8 steps to a flexible financial plan

You want to live your dreams. But you need a plan to pay for them. Even trickier, dreams change. Make a plan that's flexible enough to change right along with you.

We've got the experience to help.

We’re financial professionals at Principal®. Every day, Principal helps people make financial plans that allow them to imagine their dreams and live them. Here, we’ll show you how to do it yourself—how to adapt your money to life’s changes. Whether it’s a new addition to the family, or loss of a job, or an unexpected move.

Heather Winston, CFP®
Principal Financial Group®

Stanley Poorman, CFP®
Principal Financial Group

Graphic of a checklist.

Step 1: Set your goals

Critical goals come before needs and wants.

When life changes—sometimes for the better, sometimes not—your goals help guide your financial decisions. Goals help you focus on what's important.

So what are yours? A few questions might help.

What do you want your money to do for you?

Your answer is connected to what’s important to you—now and down the road. Do you want to pay for your kids’ college educations? Give a hand up to family members? Start a business? Retire early (or late)? These things are goals.

Write them down. Don’t worry about prioritizing just yet.

Categorize each goal as short-, mid-, or long-term.

This will give you a deadline for fully funding your goal. Here's a guide:

  • Short term goals: 6 months to 5 years
  • Mid-term goals: 5 to 10 years
  • Long-term goals: More than 10 years

Prioritize each goal as critical, need, or want.

Prioritizing tells you what to fund first. When you label each goal critical, need, or want, you're figuring out the order in which they need attention.

Let's say you have a short-term goal to build up your emergency fund, and it's "critical." If another short-term goal is to get a nicer car when your current car works just fine, that's a "want."

Next steps:

Sound daunting? Taking it one step at a time will help create a clear path forward. And less stress. Start with goal-setting. (Check back each month for your next step to success.)

An easy guide to making your financial plan


Graphic of a calculator.

Step 2: Make a budget.

With a budget, you align what you make with what you spend.

With goals set, let’s talk budget. (Wait! Don’t run off just yet.) A budget is just a way to organize your money. With a budget, you align what you make with what you spend.

Track your expenses.

Find out where your money goes each month. Categorize your spending. Housing, for example, would include your mortgage/rent, homeowner’s/renter’s insurance, property taxes, maintenance, and repairs. Other categories could include clothing, retirement savings, loans, food, transportation, utilities, entertainment—things like that.

You can refer to the last few months of bank and credit statements to speed up this task.

Add up your income.

Write down your total monthly take-home pay. If you have a spouse or partner whose income you share, include that, too.

Figure the difference.

Subtract your monthly expenses from your monthly income. If there’s money left over, you’re in good shape. You’ve got some money to put toward your first and most critical goal.

Making up a shortfall.

Spending more than you make? Don’t panic. Here are some ways to fix that:

  • Cut back on entertainment or other non-essential spending.
  • Find a side hustle to bring in extra income.
  • Look for better deals on things like cable TV, car insurance, homeowners/renters insurance, and other regular paid services.

You don’t necessarily have to make huge cuts in your spending. (Unless you want to—then more power to you!) Even small adjustments can add up over time.

How much you could save

Unnecessary expense Monthly Total/year
Gym membership $100 $1,200
Cable bill $100 $1,200
Takeout 3x/week $120 $1,440

You may be willing to trim back on some expenses but not others. Look for tradeoffs that you can stick with over time. That’s the trick to staying within your budget.

Next steps:

So you’ve set your financial goals. Now look at your budget to see if you can find more money to put toward those goals. (Check back each month for your next step to creating a financial plan.)

Budgeting to help fund your financial goals


Graphic of a savings bank.

Step 3: Build up your savings

Without an emergency fund, your plan may never get off the ground.

“Oh, shoot” moments happen all the time. That’s life. Some are bigger—and more expensive—than others. An emergency fund helps you cover expenses in the meantime so you can continue toward your goals.

How much to save

A rule of thumb for your emergency fund is 3–6 months of living expenses. That number can vary based on your life. If you have a lot of expenses or your family has just one breadwinner, you may need to save more.

If saving that amount seems overwhelming, start smaller. If you have nothing set aside for emergencies, for instance, try to save one month of expenses. Then build from there.

