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5.2: Personal Financial Planning
Opening the book…
Discussion:
What simple steps do I take to create a financial plan?
How do I use financial planning in everyday life?
How is the financial planning process implemented for every purchase?
How is financial planning related to additive and multiplicative growth?
Honestly, practicing money management isn’t that hard to figure out. In many ways it’s similar to playing a video game. The first time you play a game, you may feel awkward or have the lowest score. Playing for a while can make you OK at the game. But if you learn the rules of the game, figure out how to best use each tool in the game, read strategy guides from experts, and practice, you can get really good at it.
Money management is the same. It’s not enough to “figure it out as you go.” If you want to get good at managing your money, you must treat money like you treat your favorite game. You have to come at it with a well-researched plan. Research has shown that people with stronger finances are healthier1 and happier,2 have better marriages,3 and even have better cognitive functioning.4
Student Survey
When asking students about their financial priorities, concerns, and plans, students expressed the following:
What is your top immediate financial priority?
Figure \(\PageIndex{2}\)
Which aspect of your finances concerns you the most?
Figure \(\PageIndex{3}\)
When considering how to pay for college, which of the following do you know least about?
Figure \(\PageIndex{4}\)
You can also take the anonymous What Students Say surveys to add your voice to this textbook. Your responses will be included in updates.
Financial Planning Process
Personal goals and behaviors have a financial component or consequence. To make the most of your financial resources, you need to do some financial planning. The financial planning process consists of five distinct steps: goal setting, evaluating, planning, implementing, and monitoring.
Financial Planning in Five Steps
Develop Personal Goals
What do I want my life to look like?
Identify and Evaluate Alternatives for Achieving Goals for My Situation
What do my savings, debt, income, and expenses look like?
Explore mathematical models and predict my financial situation.
What creative ways are available to get the life I want?
Write My Financial Plan
What small steps can I take to start working toward my goals?
Implement the Plan
Begin taking those steps, even if I can only do a few small things each week.
Monitor and Adjust the Plan
Make sure I don’t get distracted by life. Keep taking those small steps each week. Make adjustments when needed.
Figure \(\PageIndex{5}\): Steps of financial planning.
How to Use Financial Planning in Everyday Life
The financial planning process isn’t only about creating one big financial plan. You can also use it to get a better deal when you buy a car or computer or rent an apartment. In fact, anytime you are thinking about spending a lot of money, you can use the financial planning process to pay less and get more.
To explore financial planning in depth, we’ll use the example of buying a car.
1. Develop Goals
First, what do you really need? If you’re looking for a car, you probably need transportation. Before you decide to buy a car, consider alternatives to buying a car. Could you take a bus, walk, or bike instead? Often one goal can impact another goal. Cars are typically not good financial investments. We have cars for convenience and necessity, to earn an income and to enjoy life. Financially, they are an expense. They lose value, or depreciate, rather than increase in value, like savings. So buying a car may slow your savings or retirement plan goals. Cars continually use up cash for gas, repairs, taxes, parking, and so on. Keep this in mind throughout the planning process.
2. Identify and Evaluate Alternatives for Achieving Goals in Your Current Situation.
For this example, let’s assume that you have determined the best alternative is to buy a car. Do you need a new car? Will your current car last with some upkeep? Consider a used car over a new one. On average, a new car will lose one-fifth of its value during its first year.5 Buying a one-year-old car is like getting a practically new car for a 20 percent discount. So in many cases, the best deal may be to buy a five- or six-year-old car. Perhaps someone in your family has a car they will sell you at a discount.
Sites such as the Kelley Blue Book website (KBB.com) and Edmunds.com can show you depreciation tables for the cars you are considering. You can build strong financial understanding by using mathematical models suitable for a specific vehicle make and model. For example, say that the depreciation value for a car you are interested to buy in 2026 is as follows:
Years after buying the car
Depreciation each year
1
16%
2
12%
3
11%
4
9%
5
7%
Discussion:
Browse online for two car models you are curious about and check their prices when buying them new. Use a table of depreciation value that is appropriate for your cars, if you do not find one, you can use the previous table. Create new tables and graphs to explore your cars' values in 1, 2, 3, 4, 5 years. For each table and graph, assume the \(x\) axis is the years after buying the car and the \(y\) axis is the actual value of the car each year.
How would you describe the relationship between the year after buying the car and the car value each year? Is this an additive or a multiplicative growth?
The graph you created should not be a linear graph; what would need to be different in order for the graph to be linear?
Definition: Linear Relationship
A linear relationship describes a connection between two variables where a change in one results in a constant additive change in the other. When plotted on a graph, this relationship always forms a straight line. In other words, the dependent variable increases or decreases by a constant amount for equal changes in the independent variable.
Do you know how much it will cost in total to own the car? It will help to check out the total cost of ownership tools (also on KBB.com and Edmunds.com) to estimate how much each car will cost you in maintenance, repairs, gas, and insurance. A cheap car that gets poor gas mileage and breaks down all the time will actually cost you more in the long run.
