There are several ways to create a financial plan—you can do it yourself, use a robo-advisor, work with a financial planner, or combine these methods. Regardless of the approach, Charles Schwab has identified eight key components that every solid financial plan should include. So, what makes a financial plan effective?

1. Setting Financial Goals

You can’t create a financial plan without knowing what you want to achieve with your money. Whether you’re making a plan on your own or with professional help, start by listing your financial goals—both big and small—along with the time frames to accomplish them. This helps organize your priorities based on when you’ll need the money:

• Short-term goals (1-2 years): Paying off debt, building an emergency fund.
• Medium-term goals (3-10 years): Saving for a down payment on a home, starting a business.
• Long-term goals (10+ years): Saving for college, planning for retirement.

For each goal, define a target amount and deadline. “The more specific your goals, the easier it is to track progress,” says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research.

Many online tools can help you analyze your financial situation, prioritize goals, and plan effectively. If you have multiple goals, a robo-advisor can help you rank them by importance—needs, wants, and wishes.

2. Knowing Your Net Worth

Understanding your current net worth provides a foundation for your financial goals. To calculate your net worth, list all your assets (bank accounts, investments, real estate, valuable possessions) and subtract your liabilities (credit card balances, mortgage, student loans). Your net worth is the difference between these two figures.

“Don’t be discouraged if your debts outweigh your assets,” Williams advises. “That’s common when you’re starting out, especially if you have a mortgage or student loans.”

3. Creating a Budget and Managing Cash Flow

A budget helps you track where your money is going and where you can make adjustments to meet your financial goals.

A budgeting tool can help ensure you account for all expenses, including irregular ones like car repairs and health care costs. When listing your expenses, separate them into two categories:

• Essential expenses: Rent, groceries, utilities.
• Discretionary expenses: Dining out, entertainment, subscriptions.

To see how your budget aligns with your goals, test different “what if” scenarios, such as retiring earlier or adjusting your mortgage. Some robo-advisors offer tools to help you explore these options.

4. Managing Debt Wisely

Debt isn’t always a bad thing. A mortgage, for example, can help build equity and improve your credit score. However, high-interest debt—like credit card balances—can be a financial burden.

If you have high-interest debt, create a plan to pay it off as quickly as possible. A financial advisor can help you prioritize payments and determine how much of your budget should go toward debt reduction each month.

5. Planning for Retirement

A common rule suggests you’ll need about 80% of your pre-retirement income in retirement. However, this assumes you’ve eliminated work-related expenses, paid off your mortgage, and your children are financially independent.

It’s also important to account for health care costs, as Medicare doesn’t cover everything. Expenses like long-term care can add up quickly. Online tools can help estimate how much you’ll need.

Don’t Rely Solely on the 80% Rule

If you’re saving 20-30% of your income, the 80% rule is a reasonable estimate. Otherwise, it’s safer to aim for replacing 100% of your income, minus what you save for retirement. Since everyone’s situation is different, fine-tune your retirement budget as the time approaches. This should be a priority since you can borrow money for many expenses—but not for retirement.

6. Building an Emergency Fund

An emergency fund acts as a financial cushion for unexpected situations like job loss or medical expenses.

It’s generally recommended to save at least three to six months’ worth of essential expenses, including rent, groceries, utilities, and transportation. Keep this money in an easily accessible checking or savings account.

7. Ensuring Proper Insurance Coverage

Insurance protects you from financial setbacks, but it’s important to have the right coverage without overpaying.

• Health insurance: Helps cover medical costs. Consider long-term care insurance as you age.
• Disability insurance: Protects your income if you’re unable to work. Employer plans typically cover about 60% of your salary.
• Auto and home/renters’ insurance: Ensures you can replace your belongings or repair damages.
• Life insurance: If you have dependents, work with an insurance agent to determine the right type and amount of coverage.

8. Estate Planning

Estate planning ensures your assets are distributed according to your wishes. At a minimum, consider these key steps:

• Create a will to specify your wishes for your assets and dependents.
• Keep beneficiaries updated on insurance policies and retirement accounts.
• Establish powers of attorney for financial and health care decisions in case of incapacity.

Final Thoughts

A well-structured financial plan can help you stay on track, whether you’re just starting or adjusting for new life circumstances. Regularly review your plan to ensure it aligns with your goals and make updates as needed.