How to develop your personal financial strategy

You probably wouldn't set off on a long road trip without GPS or a detailed map to help plan your way. Your financial life is also a kind of journey – and when you have a personal finance strategy in place, it can help guide you where you want to go. And all it takes are a few basic steps to get started. This article can help by telling you about:

• What a personal finance strategy is, and how it can help

• Key elements of a personal finance strategy

• How to set and pursue financial goals 

• Crafting a solid savings plan

What is a personal financial strategy?

Personal finance is about how you manage your individual or household finances. It potentially includes everything from budgeting and saving to investments, banking, insurance, debt and mortgages, even tax and estate planning. A personal financial strategy is an approach or game plan for using those things to take control of your financial life and make better informed choices. And the purpose of that strategy is to help reduce your financial stress, achieve greater long-term financial security, and – most importantly - help make more life goals a reality.

The three things you should do to create your strategy

Figuring out your personal financial strategy – then putting it into action – encompasses three related tasks:

1. Reviewing and evaluating your current financial situation

2. Setting realistic short- and long-term financial goals

3. Outlining concrete actions to achieve those goals

As you go through these steps you’ll make a number of decisions related to budgeting, saving, investing, debt management, life insurance, retirement planning, and more. You should also think about unexpected events that can happen along the way, like a layoff or illness that keeps you from working for a while. And remember, there's no time like the present to start working on your financial strategy. Take it step-by-step – and if you want or need help, consider talking with a financial professional.

First step: Start by reviewing your current financial situation

Taking a good look at your current financial situation – and making any necessary adjustments – will give you the solid foundation you need to better manage your financial life. Try these steps:

1. Review your current income and expenses:

• Calculate your total monthly income from all sources

• Calculate your total monthly essential living expenses (rent/mortgage, food and utilities)

• Estimate your monthly variable expenses (entertainment, dining out, clothing)

2. Track your spending:

• Keep a record of all spending for a month. You can use a spreadsheet or budgeting app, but pen and paper will also do.

• Categorize your expenses to understand where your money is going

• Compare your actual spending against your estimated amounts for each category

• Make sure to account for any small, recurring payments for unused subscriptions and apps. Also pay bills on time to avoid late payment fees – these kinds of expenses can add up fast

3. Make adjustments as needed:

• Identify areas where you may be overspending or allocating more than necessary

• Look for non-essential items or services that you can cut back on

• Consider seeking better deals on services that you use regularly

4. Create a revised budget:

• Based on the steps above, create a new budget that reduces discretionary spending

• If possible, allocate more of your income to savings and accelerated debt repayment

5. Monitor your spending and saving, and review your budget regularly:

• Track your spending against the revised budget to ensure that you stay on track

• Adjust your budget as necessary to reflect changes in income, expenses, or goals

Budgeting is a dynamic process, and it's important to adapt as cash flow and circumstances change. Regular reviews and adjustments will help you stay in control of your personal finances and on track to meet your goals.

Next steps: Start building out your financial strategy

Once you have a clear picture of where you’re at, you can start thinking about where you’re going. Again, take it step by step. Rome wasn’t built in a day, and a strategy to guide your financial future will take some time to build. Here’s how to proceed:

1. Envision your financial goals

After you’ve addressed your current financial issues – budget, emergency fund, and debt repayment – you can start setting financial goals and the process to achieve your goals. If you’re like most people, you probably have a lot of goals. While you may be able to achieve many of them, you might not be able to achieve all of them. So, you’ll likely have to prioritize your goals to determine which are most important to you and your loved ones. The timeframe of each goal also matters:

• For shorter-term goals - such as a vacation, first home purchase, or starting a business - determine the specific amount you'll need, and the timeframe for achieving them. Break each goal into smaller, manageable milestones and create a savings plan accordingly.

• For long-term goals such as retirement, think about your desired retirement age and post-retirement lifestyle. Calculate the required retirement savings and investments you’ll need to achieve those goals, taking into account factors like inflation and market performance.

• Continually review and adjust your goals as circumstances change. And be sure to track your progress and celebrate milestones along the way, which will help you to stay motivated and focused.

2. Develop a debt repayment plan

Few things can derail financial management faster than mounting debt. That’s why a debt repayment plan is critical.

• To get started, gather essential information on your current debts, including outstanding balances, interest rates, and minimum monthly payments.

• Next, assess your monthly income and expenses to determine how much you can allocate towards debt repayment.

• Then, prioritize your debts based on factors such as interest rates or outstanding balances.

