*Disclaimer*: the opinions expressed in the Financial Planning Process article and on the Frugal Fun Finance website are for general informational purposes only and are not intended to provide specific investment advice or recommendations on any financial or investing products. Any financial advice should be provided by a licensed professional.
When you hear the term ‘financial planning process,’ do you get confused or say to yourself “What’s that?”? Does anything related to personal finance make you tune out, or at the very least, bore you? Despite this term sounding foreign or maybe even complex, it isn’t at all! In fact, it’s something everyone should be interested in.
In this article, I’ll explain what the financial planning process exactly is, why it benefits everyone, and how to get started with strategic financial planning for your family.
Keep reading to find out more about the financial planning process.
What is the Financial Planning Process?
Let’s start with the first part: defining what the financial planning process exactly is. The family or personal financial planning process is a series of steps undertaken to manage past, present and future saving, investing, spending and debt. The process covers both short-term and long-term goals – anything from next week or month’s budget to your situation two years down the road, five years ahead, or more.
The process can be custom-tailored to the individual or family’s unique financial situation including net worth, savings, debt, monthly budget, and saving and investing goals.
Let’s get into the stages of financial planning. I’ve divided the process into six easy-to-follow steps for you to tailor to your situation.
Step 1: Get your Entire Family Involved with Financial Planning
What is the first part of the 6 step financial financial planning process? Getting your whole family involved. Regardless of age and interest level in finance, it’s crucial to get the entire family involved in the process.
Involve Younger Children in Financial Planning
While younger children may not be interested in financial planning, it’s never too early to create good habits. You can help them get on board by giving them an allowance if you haven’t already and teaching them the importance of saving long-term vs. short-term. Provide them with examples of bigger items that they can buy if they save their money for a few weeks or months, rather than spending it the moment they get it.
For example, you can tell them “You can either have 1 small candy every week or 1 big toy in 1 month!” If there’s something that they really want for Christmas or their birthday – like a new toy set or doll – tell them that they can save up for it with their allowance money.
While children may not be the most patient, financial planning for young families will help your children learn good lessons from delayed gratification – even if it’s just a few weeks of no spending.
Involve Older Children in Financial Planning
With older children – say, 13 and up – you can involve them more heavily in the financial planning process. Aside from giving them an allowance, you can teach them the difference between saving and investing. If it’s a bit complicated for you to explain, why not book an appointment with your financial advisor? Take some professional advice from them. There are so many online resources to teach children about investing as well.
Aside from education, ask your children what reward they’d like to celebrate once the family hits a financial goal (final step of the article, explained later on). Maybe there’s an amusement park they’d like to go to, an arcade to visit, or even a state park or city a few hours away? Getting your kids on board will give you another reason to stick with your financial planning journey. You’re not only doing it for yourself, but you’re doing it to set a good example for the next generation. Try out some different rewards for your effort! Have fun being creative.
Step 1: Getting Your Spouse Involved (If Applicable)
While I’ve touched on getting the kids involved, you’ll need to get your partner or spouse involved if you have one. If you mutually agreed to undertake the financial planning process together, skip this step.
Take some time to talk completely free of any distractions. Put away electronics, put on a kettle of hot water for tea and sit down in a comfortable place. If you need any help, consult a financial professional together.
To sum it all up: involve the entire family in the financial planning process and equip them with knowledge and skills for success.
Step 2: Set Financial Goals
Once you’ve talked with the family, it’s time to create your goals. Firstly, figure out which goals you want to complete. If you’re a newbie to planning your finances and/or have debt, just focus on the next twelve months. Why do I recommend this? In my experience, focusing on one year allows you to focus on one month at a time. You won’t be too overwhelmed by thinking too far ahead.
I know that for me, if I think too far into the future, I start to worry. Focus on today and enjoy life – don’t get bogged down with worry. Take a deep breath and enjoy the process!
Next, write down and categorize everything into 3 parts:
Debt – what you owe. This includes loans to family, friends and acquaintances, loans from the bank and interest from a line of credit, credit card, mortgage or car payment.
