What Is a Financial Plan? (original) (raw)
A financial plan is like a map to achieve your financial goals. It involves a clear understanding of your current financial status, creating financial objectives and implementing steps to achieve those goals.
Key Takeaways
- A financial plan is a strategic roadmap to help you achieve your monetary goals.
- Key components of a comprehensive financial plan include income streams, budgeting, debt and risk management, allocations, retirement planning and more.
- A well-structured financial plan provides clear insight into your financial life, leading to long-term financial health and stability.
Advertisement
The listings that appear are from companies from which this website may receive compensation, which may impact how, where and in what order products appear. Not all companies, products or offers were reviewed in connection with this listing.
Featured Savings Accounts
FEATURED
Lending Club
4.3
APY 3.50%
Bonus N/A
Min. Deposit Amount $0
Earn up to 4.75% APY with $250+ deposits per month
SoFi Checking + Savings
4.8
APY 3.80%
Bonus Up to $300
Min. Deposit Amount $0
SoFi members with Direct Deposit or $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either Direct Deposit or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi members with direct deposit are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus of either 50(withatleast50 (with at least 50(withatleast1,000 total Direct Deposits received during the Direct Deposit Bonus Period) OR 300(withatleast300 (with at least 300(withatleast5,000 total Direct Deposits received during the Direct Deposit Bonus Period). Cash bonus will be based on the total amount of Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 1/31/26. See full bonus and annual percentage yield (APY) terms at sofi.com/banking#1.
UFB Portfolio Savings
4.6
APY 4.01%
Bonus N/A
Min. Deposit Amount $0
Unlock up to 4.21% APY, Combine Freedom Checking with Portfolio Savings to boost your savings APY by up to 0.20%
Discover
4.6
APY 3.75%
Bonus N/A
Min. Deposit Amount $0
What Is a Financial Plan?
You can use a financial plan to accomplish a variety of goals — getting out of debt, saving for a house, preparing for retirement, etc. While the specifics will vary on a person-by-person basis, you generally need to include these key components:
- Current financial standing: Make an honest assessment of your current financial status, including assets (what you own), liabilities (what you owe), income and expenses.
- Budget: Dive deep into your everyday expenses and income, ensuring your spending aligns with your saving objectives and goals.
- Financial goals: Establish clear objectives to make your personal finance journey targeted and purposeful. Your goals can include funding education, saving for a home, getting out of debt, and much more.
- Strategies: Adopt tailored strategies to help you achieve them. Financial strategies include tactics for increasing your income, reducing your debt, investing and more.
- Insurance coverage: Have adequate insurance coverage, including health, disability, life, car and property insurance, to help protect you from unexpected financial losses and stop your financial plan from becoming unraveled.
- Retirement and estate planning: Include details on how you’re going to achieve your retirement goals and how you want your assets distributed once you die.
Benefits of Financial Planning
Financial planning brings a host of benefits. It serves as a guide for everyday financial decisions but can also lay the foundation for future security and wealth.
| Short-term Benefits | Long-term Benefits |
|---|---|
| Emergency preparedness: Build an emergency fund as part of your plan for unforeseen circumstances. | Financial security: Accumulate savings, gain confidence in your investments and be prepared for unexpected expenses. |
| Debt reduction: Eliminating debt can help alleviate financial stress and free up excess income for saving and investment. | Wealth accumulation: Implementing effective saving and investing strategies can systematically grow your wealth over time. |
| Increased confidence: With a solid plan, you can confidently make informed decisions because you know you’re in alignment with your financial goals. | Achievement of financial goals: Disciplined actions can help you purchase a home, fund an education and enjoy retirement. Your achievements can benefit you and your estate. |
How to Create a Financial Plan
By methodically walking through the steps below, you can lay the groundwork for financial stability and success.
1. Assess your current financial situation
This comprehensive overview sets the stage for informed goal formation. Take inventory of your current financial reality, including your income, expenses, assets, debts and any other financial obligations.
2. Set S.M.A.R.T. financial goals
S.M.A.R.T. stands for specific, measurable, achievable, realistic and time-bound and is a formula for creating achievable goals. Here’s how each aspect can help you set financial goals:
- Specific: Define your goal clearly. This can be easier in the financial realm because you can assign precise dollar amounts to your goals. Specific goals can enhance your motivation and are easier to track.
- For example, instead of “I want to save for a house,” make your goal, “I will save $50,000 in 30 months for my down payment.”
- Measurable: Without a destination, it’s difficult to know how much progress you’re making. You can measure your bigger financial goals with benchmarks to keep you motivated and on track.
- For example, instead of “I will save more money,” make your goal, “I will save $50 a week by bringing lunch from home instead of eating out.”
- Achievable: It’s important to strike a balance between overly ambitious and modest goals. If you have a particularly large goal, create mini-milestones that promote a sense of accomplishment.