We can use mathematical models to help us understand the cost of having a car, not just buying a car. Specifically, we can think about a linear relationship as two variables where a change in one variable results in a constant change in the other variable. In this case, we will model the cost of the car, \(y\), in dollars and how this value relates to \(x\) years of having the car. To create the model, discuss the following questions.
Discussion:
What costs are a one-time expense? Create a list of these costs, estimate the fixed cost and label them as "fixed cost."
What costs are recurring costs? Create a list of these costs, estimate the cost per year, and label the list as "variable cost."
Consider the fixed cost as one value. For example, in your value account for all expenses that will be a one-time thing together. This means that you will no longer think about down payment, car plate, etc. Instead, you will use "fixed cost" for all of these expenses together. Fill in the table for the cumulative fixed cost value.
Years after having my car
Cumulative fixed cost value
1 year
2 years
3 years
...
Consider the variable cost as one value. For example, in your value account for all variables that will be recurrent together. This means that you will no longer think about gas per year, insurance per year, car loan, etc. Instead, you will use the "variable cost" per year of all of these expenses together. Fill in the table for the cumulative variable cost value.
Years after having my car
Cumulative variable cost value
1 year
2 years
3 years
...
Use the previous information to create a graph and an equation to model the cost of the car \(y\) in dollars and how this value relates to \(x\) years of having the car.
In the previous chapter, we discussed that to represent an additive growth equation, we start with I, the initial amount, then adding m each time makes \(y=I+mx\). We can also think about the initial amount, I, as the fixed cost because this does not changes with \(x\) and the \(m\) as the variable cost.
Figure \(\PageIndex{6}\): Weighing all the factors is critical when deciding on any purchase, especially a major one like a car. (Credit: Greg Gjerdingen / Flickr / Attribution 2.0 Generic (CC-BY 2.0))
The information you generated in the discussion builds a strong base for creating a budget in your financial plan.
3. Write Down Your Financial Plan
Table 10.1 Examples of financial plans for a car and a computer.
Goal
Item
Details
Budget
Timeline
Transportation/Car
2014 Toyota Camry
Black, A/C, power windows, less than 60,000 miles
Car $12,000 (max)
Down payment $3,000
Insurance $100/mo
Sales tax $900
+ Licensing $145
Cash needed $4,145
Have $3600 in savings for this.
Save $50/week.
Purchase in approximately 11 weeks.
Computer
Used or refurbished laptop
Dell w/ Windows, minimum 13", 128G hard drive, HD Graphics
$300
Use free Windows update from school.
Use free Wi-Fi at school.
Sell current laptop for $100.
Buy refurbished from Dell site for $289.
$189 on credit card.
Pay off when statement comes.
4. Implement Your Plan
Once you’ve narrowed down which car you are looking for, do more online research with resources such as Kelley Blue Book to see what is for sale in your area. You can also begin contacting dealerships and asking them if they have the car you are looking for with the features you want. Ask the dealerships with the car you want to give you their best offer, then compare their price to your researched price. You may have to spend more time looking at other dealerships to compare offers, but one goal of online research is to save time and avoid driving from place to place if possible.
When you do go to buy the car, bring a copy of your written plan into the dealership and stick to it. If a dealership tries to switch you to a more expensive option, just say no, or you can leave to go to another dealership. Remember Elan in our opening scenario? He went shopping alone and caved to the pressure and persuasion of the salesperson. If you feel it is helpful, take a responsible friend or family member with you for support.
5. Monitor and Adjust the Plan to Changing Circumstances and New Life Goals
Life changes, and things wear out. Keep up the recommended maintenance on the car (or any other purchase). Keep saving money for your emergency fund, then for your next car. The worst time to buy a car is when your current car breaks down, because you are easier to take advantage of when you are desperate. When your car starts giving you trouble or your life circumstances start to change, you will be ready to shop smart again.
A good practice is to keep making car payments once the car loan is paid off. If you are paying $300 per month for a car loan, when the loan is paid off, put $300 per month into a savings account for a new car instead. Do it long enough and you can buy your next car using your own money!
Use the Financial Planning Process for Everything
The same process can be used to make every major purchase in your life. When you rent an apartment, begin with the same assessment of your current financial situation, what you need in an apartment, and what goals it will affect or fulfill. Then look for an apartment using a written plan to avoid being sold on a more expensive place than you want.
You can even use the process of assessing and planning for small things such as buying textbooks or weekly groceries. While saving a few bucks each week may seem like a small deal, you will gain practice using the financial planning process, so it will become automatic for when you make the big decisions in life. Stick to your plan.
This page titled 5.2: Personal Financial Planning was last modified on Tue, 16 Jun 2026 02:38:03 GMT and is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by OpenStax via source content that was edited to the style and standards of the LibreTexts platform.