Expenses – what you spend per month. This category includes your day-to-day expenses including your rent or mortgage payment, car payment, groceries, utilities, and any extra spending.
Savings – any savings you have. This includes cash savings and money invested in stocks, bonds and other financial assets.
Let’s get into the what each category means, their importance, and how to know how much you should be saving to pay off debt, save and cover your monthly expenses.
Step 3: Get Rid of Any Outstanding Debt
Probably the worst part of the money world to talk about – but crucial to address! Remember – debt isn’t always a bad thing. If you attended postsecondary studies, you made an investment in your future. This is good debt – as long as you pay off your loans as soon as you can to minimize interest. Maybe you feel like you haven’t used your degree in any way, but that’s besides the point. In my opinion, any education is good education because you made an investment in yourself. Many programs of study help you develop soft and transferable skills. Ok – I digress. Let’s talk about the debt you’ll want to focus on – credit card interest and other debt – maybe loan debt or money owed to a family member or friend.
It’s important to clear this debt as soon as possible to avoid accruing interest and hurting your credit score. If you feel that the amount is too much, focus on paying it off monthly – even $100 or $200 towards the balance – can help. If you need help with repayments, talk to the money lender to discuss a debt repayment agreement strategy. Many lenders have a debt agreement that requires you to pay a certain amount of interest, but some lenders are flexible. Again, check with the lender. If you feel like the amount of debt you have is overwhelming, talk to a debt counsellor – there’s no shame in getting help.
Step 4: Create or Top Up an Emergency Fund
Once you’ve created a plan to pay off any debt, it’s time to focus on topping up or building an emergency fund – the most important savings account you will have. Why should creating an emergency fund be a top priority? It’s really quite simple: bad things can happen. At any given moment, you could need money for medical bills. Maybe your van breaks down and you need it repaired as soon as possible because you need to get to work and school. An emergency medical fund or emergency car repair fund will give you peace of mind so you don’t have to rely on credit or loans from family and friends.
Get started with building two separate types of emergency funds:
- Emergency fund for cover general living expenses
- Emergency fund for other expenses – vehicle repairs, medical bills etc.
I’ll explain both types of emergency funds and why they’re important.
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Emergency Fund Type 1: Living Expenses
The first category: living expenses for emergencies. If you suddenly get laid off because of company downsizing or one of many other reasons out of your control, your income has stopped, but your expenses carry on. Since bills don’t stop, you’ll need to have some cash on hand to keep you afloat until you either receive financial assistance or get a new job. If you’re self-employed or are a freelancer, you’ll also need some funds to keep you covered in case you lose clients or your business goes under. Whether we like it or not, many things are out of our control. While we can’t control everything, we can be proactive and plan ahead for the unexpected.
While I don’t want you to worry, it’s important to remember that anything could happen. For example, in 2020, when the coronavirus pandemic began, the major parts of the economy shut down for months. Be pragmatic with your saving habits, but don’t live in fear. When you plan ahead, you’ll be well-equipped if and when something unexpected happens!
How Much Should I Save Up for Emergency Living Expenses?
It’s generally a good idea to save 3-6 months’ worth of expenses. This is enough to help you out for a few months until you receive assistance or find a new income stream. Additionally, it isn’t so much that you’re losing out too much on compound interest you could be making by investing in stocks, bonds and other assets. Additionally, if you only keep a few months’ expenses in cash, you’re avoiding the mistake of losing too much purchasing power due to inflation.
How much should you save then? 3 months, 6 months or somewhere in between? Maybe more? The answer varies from person to person. If you’re a single person with minimal resources i.e. possible support from family, save closer to 6 months in cash.
However, if you have a dual income household, you may be able to save 3 or 4 months’ worth instead. Why? If you can live on one income for a while, you can benefit by putting as much as cash as possible to work in an investment account to benefit from compound interest. It’s possible for many to live off one income if one practices frugal living!
How Do I Increase my Emergency Living Expenses Account?
