together

Ready to wrap up your full-circle DIY financial plan? Turn your intentions into reality by taking some manageable, concrete steps with the handy resources below.

Work toward reducing your debt

Resources to read:

A great first step in getting on top of your debt is to choose one credit card or loan to start paying a little more each month. Build that extra payment into your budget with an Expense so you’ll be sure you have the money you need when the bill comes due.

Create an Expense
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Wrangle your monthly budget

Resources to read:

Guess what? You already got halfway to building your budget when you listed your income and expenses in Section 2 above! Now all you have to do is get it organized and plug it into your Simple Account. Grab a free budget template and go to town.

Get your budget template
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Get serious (and successful!) with saving

Resources to read:

Studies show that you’re more likely to stick to a habit when you share your intention with others. Set up your first Goal for the year and include #2021 in the name to share it anonymously with the Simple community—and spread some inspiration with your accountability!

Create a #2021 Goal
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