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

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

A financial plan is a roadmap that helps you achieve your goals. Financial planning can be done on your own or with a professional.

A financial plan paints 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 looks at your entire financial picture in order to create strategies for achieving your short- and long-term goals. It can reduce your stress about money, support your current needs and help you build a nest egg for your long-term goals, like retirement.

Creating a financial plan is important because it allows you to make the most of your assets and gives you the confidence to weather any bumps along the way.

You can make a financial plan yourself or get help from a financial planning professional. Online services like robo-advisors have also made getting assistance with financial planning more affordable and accessible than ever.

Financial planning in 7 steps

1. Set 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. Ask yourself: What do I want my life to look like in five years? What about in 10 and 20 years? Do I want to own a car, or a house? Do I want to be debt-free? Pay off my student loans? Are kids in the picture? How do I imagine my life in retirement?

Having concrete goals can make it easier to identify and complete the next steps, and provide a guiding light as you work to make those aims a reality.

2. Track your money

Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is 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.

For example, 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 card 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, they 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. Plan for emergencies

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 future goals

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 $20,500 per year in 2022. If you’re 50 or older, the limit is up to $27,000. In 2023, you can contribute up to $22,500, or $30,000 for those ages 50 or older.

Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings by up to $6,000 a year in 2022 (or $7,000, if you are over 50). In 2023, the limits rise to $6,500 and $7,500 respectively. This NerdWallet IRA guide can 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. 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.

Using 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.

Creating a will to ensure your assets are distributed according to your wishes. Other types of estate-planning documents can also provide your loved ones with clarity on how you would like to be cared for and who should manage your affairs.