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Financial Literacy 101: Creating your own personal financial plan

First in a series for
Financial Literacy Month

We suspect this sneaked up on you, but April is National Financial Literacy Month!

It's a fairly new observance, stemming from attempts by the JumpStart Coalition, founded in 1995, to improve financial literacy among American teenagers. Later, in unhappy recognition of "pervasive financial illiteracy among adults" (who apparently never learned what they should have when they were teens), the U.S. Senate passed a resolution (PDF) in 2004 in support of a Financial Literacy Month for all.

So, to do our part to help Americans become more financially savvy, we're featuring a series of posts during April focused on basic principles of investing and personal finance. Some will link to articles we've published in recent years.

Here is the first post in our series — on creating a financial plan.

What's the most common mistake people make when managing their finances? Making spending and investment decisions apart from a personalized financial plan. No matter how good your investing choices are, if they're made outside the framework of a larger plan, you're inviting trouble.

Imagine you're preparing to build your dream home. Over the years, you've accumulated scores of ideas that you'd like to see incorporated into it. Before construction begins, you sit down with your builder to review your design goals.

You ask him how long before the blueprints will be ready, but to your surprise, he tells you he doesn't work that way. Rather than planning everything ahead of time, he prefers to develop the design as he goes along. He'll keep your ideas in mind, but "blueprints are so restricting," he says — he wants to have the freedom to be spontaneously creative as the house is being built.

Most of us would be reluctant to hire a builder like that! When building a house, we recognize it's a good thing to have a carefully considered blueprint for action before taking on a challenging task. In fact, the more important the project (e.g., having open heart surgery), the more emphasis we place on careful planning.

Unfortunately, too many people use the "we'll work out the details as we go along" approach when it comes to one of the most important projects they'll ever take on — building a secure financial future. [More...]

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

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