Keep your savings accessible.

Your emergency fund should be available when you need it. You don’t want it to go up and down with the markets. Keep it in a low-risk, highly liquid account—like a savings account.

Benefits of a high yield savings account

Initial amount $5,000
Monthly deposit $250
After 5 years $21,340 That's $1,340 interest earned!

The account should be easy for you to get to—but not so easy that you’ll be tempted to use it for non-emergencies.

Use—and replenish—as needed.

When you have an “Oh, shoot” moment, pull from your emergency fund if needed. That’s what it’s there for. Just make sure to build up the account again as soon as possible.

Next steps:

Would a $500 expense throw off your budget in a big way? If the answer is yes, you need to set up an emergency fund.

Why you need an emergency fund and how to build it


Graphic of an umbrella.

Step 4: Protect your income.

It’s good to hope for the best, but plan for the worst.

It’s those middle-of-the-night worries. What if you or your partner got too sick or hurt to work? Or died unexpectedly? Could those who depend on you still pay the bills—and save for the future?

No one likes to think of these things. But life can change in an instant. It’s good to hope for the best, but plan for the worst. Insurance helps you do that.

Disability insurance: Keep your income coming in.

Disability insurance protects your income if you get sick or hurt. It’s kind of like car insurance—but instead of covering your vehicle, disability insurance covers your income. Keep reading for some navigational tips.

Learn the lingo.

This will help you make an informed decision about buying disability insurance. A little extra vocabulary goes a long way.

  • Underwriting: Guidelines an insurance company follows to see if you qualify for income protection, how much you can buy, and what it’ll cost.
  • Premium: What you pay for coverage while you’re healthy and working
  • Elimination period: A “waiting period” before receiving monthly payments if you become too sick or hurt to work.
  • Benefit payment and period: How much money you receive from your policy, and for how long.
  • Rider: A feature you can add to your policy to enhance benefits, which may have additional costs.
  • Claim: Communicating—with paperwork by you and your doctor—a disability to an insurance company.

Find out what your employer offers.

You may have short-term and/or long-term disability insurance through your job. If you do, find out how much of your income it replaces—and for how long.

Usually, this kind of coverage will replace about 60% of your income. After taxes, though, that may only leave you with 40–50% of your income. It may not be enough. That’s where an individual policy can help.

Look into extra coverage.

An individual insurance policy could fill the gap between what you need and what any employer policy covers. And it stays with you—even if you change jobs. Do you need this kind of coverage? This is the type of question you can ask a financial advisor.

Life insurance: Protect your family.

You may also have life insurance through your job. But like disability insurance, the life insurance your employer offers might not be enough.

Life insurance can help your family pay off debt and maintain their lifestyle if something happens to you. It can also help fund the kids’ college education and more.

Two primary types of life insurance

Permanent life insurance Term life insurance
Coverage for your lifetime Coverage for a certain time period
Builds cash value Choose length & amount of protection
May provide chronic illness benefit Typically lower cost

These are all things you can discuss with a financial advisor.

Next steps:

Do you have enough disability and life insurance to help protect your paycheck and family?

3 steps to make sure you’re covered


Graphic of cutting a credit card to indicate cutting debt.

Step 5: Ditch the debt.

Debt can keep you from achieving your goals.

Not having an emergency fund is one thing that can keep you from achieving your goals. Debt is another.

Of course, not all debt is bad. A home mortgage, for example, may offer tax perks, and it helps build long-term equity (equity is what you truly “own” versus what you’ve borrowed).

Credit card debt, on the other hand, leads to the opposite of financial progress. Monthly interest snowballs quickly, which just puts you deeper and deeper into debt.

Pay expensive debt first.

Start by targeting the debt with the highest interest rate—that’s your hottest debt and should be your priority. Pay as much as you can every month. Make sure those extra payments go toward the principal (the money you borrowed)—not the interest. That way you’re paying off your actual debt, instead of just the interest.

Once that’s paid, move on to the next debt using the same strategy.

Should you consolidate?

If you have a lot of credit card debt, you might think about debt consolidation (rolling all your debt into one loan). Consolidation may make paying your debts simpler. But it doesn’t necessarily mean you’ll save money.

