What is a financial plan, and how do I make one?

Our financial situation can influence many aspects of our lives. By focusing on elements that are in our control, we can take more initiative in working toward a brighter financial future. 

If you’re on a mission to improve your financial well-being, making a financial plan is a great place to start. But what is a financial plan, exactly?

This guide will explain a financial plan’s definition, break down the financial planning process, and explore how creating a plan can help improve your personal finance situation.

What is a financial plan?

A financial plan is simply a document that looks at your entire financial situation — where you stand today, where you want to be, and how you plan to get there.

But a good financial plan provides a bird’s-eye view of your finances. It assesses your current situation, including details on how much money you have coming in each month versus how much you’re spending, and a close look at your assets/investments as well as your liabilities (debts).

Crucially, a solid financial plan also includes a detailed outlook for your future. Where do you want to be financially in five years, 10 years, or at retirement age? What steps do you need to take from your current financial situation to get to those desired goals?

Put simply, a financial plan is a roadmap to your financial goals, both short-term and long-term.

You can prepare a financial plan on your own, or work with a financial professional for personalized help.

What is financial planning?

Financial planning is the process of creating a financial plan and putting that plan into action. It’s often done with the help of a financial advisor.

Sometimes you may also see “financial planning” referenced specifically as a service offered by a professional financial planner. But in reality, financial planning doesn’t necessarily need professional guidance; it’s simply the act of creating a financial roadmap.

What are the benefits of a financial plan?

It will likely take some time to set up a financial plan, but the upfront time investment is well worth it. A little effort now can go a long way toward setting yourself up for a brighter financial future.

What potential benefits can you expect? Financial planning can help you:

• Better understand your current finances, including assets, debts, and cash flow

• Calculate your net worth

• Set clear goals for your future

• Create achievable subgoals (i.e., break big goals down into small chunks)

• Establish measurable, trackable goals and objectives

• Identify strengths and weaknesses in your financial situation

• Make a plan for debt repayment

• Conduct tax planning

• Plan ahead for major milestones like retirement

• Determine your risk tolerance to set up an investment strategy

• Prioritize the goals that are most important to you

We’ll cover more details about some of these benefits — and what they mean — in the “how to” section below.

How to make a financial plan

We’ve established why financial planning is important and some of the benefits it can offer. But how do you actually make a financial plan? Here’s a step-by-step guide.

1. List out your assets and debts.

First, establish your current financial situation by listing out all of your assets (valuables, investments, cash, etc.) as well as all of your liabilities (debts like credit card debt or student loans).

Once you’ve done that, you can calculate your net worth by subtracting your total liabilities from your total assets.

2. Figure out your monthly post-tax income.

Next, look at how much money you have coming in each month. You’ll want to look at post-tax figures, meaning the amount you actually take home once taxes have been withheld.

The simplest way to do this is to look at your paystubs or check your bank records to see the deposit amounts that you get (most people are paid two to four times per month).

If you’re sharing finances with a partner or another household member, you should also determine their post-tax income.

3. Estimate your monthly expenses.

Next, take a close look at your monthly living expenses — rent/mortgage, food, bills, etc. Some of these numbers (like rent) are likely fixed costs that are the same each month, while others might vary (like groceries). You may have to estimate expenses in some categories.

Now, add up all of your monthly expenses to see how much you spend in a typical month.

4. Calculate your monthly surplus (or deficit).

Once that’s done,  take a look at your cash flow by comparing expenses to income. Simply subtract your expenses from your post-tax income to figure out if you have a monthly surplus (extra money) or a monthly deficit (more expenses than income).

For example, let’s say your household takes in $4,200 per month after taxes, and you spend $3,900 on average. That means you have a monthly surplus of $300 — and you could probably use this money to save for a down payment, retirement savings, or any other goal you might have.

If you have a monthly deficit, that likely means that you’re adding debt each month to keep up with your expenses. If this is the case, one of your goals (see below) might be to reduce your expenses and/or increase your income.

5. Set your financial goals.

Now it’s time to figure out what your primary money goals are. Everyone’s goals will look different, but here are some common ones:

• Saving up for an emergency fund

• Paying off student loans

• Contributing to your retirement plan

• Paying off credit card debt

• Saving up for your kids’ college expenses

• Handling estate planning, establishing trusts for loved ones, etc.

• Saving up for a down payment

Whatever your goals may be, it’s a good idea to spend some time thinking about what you truly want to work toward — and what you want to prioritize.

6. Make a plan to meet your goals.

Next, shift focus to making an actionable, comprehensive financial plan to achieve your goals! The planning process involves breaking down bigger goals into smaller chunks and projecting goals over time.

For instance, say you want to purchase a home five years from now. You know you’ll need around $40,000 for a down payment, and you currently have $10,000 saved. That means you need to save $30,000 in the next 5 years — or $500 per month.

7. Save and invest to reach your goals.

Now you can start implementing plans to make steady progress toward goals. Usually, this will involve saving money, paying down debt, or investing in assets that’ll hopefully grow in value.

If you’re investing, you’ll need an account at a brokerage (and/or a retirement plan through your workplace). You’ll then need to build and grow your investment portfolio, ideally focusing on diversifying your investments. If you need help, you can seek out investment advice from a qualified financial advisor.

During this phase, consider your risk tolerance — AKA, your comfort level with taking financial risks in your investments. If you’re OK with some risk potential, stocks and other high-growth assets may be a good choice. If you’re more risk-averse, you might consider more of an allocation in bonds.

8. Monitor your progress and adjust as needed.

The journey to financial success may take time — and it’s important to keep an eye on things as they progress. It’s a good idea to check in on your finances and goals frequently and adjust strategy as needed.

A financial plan can help you work towards a brighter financial future.

Wherever you stand financially today, making a plan can almost certainly help you work toward a better financial future. Even just establishing specific goals can help you focus on what you’re working toward, while celebrating little wins along the way.

Want to learn more about personal finance? The Greenlight blog provides free resources for parents and families to learn how to budget, handle debt, invest, save, and more.

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