How to Make a Financial Plan

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Take a look at anyone who has gotten rich through investing, and you’ll find that it was by no accident. They got to their position in life through solid financial planning and a balanced investment portfolio that carefully considered their risk tolerance.

Regardless of your financial situation — whether you’re just out of college and saddled with debt or you’re on the road to making millions — you need to stick to a plan. This is the only way to manage money and eliminate financial chaos from your life.

What is a Financial Plan?

Just as the name suggests, a basic financial plan is a strategy to help you achieve a specific economic goal. You can have short-term financial plans or long-term goals (e.g., estate planning and retirement savings).

Regardless of what you are planning for, a financial plan covers 4 key areas, with the first and primary step being to create a budget.

  1. Create a Budget
  2. Form an Investing Strategy
  3. Save Money
  4. Manage Debt

1. Creating a Budget

A budget is a strategy that financial planners use to allocate funds. It’s a way of limiting spending and maximizing every dollar in your bank account.

You can form budgets on a daily, weekly, monthly, quarterly, and annual basis, or even longer. A budget is by far the most important strategy that you can use when making a financial plan. You can use it for debt repayment, to limit spending, or to maximize your investment accounts.

Why you need a budget

Whether you’re just getting started out in finance or you’ve been closely watching your money matters for years, a budget is integral to your success. It’s ultimately just one piece of the overall financial puzzle. But it’s a big piece you need to master if you want to be successful at managing money.

Setting a budget to meet your financial goals

Your budget should be determined by a few different factors, including your age, your cash flow, and your overall financial goals.

To start, spend some time thinking about your overall financial situation, and prioritize your short-, medium-, and long-term financial goals. For example, you may want to prioritize paying down debt to make your lenders happy. Or, you may want to think long-term about your own financial plan.

You should use your budget to guide all of your individual financial plans. Ultimately, your goal should be to make a master financial plan that’s made up of many smaller financial objectives. For example, you could save for a house while also planning for retirement. Both actions don’t have to be exclusive. We recommend using a free budget template to start building your budget.

2. Forming an Investing Strategy

Investing involves purchasing financial assets that hopefully will appreciate in value over time. This can be achieved through a variety of financial products, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), index funds, real estate, and cryptocurrency.

(Disclaimer: While cryptocurrency can make you money, you can definitely lose a lot of money investing in it. Do your due diligence and don’t make any fast decisions!)

Using a brokerage to invest

To start investing, the first thing to do is to select a brokerage like Schwab or Fidelity and open an account. Log into your account, and you’ll have immediate access to a broad range of financial products. You can pick and choose which investments are right for your specific needs.

When you buy an investment through a broker, the broker then executes the trade on your behalf. You’ll be able to see the status of all of the investments you’ve made on a dashboard the broker provides to you online.

Generally speaking, most young investors should build portfolios that are diverse — meaning they have a healthy mix of conservative and aggressive investments. The portfolio should be capable of withstanding a downturn while also positioning the investor to capitalize on growth opportunities.

Investing for retirement

One thing to look into is setting up a long-term retirement plan that provides tax-free growth. Nobody will look out for your financial future but yourself.

This can be achieved through an individual retirement account (IRA), a Roth IRA, a 401k, or a similar plan. Retirement accounts come with certain rules restricting when you can access your money without penalty. The tradeoff is that they allow you to grow money without paying taxes for many years, maximizing your investment.

If you’re just starting out in the market, consider talking to a financial advisor who can help you build a portfolio that is well-rounded and positioned for success.

3. Saving Money

In addition to investing, you should also consider putting money away into a savings account. In fact, you should set up an emergency savings fund before you begin putting your money to work for you through investing. But we’ll get to that.

What is a savings account?

A savings account is a type of fund that is protected by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).

Unlike an investment, a savings account comes with little to no risk. In other words, you won’t have to deal with any market volatility. Unless you take money out of the account, it will not lose value over time.

Even though inflation can technically reduce the value of your savings, interest technically helps offset this. Banks typically adjust interest rates during periods of high inflation to prevent people from pulling their money out and reallocating it.

What should you be saving for?

You can save for any short- or long-term goals you have. But here are some of the common reasons to save:

01. Saving for Retirement

In addition to investing for retirement, it’s also a good idea to set money aside in a secure high-yield savings account (HYSA) where it can collect interest. Over time, interest continues to accumulate.

This may come in handy should you decide to retire before you can access your retirement account. Or, you may want to use it to launch a business down the road. It’s always a good idea to have money set aside for flexible use.

02. Building an Emergency Fund

Most financial advisors recommend setting aside some income to cover unexpected emergencies. This fund should have enough in it to cover at least six months of living expenses like food, shelter, utilities, and debt payments.

Setting money aside in an emergency fund may not seem exciting or “sexy” at first. But if you think about it, money is security — and nothing feels better than knowing you are in a position to take care of yourself and your family should you lose your job or get sick.

03. Saving for a Down Payment on a Home

An HYSA can also come in handy if you are thinking about buying a house. Using an HYSA can help you maximize interest while still providing the flexibility to access it and put down a quick offer. In addition, an HYSA can protect you from a sudden downturn, ensuring that your money stays intact when it’s time to make a move on a piece of property.

Here are some of the best ways to save money.

