What Is a Financial Plan, and How Can I Make One?

A financial plan creates a roadmap for your money and helps you achieve your goals. Financial planning can be done on your own or with a professional. A financial plan is a comprehensive picture of your current finances, your financial goals, and any strategies you've set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance, and any other elements of your financial life.

What is financial planning?

Financial planning is an ongoing process that will reduce your stress about money, support your current needs and help you build a nest egg for your long-term goals, like retirement. Financial planning is important because it allows you to make the most of your assets, and helps ensure you meet your future goals.

Financial planning isn't just for the wealthy: Creating a roadmap for your financial future is for everyone. You can make a financial plan yourself, or you can get help from a financial planning professional. Due to online services like Robo-advisors, getting assistance with financial planning is more affordable and accessible than ever.

Financial planning in steps

1. Start by setting financial goals

A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you — whether that's buying a house or helping you retire early —  you'll make saving feel more intentional.

Make your financial goals inspirational — what do you want your life to look like in five years? What about in 10 and 20 years? Do you want to own a car or a house? Are kids in the picture? How do you imagine your life in retirement?

You start with goals because they will inspire you to complete the next steps and provide a guiding light as you work to make those aims a reality.

2. Track your money, and redirect it toward your goals

Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is a key to creating a financial plan and can reveal ways to direct more to savings or debt pay-down. Seeing where your money goes can help you develop immediate, medium-term, and long-term plans.

Developing a budget is a typical immediate plan. NerdWallet recommends the 50/30/20 budget principles: Put 50% of your take-home pay toward needs (housing, utilities, transportation, and other recurring payments), 30% toward wants (dining out, clothing, entertainment), and 20% toward savings and debt repayment. Reducing credit cards or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.

3. Get your employer match

If you visit a financial advisor, he or she will be sure to ask: Do you have an employer-sponsored retirement plan like a 401(k), and does your employer match any part of your contribution?

True, 401(k) contributions decrease your take-home pay now, but it’s worth it to put in enough to get the full matching amount because that match is free money. Here's how much you should contribute to a 401(k).

4. Make sure emergencies don't become disasters

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.

Building credit is another way to shock-proof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.

5. Tackle high-interest debt

A crucial step in any financial plan: Pay down “toxic” high-interest debt, such as credit card balances, payday loans, title loans, and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

6. Invest to build your savings

Investing sounds like something for rich people or for when you’re established in your career and family life. It’s not. Investing can be as simple as putting money in a 401(k) and as frictionless as opening a brokerage account (many have no minimum to get started).

Financial plans use a variety of tools to invest for retirement, a house, or college:

• Employer-sponsored retirement plans. If you have a 401(k), 403(b), or similar plan, gradually expand your contributions toward the IRS limit of $19,500 per year. If you’re 50 or older, the limit goes up to $26,000.
• Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings by up to $6,000 a year (or $7,000, if you are over 50). This NerdWallet IRA guide will help you choose the right type of IRA and show you how to open an account.
• 529 college savings plans. These state-sponsored plans provide tax-free investment growth and withdrawals for qualified education expenses.

7. Build a moat to protect and grow your financial well-being

With each of these steps, you're building a moat to protect yourself and your family from financial setbacks. As your career progresses, continue to improve your financial moat by:

• Increasing contributions to your retirement accounts.
• Padding your emergency fund until you have three to six months of essential living expenses.

Use insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.

8. Regulate your expenses wisely

If you are living paycheck to paycheck and finding yourself struggling for money even before the month ends, then chances are you are living way beyond your means. Maybe there are a lot of unplanned expenses! These might be leaving you with no money for the necessities. But there’s a way out of this. 

Try preparing a budget. Unless you have a budget, you won’t be able to control your cash flows. A budget simply shows how much money you have coming in and how those funds are spent. 

Start by categorizing your expenses into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable. In this way, you will create a full inventory of expenses in front of you. The more you convert things from abstract to physical, the better you will get a hold of them. 

You can create a hierarchy of needs and decide which ones to address first. It’s all about prioritizing. You need to accept that you have got limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditure. 

After addressing all necessary expenses, you can allocate some money towards entertainment and leisure. To avoid overspending, you can create a list of groceries before visiting the departmental store. You can also assign a no-spend day in the week.  Make sure you commit to your budget. Consider it as a commitment instead of a burden and stick to the boundaries.

9. Maintain a personal balance sheet

Having a personal balance sheet helps to know what you own and what you owe! It’s a pretty powerful tool to take your finances to the next level. It’s a statement wherein you can jot down your assets and liabilities. The difference between your assets and liabilities shows your net worth. 

Before getting started, pull together your bank statements and other proofs of the liabilities. Then, list down your assets like the bank balance, investments, home value, and value of other assets. Take a sum of all the assets to arrive at the total value of your assets. 

Further, list down your liabilities like the car loan, home loan, credit card balances, and remaining balances in other loans. The sum of all the liabilities will show the value of the money you owe. 

Ideally, your net worth needs to be positive, which means the money you own is greater than the money you owe. Don’t lose heart if it’s negative. As you keep repaying your loans, your net worth is going to increase gradually. 

Yet, another critical thing in asset management is what kind of assets you need to own. You must always try to own those assets which increase in value and involve lesser maintenance costs. In the end, it’s all about how much you can use. Simply accumulating things that you don’t need leads to blocking money in unproductive stuff. It’ll be wise to be aware of what you use and what you can get rid of.