Not sure what debts to tackle first? Consider using either the snowball method (paying off smaller debts first) or the avalanche method (tackling high-interest debt first). Set realistic goals and create a timeline for paying off each debt. Monitor your progress regularly and make adjustments as needed to achieve the ultimate goal of being debt-free. Remember, discipline and consistency are the keys to a successful debt repayment plan.

3. Create an emergency fund

Once you’ve balanced your budget, creating an emergency fund is the next important step in building financial stability. Allocate a portion of your income to a fund you’ll use to cover unexpected expenses or financial setbacks. It can give you a buffer in the event of a job loss, medical emergency, major car repair, or other unforeseen circumstances. You want to avoid going into debt or relying on high-interest credit-card loans that can jeopardize your financial gains. Start small and gradually increase your allocations until you have a comfortable cushion that covers at least three to six months of living expenses. Your future self will thank you for the stability and security that an emergency fund provides.

4. Create a plan for savings

Once your current financial situation is stable and you’re ready to spend some time and energy thinking about the future, a game plan for saving is the key to achieving your financial objectives and reducing financial stress along the way. It helps to create different savings “buckets” for short- and long-term goals -- and think about ways to save on taxes as well:

Saving for short-term goals:

• Set a target amount and timeframe for the goal, such as the down payment on a home

• Create a separate savings account specifically dedicated to the short-term goal

• Regularly contribute a portion of income to the savings account

• Consider automating savings through direct deposit or automatic transfers

• Reduce discretionary spending and apply the savings toward your goal

• Avoid market investments that could go down in the near term and keep you from reaching goals in a timely manner

Saving for long-term goals (e.g., retirement):

• Consider a tax-advantaged retirement accounts such as Individual Retirement Accounts (IRAs) and take advantage of employer-sponsored 401(k)s. These saving and investment accounts usually offer other benefits and tax advantages that could help savings grow faster.

• Start saving, contributing as early as possible to benefit from compounding returns

• Try to contribute the maximum allowable amount to retirement accounts each year

• If you are managing your own retirement account(s), diversify investments and attempt to reduce risk by allocating funds across various asset classes, such as stocks, bonds, and mutual funds.¹

• Regularly review and rebalance your investment portfolio to ensure that it reflects your long-term objectives and risk tolerance. Consider consulting a financial professional for advice on how to invest ², and to help ensure you have the right financial products for your needs.

Minimizing taxes:

• Explore tax-efficient investment options like index funds or exchange-traded funds (ETFs) that tend to generate fewer taxable events

• Be mindful of tax implications when selling investments to avoid unnecessary capital gains taxes

• Maximize contributions to tax-advantaged accounts to reduce taxable income and potentially lower future tax liabilities

• These are general guidelines, but every person's situation is different. You should always consult an accountant or other professional for tax advice that suits your specific circumstances and needs.

Rounding out your personal financial strategy

The actions outlined above can help you manage your personal finances more successfully, but there are other items to consider as well:

Life insurance

Life insurance is an essential source of financial confidence if you have family members who depend on your income. All life insurance – whether whole life or term – acts as a buffer to help protect your dependents in the event of your untimely death. The death benefit can be quite substantial – equal to several years' salary – and is paid out income tax-free. So, it can help ensure your family can maintain their standard of living, cover daily expenses, and even achieve long-term goals. Whole and universal life insurance policies can also be used as tax-advantaged vehicles for longer-term goals. These policies could accumulate cash value over time, which can be used during your lifetime for emergencies, educational expenses, or to help fund retirement. The dual roles of life insurance – as a buffer and a vehicle for protecting wealth - could make it a valuable addition to a personal finance strategy.³

Estate planning

Like life insurance, estate planning is not a core part of every personal finance strategy. That said, if you have dependents and anticipate passing assets on to them, it is something that should be addressed.

Creating an estate plan helps ensure your assets will be distributed according to your wishes, and your dependents will be cared for. In addition, an estate plan can help minimize estate taxes and protect assets you’ve spent a lifetime building up from unnecessary depletion.

Don’t be afraid to ask for help reaching your personal financial goals

Creating a financial strategy can seem complicated, but it doesn't have to be. There are knowledgeable financial professionals who can help you. How do you find the right professional for you? Start by asking a friend or colleague for references. Or, we can help you find a local financial professional. If possible, talk with a few candidates to see who you relate to best. However you choose to proceed, don’t put it off: the earlier you start mapping out your financial future, the more likely you are to reach your goals.

Frequently asked questions about personal finance