What Is a Financial Plan? Definition & Examples
A financial plan is a document used for managing your money and investments to help you achieve your goals. Having this kind of document allows you to map out the actions you need to take as you work toward important milestones, like paying down debt or saving for retirement.
You can create a financial plan yourself or with the help of a financial planner or advisor. Anyone can benefit from creating a financial plan, regardless of their age, net worth, or goals.
Key Points
• Key components of a financial plan include specific goals, income and spending breakdown, assets and liabilities, risk tolerance, and time horizon.
• A financial plan helps individuals manage money and investments, achieve goals, and prepare for life changes.
• Benefits of a financial plan include identifying priorities, setting goals, staying motivated, and reducing financial stress.
• Steps to create a financial plan can include assessing the current situation, listing assets and liabilities, setting goals, developing an action plan, tracking progress, and considering whether to hire professional help.
• Setting financial goals can be vital for preparedness, confidence, and stress reduction.
Understanding Financial Plans
While the exact meaning will vary among individuals, typically, the definition of financial plan might go something like this:
• A financial plan is a roadmap or blueprint for your financial life. It includes your most important financial goals and priorities, the action steps you’ll take to meet them, and guidelines for how to track your progress.
With that in mind, here’s a closer look at financial plans and how they work.
Purpose and Importance
Simply put, financial planning is designed to help you make the most of your income and assets so you can achieve specific objectives with your money.
It can be harder to do that if you’re not in touch with your money. If you don’t know how much you’re bringing in vs. what you’re spending, for instance, you might find it difficult to save anything. Worse, you may be incurring debt on credit cards to cover the gap between income and expenses.
A financial plan means you don’t have to guess about where your money goes. Instead, you can use your plan as a guide to save and invest strategically to make your money work harder for you.
Components of a Financial Plan
Financial plans, regardless of who is creating them or why, usually have some common elements:
• Specific, measurable goals or objectives
• A breakdown of income and spending
• Detailed information about your assets and liabilities (debts)
• Information about your personal risk tolerance and time horizon
Some financial plans are more complex than others. For example, if you’re 30 years old and only a few years into your career, your goals, income, debt, and net worth are likely to look very different from someone who’s in their early 60s heading into retirement.
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Types of Financial Plans
Financial planning can be divided into different categories, based on your purpose for creating the plan. Examples of financial plan uses include:
• Cash flow planning and budgeting
• Insurance planning
• Investment planning
• Tax planning
• Retirement planning
• Estate planning
• College planning, if you have children (this could also apply to those going back to school for a degree or certificate)
You may also create a succession financial plan if you run a family-owned business that you’d like to eventually pass on to someone else. Financial advisors may offer planning in all of these areas or specialize in just one or two. For example, you might work with an advisor who only assists with estate and tax planning.
Creating a Financial Plan
Approximately 53% of Americans say they work with a financial planner, according to the CFP® Board. You don’t need to have a financial planner or advisor to make your plan, though it can help to have that added expertise and a second set of eyes.
That being said, here’s how to put together a financial plan yourself.
Assessing Your Current Situation
To make a financial plan you’ll need to know where you’re starting from. Here are some of the most important things that will shape your plan.
Income and Expenses
The first step in making a financial plan is knowing how much you make and how much you spend. If you don’t have a budget yet, this is a great time to make one.
• Determine how much you make each month from a full-time job, part-time job, self-employment,
side gigs, and/or passive income
• Add up all of your necessary expenses, meaning bills you have to pay each month to survive (e.g., housing, groceries, utilities, insurance, minimum payments on loans and lines of credit, etc.)
• Add up what you spend on your wants (or discretionary expenses), such as dining out, entertainment, travel, etc.
• Add up amounts that you send to savings or additional debt payments
Once you know what you spend, subtract it from what you make. This will tell you if you’re starting your financial plan in the red (meaning you are in debt, or living beyond your means) or the black (defined as accumulating wealth).
If you’re not sure how to track income or expenses, there’s a simple fix. First, see what your banking app or website offers in terms of tracking. You may be able to categorize and review your transaction history, including deposits of income and withdrawals for purchases or bills. Or you might use a third-party app to do this.
Recommended: Online Banking vs. Traditional Banking: What’s Your Best Option?
Assets and Liabilities
Now it’s time to look at what you own and what you owe. Make a list of your assets and their value, including:
• Your home
• Vehicles
• Checking accounts
• Savings accounts and CDs
• Items of value, such as artwork or jewelry
Now, list out your debts. This can include:
• Credit card balances
• Student loans
• Mortgage
• Medical bills
• Personal loans
• Any other debts, such as money borrowed from a relative or a home equity loan
You’ll need this information to shape your goals and calculate your net worth.
Recommended: What Is a High-Yield Checking Account?
Investments and Retirement Accounts
If you have money in investment or retirement accounts, you’re already a step ahead. Make a list of all your investment and retirement accounts and their value. Include your:
• 401(k) (or 403(b), 457 plan, etc.
