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What is a Financial Plan and How to Make One

By Sam Swenson, CFA, CPA – Updated Dec 12, 2022 at 2:03PM

Having a financial plan is one of the most important factors in achieving long-term success with money.


Since the future is uncertain, we can communicate and document our beliefs, values, and assumptions through financial planning.

What is financial planning?

Financial planning is a process through which a person can evaluate their entire financial picture and prepare for short-term and long-term financial goals. Financial planning doesn’t involve only investment management -- such as which stocks to buy -- but instead incorporates other elements such as tax, estate, and insurance planning, along with budgeting and everyday household expense management.

An infographic with a numbered list showing the eight steps to create a financial plan accompanied by representative icons.
Image source: The Motley Fool

Financial planning in its entirety could also be called holistic life planning. Money touches nearly every aspect of modern life, which makes planning for both expected and unexpected events a necessity. Financial planning integrates money as a tool to prepare for such events.

8 Steps to Make a Financial Plan

1. Formulate goals

Having realistic, achievable goals is a key piece of a successful financial plan; a plan is not truly a plan without end goals in mind. Think carefully about the type of lifestyle you want and the financial means you need to achieve it. If you can estimate the annual cost of your lifestyle, you’ll get a better sense of the actions required to achieve financial solvency. Achieving your goals -- especially the short-term ones along the way -- can empower you to reach even greater goals down the line.

2. Budget carefully

Effective budgeting doesn’t necessarily mean cutting out all means of enjoyment from your life. But it does mean knowing the amount of money you have coming in every month, as well as the fixed and variable expenses that need to be paid every month.

To be clear, fixed expenses are those that don’t change much from month to month such as rent and utilities. Variable expenses are those that you have some control over such as eating out, ridesharing, and recreational activities. Tracking your money and monitoring your cash flow are two effective ways to set an initial budget and plan for the road ahead.

3. Save for retirement

One of the biggest savings goals most people have is to enjoy a long and secure retirement. Whether this means retiring early or simply having enough to retire as soon as Social Security becomes accessible, planning for retirement is absolutely essential -- and it’s especially important to start as soon as possible.

By focusing on maxing out your retirement accounts -- for example, 401(k)s, 403(b)s, or IRAs -- you’ll be acknowledging future needs by committing to them now. If maxing out these accounts isn’t possible at the moment, try contributing at least enough to lock in your employer match. Because much of retirement planning hinges on the power of compound earnings and interest, it’s critical to contribute as much as you can as early on in the game as possible.

4. Make an estate plan

While only a small percentage of people will owe estate taxes, everyone will one day have to decide how their property will be divided after their life comes to an end. Whether this is through a traditional will or through a trust set up during your life, you’ll need a well-thought-out estate plan that spells out how your money will be treated -- and who is responsible for it -- after your death.

Because family dynamics differ, if you’re encountering difficulty in this area, it’s best to consult with an experienced estate planning attorney.

Related retirement topics

5. Manage debts

While the amount of money and other assets you have matters a lot, it will only really matter to the extent it’s stacked up against your outstanding debt. If your debt exceeds your assets, you’ll still have a net worth of less than zero no matter how much money you have.

The debts you’ll need to really focus on are unsecured ones that carry high interest rates such as credit cards or personal loans. These have a tendency to eat away at your net worth and can make it difficult to become financially independent. By paying the high-interest creditors off first, you can clear a path to financial freedom.

This is not to say all debts are bad; low-interest, fixed-rate mortgage debt can be useful in securing homeownership, as well as a number of tax incentives. These debts -- also known as “strategic debts” -- can be useful in increasing your net worth through low-cost borrowing.

6. Prepare for emergencies

Early on in your career, you’re likely to be more dependent on your income than you will be later in life. You’ll need to build in a margin of safety by holding at least some liquid assets in the form of an emergency fund.

Having available cash reserves serves two main purposes: First, you’ll be covered in the event of a job loss or other unexpected emergency. Second, you’ll avoid selling stocks at a loss should you need money immediately.

Many people criticize the emergency fund as a low-return option that loses to inflation in the long run. But the purpose of the emergency fund isn’t to generate a maximum return. It’s to act as a proverbial “designated driver” in the event of unforeseen trouble. And, should you end up needing the money, you’ll be glad to have cash at the ready.

7. Plan for taxes

Nobody needs to be a CPA to learn the basics about taxes, but it’s a good idea to have a handle on some basic concepts before you create a broad financial plan. Poor tax planning can lead to unnecessary -- and sometimes quite large -- expenses that can be a drag on your net worth. On the flip side, efficient tax planning can make your life a lot easier and can also guide your decision-making in a way that benefits you and your family over time.

Remember that you’ll need to factor in your tax bill for any investing, budgeting, and savings plan. At the end of the day, taxes are an expense to be planned for like any other. Know what you’re expected to pay!

8. Invest

When you create a financial plan, your investment portfolio should sit at the center. Whether you’re using index funds, picking stocks, or working with a robo-advisor, you’ll find that a diversified portfolio is a key element to financial success.

The Foolish investing style -- another way of saying “buy and hold for the long term” -- is a tried-and-true method for achieving financial gain over time. Trading in and out of stocks is unlikely to be a winning strategy in the long run, but buying high-quality stocks and never selling them is generally a recipe for wealth generation.

A keyboard key is shown, labeled with the words stick to the plan.
Source: Getty Images

When you need financial planning help

Financial planning can range from extremely simple to extraordinarily complex. The variables depend on your choices as well as your circumstances; some are changeable, and some are not.

If you find yourself in a bind, it pays to consult with a financial advisor or consultant who can either walk you through a specific issue or build a broad-based financial plan along with you. More specifically, it’s a good idea to work with a fee-only financial planner who is a fiduciary at all times. This means they’re obligated to work in your interests and focus on providing quality, objective advice as opposed to selling a particular product or service.

You also don’t need to fork over all your hard-earned money for an advisor to work with you. Many advisors now work on an hourly or as-needed basis, which has helped to fill the gap between people seeking advice and those who can competently offer it.

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