Save a small amount every month if you’re just getting started with saving. Want to have $6000 saved in one years’ time? Create an ’emergency fund challenge’. Aim to save $500 a month. Each month after you get paid, transfer the amount to its own bank account. If you’re a busy and forgetful person (like me!), many banks will allow you to do auto-deposit on a specific day or month of the year. Another way to save up enough cash to cover emergencies in just a few months? Do a no spend month – cut out all unnecessary spending for 30 days. Some short-term delayed gratification to cover you long-term.
Emergency Fund Type 2: Other Expenses
After you’ve saved up 3-6 months of emergency living expenses, it’s time to think about other costs outside of living expenses. Generally, you’ll want to focus on one or two relatively expensive items you own that:
- Have a limited life – think computer, laptop or car;
- Cost a lot of money to replace at once – ‘a lot of money’ differs from person to person, but items around $1000 might be a lot of money for the average person to spend at once.
If you have a partner, get on the same page with your goal to save money for unexpected expenses.
I’ll give you an example. Let’s say that your biggest expense you might have is replacing a faulty dishwasher. Yours is several years old and isn’t working quite the way it used to. You estimate it’ll cost $1500-2500 to replace. You’re relatively new to saving, so you’re giving yourself 6 months to save up enough money to replace it, should it break.
Take the highest possible cost of the item and divide it by 6. Let’s say the dishwasher will cost $2500 maximum.
$2500 total purchase / 6 months = $416.66 = rounded up to $417 for simplicity
Therefore, you’ll want to set aside $417 per month towards your emergency account for this purchase. To make it easier to remember, you can round it up to the nearest $50 – so, in this case, save $450 a month.
Step 5: Save in Sinking Fund Accounts
You’ve got a handle on your debt and crucial savings! Now, it’s time to focus on saving for fun stuff. How do you do this? Sinking funds! What? What is that? It’s not for a kitchen sink (sorry). This is also a savings account, but there’s a difference between a sinking fund vs emergency fund. A sinking fund is a savings account for a specific purchase.
Some examples of sinking funds include saving up money for a vacation, video game console or designer shoes. Types of sinking funds vary depending on your interest and goals. Some people want to save for a vacation. For others, they’re looking to buy the latest iPhone. Choose a sinking fund category that suits you!
How to Set Up a Sinking Fund
Similar to paying off debt and building an emergency account, set aside a specific amount of money per month to reach your goal. Create a separate bank account to ensure you are saving enough per month and visualizing your goals. Save using the sinking fund strategy follow the same method used when saving up for emergencies. Determine how much the item will cost and when you need to buy it, then determine how much you’ll need to save per month to reach your goal.
The sinking fund method is a great alternative to putting it on credit. If you always put things on your credit card but don’t pay them off in full at the end of the month, you end up paying more due to interest. Credit cards are primarily a tool to build your credit score and maybe even reap some awesome rewards. While the bank wants you to use it, forget to make payments and end up paying more with interest, you don’t want to do that. Don’t spend more than you make, or you could dig yourself into a hole of debt. Remember, we’re practicing frugal living and eliminating bad debt!
Try the sinking funds strategy. Before you know it, you’ll have a stack of cash saved and you’ll be able to pay for that airline ticket to Paris without relying on credit! Find a sinking funds tracker on Pinterest to help you crush your goals.
Step 6: Create a Plan and Execute
You’ve now learned how to tackle debt and save. Now it’s time to track savings, monthly spending and debt repayment plan by putting it into a planner!
Case Study: Family of 5, 1-Year Plan
For the purposes of this article, let’s focus on a family plan for the next two years for a family of four with two kids and two parents.
After tax, the family takes home $5,000 per month. The family has some moderate debt and has both short-term and long-term financial goals, broken down into the following five categories:
- EXPENSES – Monthly Expenses: $5,000
- DEBT – Credit card: $1200 in accrued interest
- SAVINGS – Emergency fund: $0 balance
- SAVINGS – Sinking fund (vacation fund): $0
- SAVINGS – Retirement fund: $80,000
Let’s get into creating a financial plan for this family so they can:
- Meet their monthly expenses of $5,000 (that include occasional splurges like dinner out once a month and one outing to the theme park or movie theatre per month)
- Completely eliminate their $1,200 worth of credit card interest
- Build their emergency fund up to $3,600
- Save $1,200 for a family weekend getaway
- Invest $500 total per month for retirement for the couple
Old Budget vs. new Budget
Here’s an example of how this family will cover expenses, eliminate debt and even save at the end of the month. Both budgets are based on the zero-based budget strategy, where every dollar is put to work – either saved, spent or invested.