• Individual Retirement Accounts (IRAs)
• Brokerage accounts
Here’s a tip: Look for “lost” or “forgotten” retirement accounts. If you’ve changed jobs a few times, you may have some old 401(k)s floating around that you could add to the pile.
If you’re thinking of working with a financial planner, check their credentials. Some financial planners are certified by the CFP Board, meaning they’re held to the highest ethical standards. Others are registered with the Securities and Exchange Commission (SEC) as investment advisors. They’re fiduciaries, meaning they’re obligated to act in your best interest at all times.3
Working with a credentialed financial planner can ensure that the advice you’re getting is backed by expertise, knowledge, and a strong code of ethics.
Key Elements of a Financial Plan
Your financial plan should be tailored to your situation. That being said, the most important elements in a financial plan include:
• A personal budget
• Debt management strategies (if you have credit cards, student loans, or other debt)
• Emergency fund savings
• Insurance planning, including life insurance and property insurance
• Tax planning
• Estate planning
Your plan should reflect your goals in each of these areas. For example, when you’re talking about budgeting, your goal may simply be to stick to a budget month after month. If you’re planning for emergency fund savings, then you might set a specific target of saving $15,000 in 12 months. (Experts usually say to aim for three to six months’ worth of living expenses.)
Financial plans are not set-it-and-forget-it. It’s important to adjust your plan as you go through life changes. For example, changing jobs, getting married or divorced, or having a child can impact your financial goals and the steps you need to take to reach them. Also, if you are investing, your risk tolerance may change as you approach retirement. You might want to play it safer to protect your nest egg from, say, market fluctuations.
Benefits of Having a Financial Plan
Can you manage money without a structured financial plan? Certainly, but there are some benefits to creating one. Financial planning can help you to:
• Identify what’s most important to you financially
• Set realistic goals to help you create the life that you want
• Stay motivated as you work toward the goals you most want to achieve
• Be better prepared for life changes or unexpected events that might affect you financially
• Feel more confident in your financial decision-making
• Experience less stress over money or the future
According to one recent survey, 87% of Americans say they feel stress at least once a week surrounding their finances. Rather than hiding out from your checking account balance, you could implement a financial plan to help you feel more in control over your money and getting where you want to go.
Financial Plan Examples
Financial plans can help you manage a variety of goals from starting a business to retirement planning to saving for education. You could also use your plan to account for windfalls, either expected or unexpected.
For example, say your parents plan to leave you the entirety of their estate when they pass away, which is valued at $1.5 million. Your financial plan should reflect how you go about managing an inheritance of that size, including:
• Where your parents’ assets are held (e.g., 401(k) plans, IRAs, savings accounts, etc.)
• Whether any special restrictions or requirements limit what you can do with the inheritance
• What your tax obligations will be and what strategies, if any, you can employ to minimize taxes owed on an inheritance
• How you plan to put the assets you’re inheriting to work and what your goals are for their performance
• Who you would like to inherit your assets when the time comes
By mapping out different scenarios in a plan and tracking how this inheritance could best be utilized, you can be prepared for the future. As noted above, you might want to work with a financial professional to guide your thinking.
Another scenario might be planning how you will achieve saving for both your child’s college education and your own retirement. If you are feeling as if hitting those two goals is both necessary and extremely challenging on your current income, planning can help you explore and utilize different techniques to attain your aspirations.
The Takeaway
Financial planning can give you clarity on your money situation and help you decide what you need to do to realize your goals. There are different kinds of financial planning for different needs, but at its most basic, it involves assessing your current financial status, your money goals, and how you could reach them. If you don’t have a financial plan yet, it’s never too late to create one, whether on your own or with a financial professional.
One part of smart financial planning can be to find a banking partner that helps you grow your money. See how SoFi can work with you.
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FAQ
When should I create a financial plan?
There’s no set time at which you need to create a plan, though sooner is usually better than later. If you’re making money and spending it, then you can benefit from having a financial plan even if you don’t have a lot of assets yet. Also, many people find pivotal life moments, such as getting married or divorced, or changing careers, to be a good moment to reflect on their financial status and goals.
How often should I review and update my financial plan?
Reviewing your financial plan at least once a year is a good way to track the progress you’ve made over the last 12 months. You could also institute biannual or quarterly reviews if you have some big goals you’re working on, like paying down $40,000 in student loans or saving $50,000 toward a down payment on a home. Also, life events like the birth of a child or buying a home may be a good time to reassess your financial plan.
Can I create a financial plan on my own?
You can create a financial plan on your own; an advisor is not required. You’ll need to know how much you’re making and how much you’re spending, what you owe to debt, what assets you have, and how much you have invested. Then you can identify your current outlook and your goals and develop an action plan. That said, working with a financial planner can allow you to access deep professional knowledge as well as provide support as you work toward your goals.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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