First, review what got you into debt. If it was a budgeting issue, fix those spending habits. Otherwise, you will never break that debt cycle.

Then, understand the total costs of any debt consolidation before you sign on the dotted line with a debt consolidation company. Ask lots of questions. And explore other options first.

Next steps:

Debt is a fact of life. Find the right balance and manage it using 1 of these methods.

Managing debt: 3 ways to find the right balance


Graphic of a palm tree.

Step 6: Save and plan for retirement.

The sooner you start, the more potential your money has to grow over time.

Your retirement might be a long way down the road, so you’re saving for it. Or maybe it’s just around the corner and you’re beginning to plan. The goal is relatively worry-free financial independence when you retire. So either way, saving and planning now is a smart idea.

Why the urgency? These days, most people have to fund their own retirement.

The sooner you start, the more potential your money has to grow over time. It’s all about compound earnings—when your money earns more money.

Let’s say you invest $10,000. And you earn 5% over a year. So now you have $10,500. Over the coming year, you make 5% not just on your initial $10,000 but also on the $500 you earned last year. That’s compound earnings.

Take a look at the graph below. It shows how starting early could make a big difference in your nest egg at retirement.

The power of starting early

Assumes $400 saved every month with a 6% annual return. The assumed rates of return in this chart are hypothetical and don’t guarantee any future returns nor represent the returns of any particular investment. Amounts shown do not reflect the impact of fees, taxes, or expenses. This is for illustrative purposes only

How much should you save?

Most experts say at least 10% of your income should go toward retirement. If you’ve started saving late in life, you may need to save more than that.

If that just isn’t possible right now, that’s OK. Save what you can now and commit to increasing 1% every year until you can hit the mark. Try to save enough to get your employer’s matching contribution (if they offer one) so you don’t leave any money on the table.

Tax benefits

Another perk of saving in a retirement plan—like a 401(k) or an IRA—is the tax benefit.

With a traditional 401(k) or IRA (or a similar retirement plan), you generally won’t pay taxes on the money you put in the plan until you take it out at retirement.

With plans allowing Roth contributions, you pay taxes up front—not when you withdraw it —as long as you meet distribution requirements.

How much can you contribute in 2020?

Type of plan 2020 limit Catch up limit (Age 50 or older)
Workplace plans [like 401(k)s or 403(b)s] $19,500 $6,500
IRAs $6,000 $1,000

Source: IRS.gov | Workplace plan limits may be lower.

(Relatively) painless retirement savings tips

Make it automatic. Contributions to your employer’s retirement plan can come straight out of your paycheck. Your employer’s plan may even let you automatically increase your contributions every year.

Put your raises to work for you. If you get a raise, increase your retirement contributions, too. That way you won’t miss the extra money.

Take advantage of debt payoffs. Focusing on paying off debts? When you’ve cleared them, put that payment money toward your retirement savings.

Max it out. If you really want to boost your retirement savings, know how much you can save in a retirement plan.Take a look at the chart on page 15 to see contribution limits.

The shift from saving to spending

Once you move into retirement, you’ll shift to spending that money you’ve saved.

Identify what you’ll spend each month in retirement.

Identify how much money you’ll have coming in, and from where. Some can be guaranteed income, like Social Security or an annuity. Some can be variable, like a 401(k), depending on what you’ve saved.

Match what’s coming in with your expenses.

If you’re off, reach out. A financial advisor can help you plan how to fill the gaps.

Next steps:

Even if it’s a long way off, saving and planning for retirement is a good idea.

5 steps to creating your retirement plan


Graphic indicating investing money.

Step 7: Invest some of your savings.

For mid- and long-term goals, you also need to invest your savings.

Saving is good for short-term goals. For mid- and long-term goals, you also need to invest your savings.

Think of it this way:

Saving is like a bicycle. It’s great, it’s convenient, and it’s fairly safe if you stay on the sidewalk close to home. But! There are places that a bike just won’t get you.

Yeah, you could ride your bike to South America (i.e. use a savings account for retirement). But it’ll take waaaaay too long and you’ll likely never get there. So you need alternative forms of transport.

