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What Is a Financial Plan, and How Do You Start One?

In this article

  1. What is financial planning?
  2. What are the essential elements of a financial plan?
  3. Financial planning in 5 simple steps
  4. Tips for a better financial plan

A well thought-out financial plan can help you meet your money goals and have a huge impact on your future. Learn what a financial plan is and how to start one.

Katana Dumont • December 14, 2020

Having financial independence and generating wealth is something most of us strive for in our lives. We each have our own personal financial aims, and whether that be saving for college, buying a house, or building towards retirement, planning ahead is one of the most effective ways to achieve any goal. That’s why financial planning is so important.

According to Schwab’s 2019 Modern Wealth Survey, people who have a written financial plan tend to demonstrate better money and investing habits. The survey found that more than 60 percent of those with a written plan feel financially stable compared to only about a third of people without a plan.

One common misconception surrounding financial planning is that it’s only for the affluent. When in fact nothing could be further from the truth. Everyone—no matter your financial situation—can benefit from a financial plan. Through seemingly small steps, like setting up an automatic savings account or investing a portion of your paycheck each month, your financial plan will help you build healthier financial habits and can lead to a much brighter future.

What is financial planning?

Think of a financial plan as a guide to help you achieve your goals and prepare you for a healthy financial future. Financial planning is an ongoing strategic process that will support your current financial needs as well as help you build towards your long-term goals.

A financial plan is usually a physical document that breaks down your financial goals into achievable steps. It also provides insights into your personal finances so that you can make the most of your resources and finances. 

While financial plans should be highly individualized to reflect your personal and/or family needs, risk tolerance, and goals, all financial plans follow the same basic elements and principles. Here’s everything you should know about starting a financial plan.

What are the essential elements of a financial plan?

Every financial plan will look slightly different, depending on the needs and goals of the planner but there are some main elements that are typically necessary to craft a well-thought-out financial plan. 

Here are the key financial components to focus on:


We are all guilty of splurging from time to time — impulse spending is all too real. And while the occasional compulsive buy probably won’t break the bank, it is important to maintain healthy spending habits as best we can. Budgeting is a great tool for this, as it tracks your spending and helps foster better financial awareness.

How you can incorporate budgeting into your financial plan:

  • Create a statement that documents your income sources and expenses
  • Draft out a balance sheet that reviews your assets and liabilities
  • Figure out what factors are benefiting or harming your current financial situation 
  • Manage your money based on a percentage-based budget, like the 50/30/20 rule


Investing sounds like something for the wealthy or well-established, but in reality, it’s for everybody interested in saving for the future. Having a mapped-out investment strategy will ultimately help you meet your long and short-term goals, such as buying a house. Plans are typically designed to help you decide how much to invest in stocks, bonds, cash, real estate, and retirement in order to maximize your returns. Plans should be highly customized and can be as small or as large as you deem fit.

How you can incorporate investing into your financial plan:

  • Diversify your investment portfolio
  • Create a plan for asset allocation
  • Draft an overview of your retirement account investments
  • Invest a portion of your paycheck every month

Retirement planning

Don’t forget about retirement—even if you’re young. In order to have a comfortable and secure retirement, retirement planning should be included in your financial plan. Remember that even a little bit of planning over time can make a big difference.

How you can incorporate retirement planning into your financial plan:

  • Draft out estimates for post-retirement and Social Security income
  • Figure out what your ideal post-retirement lifestyle will look like
  • Calculate your contributions to a 401(k), or other employer-sponsored plans
  • Invest in an IRA
  • Gradually increase your savings rate as your earnings increase

Estate planning

It’s not something most of us like to think about but deciding who will inherit your assets after you’re gone, is an important part of planning for the future. Without planning ahead, your loved ones could be left with the burden of having to decide how to allocate your assets and affairs.

How you can incorporate estate planning into your financial plan:

  • Create an estimate of your estate/inheritance taxes
  • Take a tally of your valuables and possessions
  • Complete your will

Risk management

It’s essential that you incorporate risk management into your financial plan. Common risks to consider include—death, disability, illness, economic upheaval, loss of income, and property damage.  Events like this can be very devastating to you and your financial well-being so preparing for them ahead of time will make a huge difference. While it may be impossible to avoid the unforeseen, you can still strive to manage them. 

