Financial planning means examining your current financial situation—either on your own or with a professional’s help—and setting strategies to reach both your long- and short-term goals.
What is a Financial Plan?
A financial plan is a document outlining your financial situation, goals, and the strategies you’ll use to achieve them. Ongoing financial planning helps you make the most of your money.
A thorough financial plan should cover all areas of your finances, including cash flow, savings, debt, investments, insurance, and other financial aspects of your life.
A financial plan isn’t just a one-time document; it’s a tool to track your progress and adjust as your life changes. Major milestones, like marriage, a new job, having children, or losing a loved one, are good times to revisit your plan.
You can create a financial plan on your own or seek help from a professional. Online services and robo-advisors also make financial planning more affordable and accessible.
Ready to begin? Check out our list of top financial advisors.
How to Make a Financial Plan in 9 Steps:
1. Set Your Financial Goals
Start your financial plan by setting goals. Think about what you want your money to accomplish, whether it’s buying a house, paying off loans, or planning for early retirement. Define goals that inspire you and keep you focused.
Picture your life in the coming years: Do you want to own a home? Be debt-free? What kind of retirement do you envision? Concrete goals will guide your plan and help you take meaningful steps toward your future.
Need a hand? Learn more about setting financial goals.
2. Track Your Money
Begin by understanding your monthly cash flow—what you earn and where it goes. This will reveal ways to allocate more to savings or debt repayment.
One budgeting approach is the 50/30/20 rule: 50% of your income goes to essentials, 30% to wants, and 20% to savings and debt repayment.
Need help? Check out our budgeting guide.
3. Budget for Emergencies
Start by setting aside cash for unexpected expenses. Even $500 can cover small emergencies. Work toward one month’s living expenses, then increase over time.
Good credit can also strengthen your finances, helping you get better rates on loans and lower insurance costs.
Need assistance? Try our emergency fund calculator.
4. Reduce High-Interest Debt
Tackling high-interest debt, like credit card balances and payday loans, is key. These debts often carry steep interest rates, meaning you might pay back double or triple what you borrowed.
If needed, look into options like debt consolidation or a debt management plan to reduce your interest rate and monthly payments.
Need tools? See our debt repayment guide.
5. Plan for Retirement
A financial advisor will likely ask if you have an employer-sponsored retirement plan, like a 401(k). Many employers match a portion of your contribution, which is essentially free money.
Beyond the 401(k), consider an IRA to save even more for retirement. Contribution limits for both 401(k) and IRAs increase with age, allowing people 50 and older to save more.
Need help planning? Use our retirement calculator.
6. Optimize Your Tax Strategy
Effective tax planning means looking beyond the annual tax return. For example, if you usually get a large refund, consider adjusting your W-4 to keep more of your paycheck throughout the year.
Understanding credits and deductions in advance can also save you money when tax time comes.
Need tax tips? See our tax planning guide for beginners.
7. Invest in Your Future Goals
Investing isn’t just for the wealthy. Even small investments can help you grow your wealth. Start with retirement accounts, such as a 401(k), and consider opening a brokerage account if you’re ready to go further.
Not sure how to begin? Learn how to start investing.
8. Improve Your Financial Security
Each step you take builds your financial resilience. If possible, increase your contributions to retirement accounts, grow your emergency fund, and consider life insurance for added security.
Need guidance? Learn about life insurance and how it works.
9. Create an Estate Plan
Financial planning also includes protecting your future needs and clarifying your wishes for your loved ones. A will can help ensure your assets go to the people you choose. Other estate-planning documents can guide your family on your preferences for care and financial management.
Need assistance? View our estate planning checklist.
When to Make a Financial Plan
There’s no wrong time to start financial planning, but life events like these make a perfect opportunity:
Having Children: A financial plan helps you prepare for expenses like childcare and education.
A Raise or Windfall: A big increase in income or assets can lead to lifestyle inflation, but a financial plan can help you make smart choices.
Serious Illness: A plan can offer peace of mind during health issues, ensuring you stay on track financially.
Retirement: A well-crafted plan can stretch your savings, helping you enjoy your retirement years.
Getting Help with Financial Planning
If you’re not ready to handle everything yourself, consider the type of help that would best meet your needs:
Complete Financial Planning: Online services provide access to advisors and robo-advisors, blending professional advice with automated investment management.
Specialized Guidance: A traditional, fee-only financial advisor might be right if you need specialized help with areas like taxes or estate planning.
Portfolio Management Only: Robo-advisors offer lower-cost portfolio management, based on your goals and risk tolerance.
Interested in finding a local advisor? Check out our guide to finding a financial advisor near you.
Why Financial Planning Matters
Financial planning can help you feel more prepared for financial challenges. According to a survey by Charles Schwab, Americans with a written financial plan report feeling more in control of their finances than those without one.
Once you’ve addressed immediate needs, a financial plan can also help you aim for big goals, like building generational wealth or ensuring a smooth transfer of assets to loved ones.