- For example, instead of “I will increase my income by 50,000nextyear,”makeyourgoal,“Iwillinitiateasidehustlethatincreasesmyincomeby50,000 next year,” make your goal, “I will initiate a side hustle that increases my income by 50,000nextyear,”makeyourgoal,“Iwillinitiateasidehustlethatincreasesmyincomeby300 each month within the next two months.”
- Realistic: Your financial goals should be both challenging and attainable — if they’re not, you could end up feeling discouraged and unmotivated. Ensure your financial goals are realistic compared to your circumstances.
- For example, instead of “I will become a millionaire in two years,” make your goal, “I will invest 15% of my income to grow my net worth.”
- Time-bound: Have a specific deadline. This will help keep you accountable as well as help you stay on track and use your resources effectively.
- For example, instead of “I will pay off my house,” make your goal, “I will put an extra $200 toward my principal mortgage balance each month to pay off my home in nine years.”
Consider meeting with a financial planner or advisor who can help walk you through these steps and give insights to help you craft a financial plan.
3. Calculate your net worth
Your net worth is your assets minus your liabilities. An asset is anything you own that has monetary value, including cash and cash equivalents, real estate, investments and personal property (e.g., cars, collections or jewelry). Liabilities are obligations you owe, including a mortgage, credit card debt and loans (e.g., car, personal or student loans).
Net worth can be either positive or negative (if your liabilities outweigh your assets). The best way to increase your net worth is by reducing your liabilities while increasing your assets.
4. Create a budget
Budgeting is a strategy for ensuring each dollar has a specific role. Following a budget can help prevent wasteful spending on unnecessary purchases,
For those new to budgeting, zero-based budgeting is a great place to start. This method involves creating a detailed list of your income and expenses for the upcoming month. You should direct any extra funds to a category — this can be saving up for a future expense or investing it for your financial future.
Another budget plan is the 50/30/20 strategy. This plan aims for you to put 50% of your money toward needs (food, housing, etc.), 30% toward wants (entertainment, hobbies, etc.) and 20% toward savings and debt repayment.
At the end of each month, no matter what budget plan you use, review how the last month went and note any categories where you under- or overspent. Using this information, readjust your projected expenses for the following month.
5. Reduce high-interest debt
Reducing high-interest debt frees up significant monthly cash and saves you from paying a hefty amount of interest. The debt snowball method is a popular strategy for debt repayment. It involves listing your debts from the smallest principal balance to the largest and then funneling all excess monthly cash flow to the smallest debt (while continuing to make the minimum monthly payment on all your other debts).
Once you’ve paid off the smallest debt, you’ll roll that payment (both the minimum and any extra) into the next smallest debt. This process continues until you’ve repaid all your debts.
>> Related: Learn more about debt consolidation loans
6. Build an emergency fund
The majority of Americans struggle to cover a $500 emergency. Having a rainy day fund can protect you against having to borrow money or stress about unexpected expenses.
It’s commonly suggested you have three to six months’ worth of expenses saved in a liquid emergency fund, but this will vary based on your personal risk tolerance. You should store this fund away from regular accounts to avoid dipping into it when it’s not a true emergency. Consider putting it into a high-yield savings or money market account where you can earn interest.
It’s also important to consider other types of emergency protection such as long-term disability and life insurance, especially if you have dependents.
7. Open investment accounts
There are multiple types of investment accounts you can choose from. Some may be specific for retirement, such as a 401(k) or an individual retirement account (IRA), while others, such as a high-yield savings account (HYSA), are everyday accounts.
Investments are part of a long-term plan, taking advantage of compound interest and growth over many years. Working with a financial advisor can help you figure out what investments would be right for your situation and risk tolerance levels.
The Bottom Line: Financial Planning
Financial planning is a dynamic process that requires regular review and adjustment. A financial plan outlines your current financial status, goals and the steps and strategies necessary to achieve your financial objectives.
Essential components of a financial plan include income, debts, risk, budgeting, investments and retirement and estate planning. Periodically reassessing your plan can help ensure it stays aligned with your current situation and future goals.
>> Related: Learn more about the best savings accounts to help you plan your future
FAQ: What Is a Financial Plan?
The key elements of a financial plan are assessing your current financial standing, creating S.M.A.R.T. goals, calculating your net worth, creating a budget, reducing high-interest debt, building an emergency fund and opening investment accounts.
You should revisit your financial plan at least once per year. If you experience significant life events or financial fluctuations, it may be necessary to adjust your financial plan every few months.
Common pitfalls include setting goals that are not specific, measurable, achievable, relevant and time-bound. Other common mistakes include underestimating your expenses, particularly those that are less frequent or unexpected, ignoring debt and failing to update your financial plan as your life evolves.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.