A financial plan is a comprehensive overview of your financial goals and the steps you need to take to achieve them. Financial plans are usually written down in physical documents to make them as concrete as possible. Many people combine their financial plan with an investment plan, as investing is often part of what will help you save for the future. Other important aspects of a financial plan include an estate plan, a college savings plan, a retirement plan and more.
Do you need help building a comprehensive financial plan for the future? Speak with a financial advisor today.
What Is a Financial Plan?
A financial plan identifies, organizes and prioritizes your financial goals, then outlines the steps you need to take to achieve them. They can also help you track your progress toward these financial goals and help you determine whether you need to make adjustments. These plans may cover financial needs like consolidating debt, opening bank or brokerage accounts, establishing a savings regiment or building an investment plan.
Financial plans can stretch over years, months or decades, depending on the time horizon of your goals. But through seemingly small steps, like having a monthly savings goal or investing a portion of your paycheck, your financial plan can lead to much better preparation for the future.
Financial plans are typically flexible too, allowing for any possible life changes or unforeseen events. This could encompass an extended hospital stay, a marriage, the birth of a child, a move, a new job and more.
What Are the Essential Components of a Financial Plan?
To create a comprehensive and extensive financial plan, it will need to cover multiple aspects of your financial life, such as your tax situation, retirement accounts and investments.
There are a number of key elements that are typically involved in a good financial plan. Although they all affect your money in different ways, their cumulative effect dictates what your financial future will look like.
Here are the financial categories and sub-categories to focus on:
Parts of a Financial Plan
| Budgeting | – Cash flow statement showing your income sources and expenses – Balance sheet that reviews your assets and liabilities – Positives and negatives of your current financial situation – Education funding plan |
| Investing | – Investment portfolio return reports – Asset allocation plans – Overview of retirement account investments |
| Retirement Planning | – Post-retirement and Social Security income estimates – Post-retirement lifestyle plan |
| Estate Planning | – Estate/inheritance tax estimates – Completed will – Philanthropic gift planning |
| Tax Planning | – 401(k) and IRA contribution plan – Capital gains and income tax returns |
| Risk Management | – Long-term care, disability and life insurance – Beneficiary and survivor benefit plan – Annuities |
The 5 Steps to Creating a Financial Plan
Most people have a wide range of short- and long-term financial goals, from paying down debt to planning for retirement to building a college fund. But since everyone’s personal situation is unique, each financial plan will look a bit different. In general, though, there are five main steps to the creation of any in-depth financial plan:
- Determine your financial goals.
- Compile relevant documents and account statements that paint a picture of your current financial situation.
- Create a short- and long-term plan to reach your financial goals.
- Begin putting your financial plan into practice.
- Adjust your financial plan as your life and goals change.
Step #1: Outline Your Financial Goals
The first thing you need to do when putting together a financial plan is determine exactly what you want to accomplish. Start by reviewing possible short- and long-term goals and objectives. These goals will become the driving force of your financial plan.
- Short-term financial goals: These are financial objectives you aim to achieve within the next few years, typically within one to five years. Short-term goals usually focus on immediate needs and small financial milestones. Examples include building an emergency fund, paying off credit card debt or saving for a vacation or a car.
- Long-term financial goals: These are financial targets that take longer to accomplish, generally spanning more than five years. Long-term goals often focus on larger, more significant financial outcomes that require sustained effort and planning. Examples include saving for retirement, buying a home or funding a child’s education.
Look at your financial future as a whole when outlining these goals. All of your finances are connected, so don’t just focus on one aspect. For example, when it comes to family planning, you may want to think about not only starting a college savings fund, but also putting a down payment on a house.
Step #2: Collect Information About Your Finances and Investments
Once you’ve set goals, you can compile an overview of your financial situation. Include any assets and liabilities, such as properties, investments, retirement accounts and loans. Analyzing all of this information provides a more accurate understanding of your current financial standing.
When you’re collecting this information, start with consistent outlays like your rent or mortgage, utility bills and other fixed expenses. Then look at your spending history to get an idea of your discretionary spending on things like groceries, entertainment, travel, clothes and other areas. And of course, you’ll want to have a clear sense of your income, including your paycheck and any investment or rental income.
Knowing where you stand now will help determine the next steps you need to take to achieve your goals. You can tweak your goals or timeline based off your starting point, their practicality and feasibility.