For longer-term goals, you’re going to need something with an engine. That’s what investing does: takes your saving strategy and puts an engine behind it.

Thinking about where you are in life will help determine your investing approach.

  • How long do you have until you need the money?
  • What’s going on in your life?
  • How do you feel about risk?

Then take those insights and apply it to some basic investing concepts.

Stocks, bonds, and other investments

What’s the difference between common types of investments? A lot of it centers around risk versus return.

In general, the higher the potential for return (a return is a gain or loss on investment) the higher the potential for risk of loss—and vice versa. Take a look at the graphic below.

Mix it up

Choosing a mix of investments from various asset classes also helps manage risk. That’s because some kinds of investments tend to increase in value while others decrease.

For instance, stocks and bonds tend to move in opposite directions. If the value of your stock funds goes down, the value of your bond funds may increase.

It’s also a good idea to choose a mix of different funds within each asset class. So within your stock investments, you could choose some lower-risk stock funds and some higher-risk stock funds. This can help you balance the ups-and-downs of the stock market. This strategy is called diversification.** And over long periods, it might help you get a more consistent return.

Adjust over time.

As you get closer to retirement or another goal, you may want to adjust your mix of investments. In general, it’s good to have less risk as you get closer to your “end goal.”

That’s because if the market drops, you have less time to recover from losses. Giving up some potential for growth might be worth it in exchange for lower risk.

It’s also a good idea to rebalance your portfolio regularly. Over time, some investments may grow more than others. After a while, your mix of investments isn’t the same as when you started. That could mean your money is taking on more risk (or less) than you originally intended.

Rebalancing once a year takes everything back to your original mix. Most financial institutions can help you do this easily. Some can do it automatically for you.

Mutual funds or pooled investments can help make it easier.

We all hear about people “making a killing” on individual stocks. But it’s also easy to lose money on individual stocks—or any single investment. It may be intimidating to think about researching and picking stocks or investments with the pressure of potentially losing your hard-earned money.

Mutual funds and other commingled vehicles include a variety of investment types. That helps to reduce risk.

Investment pros (portfolio managers) with special training and tools manage mutual funds. That means you don’t have to worry about the everyday decisions involved in picking individual investments within a mutual fund. And in some types of funds, the managers even adjust the mix of investments over time to help you stay on track to reach your goals.

Next steps:

You’re already an “investor” if you contribute to your 401(k). But if you’re ready to venture beyond saving/investing in a retirement plan, here are 3 steps to get started.

Ready to invest some of your savings?


Graphic of a contract.

Step 8: Make your final plans.

Estate plans aren’t only for the wealthy.

At the end of your life, it doesn’t matter how much money you have. What matters is the people you love. An estate plan can help you take care of them and carry out your final wishes.

They don’t just include a will. A good estate plan also lays out who you want to make decisions if you can’t make them for yourself.

You need a will if you:

  • Have family, friends, or a cause you want to support
  • Want control over who gets what (and who doesn’t)
  • Have kids who’ll need a guardian
  • Would like to minimize taxes and fees on your estate

If you die without a will, the state you live in makes these and other decisions. It can take a long time to process. And the fees can add up quickly. This can be a lot to handle for the people you love.

Designate powers of attorney.

What if you’re in a serious accident and, for a while at least, can’t make decisions for yourself? Do you want a doctor or judge to choose who can make your medical, financial, and other decisions? Or do you want to spell out your wishes ahead of time?

Fairly simple legal documents can help you stay in control. Durable power of attorney and healthcare power of attorney are the most common.

You can work with an attorney to set up these documents or you can use an online legal service.

Keep the estate plan up-to-date.

It’s easy to create an estate plan then cross it off your list. But as life changes, your estate plan should change, too.

Review your plan every year or two, or any time you have a major life change, like a marriage or divorce, kids leaving home, or extended family moving in with you.

Next steps:

You don’t have to be wealthy or old or married or a parent to need an estate plan. Learn how to create your plan, and the 4 key documents you need.

Who needs an estate plan? Probably you


Want the help of a financial professional? Find one near you.

* An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

** Asset allocation and diversification do not ensure a profit or protect against a loss