Old Budget
First, take a look at the old budget. The family made a total of $5,000 after-tax and spent over $1,000 on miscellaneous wants with no savings.
| Old Budget | 1 month | 12 months |
| After-Tax Income | 5,000.00 | 60,000.00 |
| Expenses | ||
| Regular Monthly Expenses | 4,000.00 | 48,000.00 |
| Misc. Spending – Wants | 1,000.00 | 12,400.00 |
| Total Expenses | 5,000.00 | 60,000.00 |
New Budget
After implementing the family budget, they are able to not only cover expenses, but pay off the credit card interest and also save $975 per month towards their emergency fund ($250/month), their vacation savings ($125/month) and retirement ($600/month)!
| New Budget | 1 month | 12 months |
| After-Tax Income | 5,000.00 | 60,000.00 |
| Expenses and Savings | ||
| Regular Monthly Expenses | 4,000.00 | 48,000.00 |
| Credit Card Interest Payment | 100.00 | 1,200.00 |
| Emergency Fund | 300.00 | 3,600.00 |
| Sinking Fund – Vacation | 100.00 | 1,200.00 |
| Retirement Savings | 500.00 | 6,000.00 |
| Total Expenses and Savings | 5,000.00 | 60,000.00 |
By creating a financial plan, this family was able to achieve their goals of paying off debt and saving for 3 different buckets (emergency fund, sinking fund, and retirement)! They practiced frugal and intentional living by cutting out the $1000 of mindless spending and compared prices when shopping to stay on budget.
One important note: this family did treat themselves to occasional non-essentials, like pizza once a week and a monthly trip to the amusement park. Just because you’re on a budget doesn’t mean you need to completely cut out fun stuff – don’t pinch pennies and be cheap! For this family, occasional treats are part of their ‘regular monthly expense.’ If you want to track your expenses in a more detailed manner, you can break down each expense by type. Write down a list of each expense eg. mortgage, car payment, groceries, etc. on one line each.
Does the financial planning process take discipline? Absolutely. Is it worth it? Of course! Once you’ve hit your goals, you’ll want to keep hitting them!
Bonus Step: Track Your Accomplishments and Treat Yourself
I’ve covered all 6 steps of the financial planning process, but there’s one often-overlooked one: rewarding yourself!
Each time you get one step closer to your goal – maybe once a month or so – take a bit of cash out of your discretionary spending budget and have some fun! Why not go mini-golfing or camping? If you prefer to stay in, order some special takeout or snacks and enjoy a night in! If you have kids, make sure you pick something they want to do. Got more than one child and they want to do different things? If you enjoy cooking, why not shop for some special ingredients and cook a meal together? Alternate the activity each month based on each child’s’ preference.
Conclusion – Financial Planning Process
While it takes some work to get going with, the importance of personal financial planning for you and your family cannot be understated. When you get in the habit of managing your finances, it’ll be easier to save money and hit your goals.
Once you’ve seen the fruits of your labor – undertaking financial discipline – you’ll want to keep on track with your journey. You can use various budget planners and strategies to save and track money. If you’re undertaking financial planning for a special occasion like traveling, try creating a budget plan for this. Choose whichever saving strategy works for you and don’t be afraid to experiment with different methods. Remember to enjoy yourself and keep frugal living fun!
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Janita is a frugal living expert and owner of Frugal Fun Finance. With over five years of personal experience finding and trying out the best ways to make and save more money, she's eager to share her knowledge. Janita's strategies have helped her save thousands of dollars for funding investments and traveling to over 20 countries.
Janita completed training in personal finance at The University of Western Ontario and McGill University, two prestigious Canadian universities. Her expertise has been shared on GoBankingRates, Yahoo Finance, and NASDAQ.com.