Step #3: Construct a Comprehensive Financial Plan
With your financial standing and goals defined, you can start developing the actionable steps of your financial plan. Most likely, this will include saving money for retirement, establishing an emergency fund or a big purchase. Investing will also likely play a prominent role in your financial plan – over the long term, investing in the market can be an effective way to grow your wealth.
How exactly you invest your money will likely be dictated by your goals, time horizon, risk tolerance and other factors. If you work with a financial advisor, they can help you identify and implement an appropriate asset allocation – how you spread your money across stocks, bonds, cash and alternative investments.
If you have significant debt, part of your plan will be to pay it down. How exactly you go about it, if you get a consolidation loan or not, if you increase your monthly payment or if leave it unchanged will be dependent on your situation. Rather than focusing on paying down credit card or student loan debt, wealthier individuals often engage in tax-efficient borrowing or strategically managing debt to enhance overall financial returns.
Wealth preservation through estate planning, including setting up trusts or foundations, may also be critical components of your financial plan, especially if you have considerable assets.
A financial advisor can help with the financial planning process, offering recommendations based on your financial overview. Whether it’s suggesting a savings minimum or proposing a debt repayment timeline, they are there to help. Take into account any risks or alternatives they point out. If your financial plan ever needs to be changed, these steps can prevent you from getting stuck.
Step #4: Implement Your Financial Plan in Your Everyday Life
Once you’ve created your plan, it’s time to put it in action. It may be easier to start off small, rather than immediately jumping into the deep end. For example, instead of saving half your paycheck at once, start saving in small increments.
The timeline of your financial plan can stretch for years, so there may not be any immediate results. But stick to the steps outlined in your plan and you will reach those milestones in no time.
It’s important to follow the steps you set in your financial plan. However, it’s just as important to recognize that unexpected things do happen, from starting a new job to having a medical emergency. Any situation that arises that you didn’t expect can impact your finances, so you should make changes to your plan accordingly. That way, it can better reflect your financial standing.
Step #5: Periodically Revise Your Long-Term Financial Plan
Of course, financial changes may impact your ability to reach your financial goals. You’ll want to check on your plan to see if you can still meet those goals after those unexpected hurdles. If not, you can easily change the plan. You can alter your timeline, set a higher savings minimum or change the goal altogether.
Meeting with your financial advisor every few months can be helpful. If necessary, they can help make changes to your plan to steer you back on track. Be adaptable and open with your advisor when it comes to revising your plan according to new objectives or setbacks.
Financial Planning With the Help of a Financial Advisor
While it’s certainly possible to craft a financial plan on your own, it’s an exceptionally difficult process. This is where are a financial planning-focused financial advisor can come in handy.
Financial advisors differ from specialized professionals like estate planning attorneys, as they focus on a more holistic overview of financial planning. They provide not only an overarching gauge of your overall situation, but also extensive advice to help you meet your goals. They can also help you create a tax-friendly plan.
When choosing a financial advisor to build a financial plan with, look for those with designations like Certified Financial Planner™ (CFP®) or chartered financial consultant (ChFC). These certifications ensure that the advisor has garnered the proper education and experience in the financial planning field. However, just because an advisor might not have these certifications doesn’t mean they’re not qualified to help you.
Though financial advisors often have an overall understanding of financial planning, most work within specific financial fields. For example, an advisor may specialize in services for those close to retirement, while others work more with younger people clients. Therefore, pick an advisor that closely aligns with where you are in life.
Bottom Line
A financial plan helps you responsibly manage your money and plan for the future. Though making a plan may take some time and dedication, it will likely pay off in the long run. In turn, you’ll have a clearer path to the future for you and your family. Don’t be afraid to seek out a financial advisor if you’re unsure of where to begin with your financial plan.
Tips for Building a Financial Plan
- Financial plans can get complex, so having the help of a professional can be extremely beneficial. Financial advisors often provide financial planning services, along with investment advice if you need it. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Do you want to start investing on your own? Start by opening a brokerage account and selecting an asset allocation for your personal risk tolerance. A robo-advisor service can further simplify your investments, as they invest your money based on proprietary algorithms.
- For DIYers, there are plenty of useful financial planning software options on the market. Check out SmartAsset’s list of financial planning software to learn more.
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