What Is Financial Planning?

A financial plan could help you achieve your goals.

Creating clear financial goals is a great way to plan for your future, but achieving those goals may feel out of reach. Roughly 50% of Americans report feeling anxious about their financial situations.¹

While some circumstances may be out of your control, there are things you could do to improve your situation and set yourself up to live a financially secure life, and building a financial plan is one of them. Let’s take a look at what financial plans are and how to create one for yourself.

Key Takeaways

• Financial plans are outlines of your long-term financial goals and define the steps necessary to achieve them.

• Your financial plan may change over time, so you want to review it regularly and make changes as needed.

• Everyone’s financial plan is slightly different, depending on the types of assets they have and the goals they set.

What Is a Financial Plan?

A financial plan may sound like nothing more than a budget, but it’s more complex and provides a holistic view of your finances beyond your day-to-day cash flow and monthly bills. These plans include your total assets, your retirement savings, your debts, etc. The exact goals you set depend on your situation and the lifestyle you want to maintain or achieve.²

For some people, the plan may prioritize paying off debt. For others, it may prioritize building savings and finding ways to start investing. It all depends on where you are financially.

Unlike budgets, financial plans provide a multi-year view of your finances rather than a monthly or even annual view. These plans could help you stay on track for your long-term goals. Everyone’s financial plan is different and should be customized to fit your needs and help you prioritize your goals .

What Should a Financial Plan Include?

There are a few key elements that every financial plan should include. Here are the most important components to add to your plan.

• Financial management: These plans should explain how you intend to manage your finances, your expenses, and other similar matters.

• Investment management: Great financial plans have detailed information about your portfolio, your asset allocation, your retirement accounts and their allocations, and overall performance or returns on your investments.

• Insurance and risk management: Include information about your insurance policies so you can review your coverage and make changes when necessary.

• Retirement planning information: Including your retirement plan and an estimate of your retirement savings and income once you leave the workforce could help you better identify goals and help you track your progress.

• Estate planning documents: Your estate plan details how you want your assets distributed when you pass away. Including this in your financial plan helps you keep track of your beneficiaries and make updates as needed.

• Tax planning: These plans may detail ways to potentially reduce your tax liability as your assets grow and your wealth increases.

Keep in mind that these are just common key components you could add to your financial plan. If you’re not sure where to start or want help developing a comprehensive plan that takes your full financial picture into consideration, speak with a financial planner.

Financial Planning: A Step-by-Step Guide

Creating a financial plan is a great way to set yourself up for long-term financial success and could help you reach your financial goals. Here are a few steps to help you create a plan that works for your needs.

Look at Your Finances and Your Goals

Start by looking at your financial situation and consider what you want it to look like in the future.

Gather your bank statements, debt statements, lists of current assets, and any other financial information you have. Consider how those assets and debts impact your total net worth .

With that information, review your long-term goals and identify the steps necessary to reach those goals. Be as detailed as you want but be sure to consider your entire financial situation as you go.

Be Mindful of Your Day-to-Day Activities

As part of your financial plan, implement a budget for your daily and monthly expenses. Your budget should outline how you use your income to cover necessities, pay down debts, and build your savings. Like your financial goals, your budget will likely change over time, and you may switch budgeting methods to help you reach your goals.

If you’re currently carrying debt, you may want to make paying it off a priority as debt eats into your total net worth. When you pay down your debt, you could then have more freedom to pursue other financial goals, like building your savings or freeing up money to build your investment portfolio.

Invest in Your Future

Investing is considered a long-term wealth-building strategy and creating a diverse investment portfolio is a great place to start. But before you start investing, you may want to consider breaking your investment goals into two categories: retirement and other investment types.

Retirement Investing

Using a retirement investment account could be a great way to set money aside specifically for your retirement. Consider starting with a 401(k) plan if your employer offers one or open an Individual Retirement Account (IRA) on your own.

Contributing to one or both of these accounts consistently could help you to build more savings for retirement .

Other Investments

Once you’re contributing the maximum to those accounts or you feel that you have enough money to meet your goals, you may choose to open an investment account and invest in stocks, bonds, real estate and other investment products that you’re passionate about or believe in.³

As with any investment strategy, it’s best to speak with a financial advisor before getting started. Their job is to help you determine your risk tolerance and potentially set up an investment strategy that works for your lifestyle.

Develop a Tax Plan

Some of your investments and retirement planning efforts may help you reduce your tax liability in the long run. An experienced accountant or financial professional can help assess your situation and your long-term goals to help you come up with a plan that may maximize your savings.

Create an Estate Plan

Part of your financial plan should involve creating an estate plan which outlines how you want your assets distributed when you pass away. Estate plans tend to include wills, a list of beneficiaries, power of attorney documents, health care directives to provide instructions if you’re unable to do so, and other similar items.⁴

Over time, you may find that your estate plan needs to be updated to reflect your current assets and update beneficiaries as needed.

While this might seem like a step geared toward people just about to enter retirement, creating an estate plan may be a good idea for anyone with assets they want to pass on, regardless of age. It’s never too soon or too late to create an estate plan.

Final Thoughts

Creating a financial plan could help you set yourself up for financial success in the future. These plans act as a detailed outline of how to achieve your financial goals, long-term plans for your finances, and more.

Remember that these plans can and should change as your situation changes. Reviewing your plan regularly should give you the chance to make updates and changes as needed.