How To Create A Personal Finance Plan In Twenty Minutes

By | October 3, 2014

Recently, I was asked to help somebody very close to me to get their personal finances in order. They didn’t know what to do with the money building up in a checking account. They didn’t know what to do about retirement saving. They didn’t know what to do about paying off liabilities. I was very happy to help. I enjoy planning personal finances and creating plans. I’ll walk you through how I created the personal finance plan in about twenty minutes.

Assets

The first step is to make a list of your assets. I’m partial to excel, but it’s also possible to do it with quicken online or pen and paper. I listed out all of the assets: checking, savings, brokerages and retirement accounts. The assets list is below.

Assets

The checking account is at a major bank with ATMs and branches all over. The savings account is a money market fund earning 0.02%. The IRA account is a traditional IRA that was a 401k rollover. The brokerage account is at the same bank as the checking account and is 80% bonds, which is ridiculous if you’re young (and old in my opinion). The municipal retirement is similar to a pension, where money is pulled out of your account and if you work for a certain number of years you get a pension. Otherwise, you get the money you put in back. The municipal retirement fund is mandatory, which is nice if you reach the number of years, but crappy if you don’t

Liabilities

The next step is to list your liabilities and the associated interest rate. Below are all of the liabilities:

Liabilities

The computer liability refers to a credit account charging 16.74% interest that a computer was purchased with. The interest on the student loans is on hold as a masters degree is  being pursued. Finally, the remaining car liability comes with a 4.90% rate.

Immediate Steps

After listing your assets and liabilities, it’s important to understand your goals. Do you want to maximize your net worth? Do you want to eradicate all debt. Do you want to focus on retirement savings? Do you have more immediate savings goals? Below is how I would first start out shifting funds around. This first part should be done in the first week or two.

Personal Finance Plan

As you can see I paid off the computer credit card first. The 16.74% was just ridiculous. Otherwise, I didn’t touch the liabilities. On the assets side, I transferred the savings account funds into the checking account. Earning 0.02% is worthless, you might as well have it in a checking account to have immediate access to it. I also opened a Roth IRA at Vanguard. I took the funds from the taxable brokerage and moved them into the Vanguard Roth IRA for a 2009 contribution. Finally, I opened a high yield checking account that earns 4.15% and moved all of the funds into it except for $1,000. This money is going to act as an emergency fund, an ATM fund and an easy way to deposit checks. The high yield checking account will be set up for direct deposit and most everything will be paid with this account.

Future Plans

I always recommend determining what your going to do with your excess money at the end of each month. For example, in the above example I set up the following future plans:

  • Save $5,000 for 2010 Roth IRA contribution in January 2010.
  • Keep $5,000 in Checking account for emergency fund, traveling, etc. (that puts $10,000 in high yield checking account until January)
  • Anything over $10,000 ($5,000 after January) in the checking account goes towards paying off the car. If you have $11,000 in the checking account at the end of the month, you make a $1,000 payment towards the car.
  • Once the car is paid off, excess money goes towards the 5.0% student loan.
  • The next step is debatable, if you really dislike debt, pay off the 1.63% student loan, otherwise go to the next step.
  • Retirement savings – Roth is already funded in full, so that leaves a 401k or a 457 for municipal workers.
  • Finally, if you’re fortunate enough to pay off all debts and fund all retirement options, you can invest in taxable accounts.

List your assets, liabilities and future goals then use that information to develop your plan. Your first stab shouldn’t take more than 20 minutes. The next step of opening accounts, closing accounts and transferring funds takes a week or two. Afterwards it’s a month to month grind to work towards your goals. You’ll be surprised how quickly you can achieve your goals once you’ve developed an appropriate plan. Good Luck.

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