4. Managing Debt

One of the top reasons for forming a financial plan is to avoid living beyond your means — spending more than you have. That’s why you build a budget and stick to it. By doing so, you make sure you don’t overspend and get buried in credit card debt.

That said, life happens, and it’s very easy to get pulled into debt even if you are careful. For example, your stove may break, forcing you to buy a new one. Or the car that you have been driving for the last 15 years may decide to stop running. If you should find yourself buried in significant debt, it’s vital to try and get out of it as quickly as possible so that it doesn’t compound and set you back years.

Good debt vs. bad debt

Even still, not all debt is bad. For example, responsible credit card management can help you build credit and obtain better loans for items like cars and houses. Taking out a mortgage or taking out a student loan can also be considered good debt.

Bad debt occurs when you overspend and can’t pay off your monthly statement balance, therefore accruing interest. If left unchecked, bad debt can reduce your credit score and make your financial situation unpleasant in more ways than you probably even consider.

Form a payoff strategy

If you are in a lot of debt, take comfort in the fact that countless people have been there before, and not all hope is lost.

There are a few different strategies you can use to pay off heavy debt. The first strategy is called the avalanche method, which involves throwing a large sum of money at a high interest credit card. For example, if you have $5,000 in credit card debt and you have the money on hand, you can cut the debt in half overnight, lowering your monthly payments.

The other strategy is called the drip method, which involves paying down debt slowly and methodically. This strategy takes longer to pay off and it will cost you more in interest in the long run. However, you can avoid having to lose a large lump sum at once due to debt.

Pay down high interest credit cards first

Once you decide which payoff strategy is right for you, the next step is to organize your debt based on interest level.

For example, if you have a credit card that charges 22% interest and a personal loan that charges 17% interest, you’ll want to focus your attention on paying down the card with 22% interest first.

Consolidate debt

Borrowers sometimes choose to consolidate debt into a single payment. This makes it easier to pay down and reduces the hassles that come with having to manage multiple accounts with varying interest rates.

For example, if you have three credit cards that you’re looking to pay down, consider rolling them into a single card that has a 0% promotional annual percentage rate (APR).

Just make sure to pay off the card in full before the promotional period ends or your monthly payments could skyrocket. Read the fine print and understand what you’re going to be on the hook for if you still have a balance once your honeymoon phase is done.

Putting it All Together: Understanding Your Net Worth

As you can see, there is a lot to consider when forming a personal financial plan. As such, it can be difficult to see the forest from the trees.

One strategy that you can use to determine if you’re on track is to keep a running tally of your personal net worth.

What is Net Worth?

In short, net worth is a ratio of what you own versus what you owe. It’s a high-level overview that describes your overall financial situation.

While having a strong net worth won’t get you anything (like a lower interest rate on an auto loan), it’s one of the best benchmarks you can use to track your personal finance.

There are many ways you can tally net worth. Ultimately, it’s just a matter of adding up everything you own and subtracting all of your debts.

For example, suppose you have:

+ $150,000 in real estate (meaning your house is worth $150,000)
+ $2,000 in checking,
+ $10,000 in savings accounts,
+ $40,000 tucked away in retirement accounts, and
+ a car that’s worth $15,000.

At the same time, you have:

$130,000 left on a mortgage,
$10,000 in credit card debt,
$20,000 in student loans, and
$10,000 left to pay on your car.

Add it all up, and you have a net worth of $47,000.

This isn’t bad, even when considering that you are technically in debt. In this case, your assets would outweigh your liabilities.


Should I use a financial advisor?

It’s not a bad idea to check in with a financial advisor from time to time to make sure you are on track to meet your financial goals.

How often you leverage a financial advisor depends entirely on your financial situation and what you want to accomplish — as well as your general ability to manage finances.

The fact is that not everyone is good at managing money and that’s fine. If you fit into this category, it’s important to admit it and seek help.

There is absolutely nothing wrong with using a certified financial advisor to help you make financial decisions, as long as you’re not paying substantial fees that are dragging you deeper into debt.

Is life insurance necessary?

Life insurance is something that all financial planners should look into. Simply put, you need life insurance regardless of whether you have a family. And the earlier you get it in life, the better your rates will be. The longer you wait, the greater the likelihood that your health will decline.

What’s more, certain types of life insurance policies can provide tax-sheltered growth, allowing you to set aside money for retirement. You can use certain life insurance policies much in the same way you leverage an IRA or a 401k.

How often should you do financial planning?

Let’s face it: Life changes. And as your needs change, it’s important to revisit your goals and budgets.

Some people need to engage in financial planning annually, while others need to do it every few months. It largely depends on your financial situation.

Learn more: What Should I Do With My Money?

The Bottom Line

Creating a financial plan is one of the best things that you can do in your financial journey. Even if you are having a hard time seeing into the future and understanding what your personal situation will be down the road, planning ahead now can help you have an easier time adjusting to change.

For example, you may be 25 and just getting started in your professional life with no thought of having a spouse or kids. But someday, you may meet a special someone and decide to start a life together. So, you’ll want to put yourself in the best possible situation to provide for your family down the road.

The same mentality can be applied to your future self. Even if you don’t anticipate getting married or having children, it’s still a good idea to put money aside so that it can grow and generate income down the road. Worst case, you’ll be in a solid financial position. And while money can’t buy happiness, it can certainly make life a little easier.

Here’s to developing a financial plan that works for you and helps you get the most out of life!

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