How you can incorporate risk management into your financial plan:

  • Review your disability and life insurance, health insurance, and personal liability coverage
  • Draft a beneficiary and survivor benefit plan
  • Invest in income annuities

Tax planning

Almost every financial decision you make has tax consequences. That being said, setting up a strategic plan to reduce the amount of taxes you pay will have a significant impact on your financial future. Don’t wait till tax time to look at your taxes, by then it’s usually too late to make changes that significantly reduce your tax bill. Instead, look at each investment decision from a tax perspective—before you make it—so that you can better avoid potential mistakes or actions that could eat into your earnings.

How you can incorporate tax planning into your financial plan:

  • Review your tax returns
  • Take full advantage of deductions and credits you may qualify for
  • Choose tax-efficient accounts and investments
  • Make tax-efficient retirement withdrawals

Financial planning in 5 simple steps

While everyone’s personal situation is unique, in general, a financial plan will include five principal steps.

Step #1: Determine your financial goals

The first thing you should ask yourself when putting together a financial plan is what you want your money to accomplish. What are your short and long-term needs? Where do you see yourself in 10 years? How do you imagine your life in retirement? Identifying and prioritizing your goals will act as a motivator as you plan out your financial future.

When you’re setting goals for your finances, there are a few rules to follow. For example, it helps to make sure your goals are S.M.A.R.T.

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time-bound

The purpose of setting S.M.A.R.T. goals is to make your goals attainable within a specific time frame

Step #2: Calculate your current financial situation

In order to get where you want to go, it’s important to know where you are—consider your net worth (how much you have in assets minus your total liabilities) and your cash flow. You’ll have a better idea of your financial health after taking this step.

To calculate your net worth, list all of the following:

  • Your assets: This may include a home and a car, some cash in the bank, money invested in a 401(k) plan, and anything else you own of value.
  • Your liabilities: These may include credit card debt, student loans, an outstanding mortgage, and a car loan.

To get a sense of your cash flow, list all of the following:

  • Your income: This will include your paycheck and any investments and money you have coming in, month-to-month.
  • Your expenses: Document how much you’ve paid over a year in basic living expenses (i.e., rent or mortgage payments, utilities, credit cards, etc.) and document your day-to-day spending on things like food, clothing, and transportation, as well as any extra expenditures on things like travel, entertainment, and dining out. Add up all these numbers for a year and then divide by 12, to get an average monthly estimate of your spending.

Step #3: Create a long-term plan

After identifying your goals and where you stand financially, it’s time to start mapping out the steps you’re going to take to achieve your goals. Whether you need to reduce spending and debt, increase your savings, or start getting organized, creating a comprehensive financial plan will set you up for future success.

You can always start with traditional financial planning steps like saving up for an emergency fund, focusing on improving your credit score, or thinking through different retirement strategies. Debt consolidation and investing may also be a big focus of your financial plan.

Step #4: Put your plan into action

Now that you’ve mapped out your financial plan, it’s time to take the necessary action steps and commit to moving forward. Changes to your financial lifestyle do not have to be drastic and happen all at once. In fact, it’ll probably be easier and more sustainable to start off small. The main thing is to stick to your goals and your plan. If you do this, you’ll meet your goals very quickly. 

Step #5: Don’t be afraid to make a change

Don’t shy away from modifying your financial planning strategies when you need to better suit your lifestyle and the ways it will naturally evolve over time. Consider substantial life milestones like marriage, promotions, and having children – all these things can (and should!) impact your financial planning.

Here's how to calculate your net worth
Your assets - your liabilities = your net worth

Tips for a better financial plan

  • Get a financial advisor — A financial advisor can help you build on your work if you want additional guidance, analysis, and direction.
  • Automate your finances — Creating an automated system to manage your bills, payments, savings, and investments, can better help you stick to your financial goals.
  • Use a robo-advisor serviceRobo-advisors can make investing less overwhelming through the power of automation.
  • Work with an estate planning attorney — An estate planning attorney can help you better plan for complex situations and provide you with added support.

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