How to make a financial plan in 11 steps

A person with long hair sits at their dining room table and uses their laptop to research how to make a financial planImage: A person with long hair sits at their dining room table and uses their laptop to research how to make a financial plan

In a Nutshell

When you make a financial plan, you develop a long-term strategy to help manage your expenses and grow wealth. A financial plan can help you stay in control of your finances and make the best decisions for your future.
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What is a financial plan?

A financial plan is a document that helps you track your monetary goals to measure your progress toward financial literacy.

Without a solid foundation — and a roadmap for the future — it can be difficult to stay on track with your goals. Having a financial plan can help you prioritize your time and measure progress as you work toward financial freedom.

Planning your financial strategy doesn’t have to be difficult. Here’s a step-by-step guide on how to make a financial plan.

  1. Evaluate where you stand
  2. Set SMART financial goals
  3. Update your budget
  4. Save for an emergency
  5. Pay down your debt
  6. Organize your investments
  7. Prepare for retirement
  8. Start your estate planning
  9. Insure your assets
  10. Plan for taxes
  11. Review your plans regularly

Putting together a financial plan is a tangible way to organize your monetary situation and goals with a path to help you achieve them. When deciding where to start, consider what you currently possess, what your long-term goals are, and what you’re willing to take on to meet those goals.

No matter where your finances stand, financial planning is an essential strategy that boils down to one question: What do you want your future to look like?

Here’s how to create a financial plan in 11 steps.

1. Evaluate where you stand

Building your financial plan is like creating a fitness program. If you don’t outline specific steps to reach your goals, you could end up doing random work without making progress. A successful financial plan involves being honest about your financial weak points and creating goals to address them.

Determine your net worth

One way to figure out your financial status is to determine your net worth. To do this, subtract your liabilities (what you owe) from your assets (what you own). Assets include things like the money in your accounts and your home and car equity, while liabilities can include any debt, loans or mortgages. Here’s how to calculate your net worth using your assets and liabilities.

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Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. You should regularly keep track of your net worth to monitor where you are with your financial plan.

Track your spending

Another way to evaluate your financial planning process is by measuring your cash flow or how much you spend compared to how much you earn. Net worth is a great way to understand where you stand financially, but measuring cash flow is how you might ensure you’re heading in the right direction.

Negative cash flow means that you’re spending more than you make, leading to things like credit card debt and bankruptcy. On the other end, positive cash flow means you’re earning more than you’re spending — a good step toward achieving your money goals.

Now that you have an idea of your net worth and cash flow, it’s time to set your financial goals.

2. Set SMART financial goals

By setting SMART financial goals (specific, measurable, achievable, relevant and time-bound), you can put your money to work toward your future. Think about what you ultimately want to do with your money — do you want to pay off debt? What about buying a rental property? Or are you aiming to retire before 60?

Start by putting together a list of your goals and dreams — from running a doggy daycare to living in Paris. Even if it feels outrageous, your financial plans should help you work toward your long-term goals, big or small.

SMART goals help you break down your financial plan into actionable pieces. Remember that dream to move to Paris? Using SMART goals, you may make your dream to live along the Seine a reality. Here’s how to get started creating your SMART goals.

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Setting concrete goals — and reminding yourself about them — may keep you motivated and accountable, so you stick to your budget and make smarter short-term decisions, whenever possible, to invest in your long-term goals.

But it’s important to understand that your goals aren’t static. When your life goals change, your financial plans should follow suit.

3. Update your budget

Making a budget, can help you understand what you can afford to spend and where you should be saving.

An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories.

  • Essentials (50%)
  • Wants (30%)
  • Savings (20%)
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The 50/30/20 rule is a simple way to approach your financial goals.

No matter what financial goal you’re working towards, it’s essential to have an updated budget and plan to achieve it. For example, if you’re planning for a wedding, you might cook at home more to reduce your dining-out budget each month.

What to include in your budget

If you’ve put together a budget before, you’ve considered the basics like rent, debt and groceries. But what other expenses should you consider? It’s crucial to think about the many different costs you could incur during any given month. When updating your budget, here are some common items to include …

  • Rent or mortgage
  • Groceries
  • Dining out
  • Household maintenance
  • Emergency fund
  • Subscriptions and memberships
  • Travel
  • Medical expenses
  • Bank fees
  • Auto or transportation expenses
  • Pet costs
  • Entertainment
  • Clothing
  • Personal care
  • Charity

Check out our budgeting tips to help you get started. If you’re ready to get the ball rolling on your future, try using a spreadsheet, a piece of paper or a budgeting app to kick off your financial plan today.

4. Save for an emergency

Unexpected costs can derail you if you aren’t prepared for an emergency that comes your way. Whether you’re just starting on your path or have been saving for years, it’s good practice to review your emergency finances.

Tip: It’s helpful to have multiple emergency funds to hold you over in case of an unexpected crisis.

5. Pay down your debt

It can be frustrating to allocate your hard-earned money toward savings and paying off debt, but prioritizing both can set you up for success in the long run. With two significant methods of paying off debt, it’s essential to understand the difference between them so you can make the smartest decisions for your financial future.

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No matter the debt repayment option you choose, the key to getting out of debt is to be disciplined as is possible with your budget. Skipping even one or two months of debt repayments can throw a wrench in your financial plans, so it’s essential to create a realistic budget that you can stick to whenever possible.

You can use our budget calculator to help you break down where your money is going.

6. Organize your investments

Investing may seem like a difficult topic to navigate, but understanding the basis can help you put your money to work passively growing your wealth. To start investing, you should first figure out the initial amount you’re comfortable depositing.

When deciding how to create a financial plan, consider budgeting a set amount each month from your savings allotment to go directly into your investment portfolio — this will be your contribution amount. Over time, those small bits of money may begin to grow into increasingly larger sums.

It’s important to note that investing is a long, patient game. If you want to see serious results, you’ll likely be waiting several years.

Ready to get started on your path toward long-term financial success? Check out our investment ROI calculator to create goals, forecast earnings and forecast what you could earn over time.

7. Prepare for retirement

When thinking about how to create a financial plan, it’s crucial to consider your goals far in the future. Although retirement may feel a long ways away, planning for it early can mean the difference between a prosperous retirement income and just scraping by.

The earlier you can start saving for retirement, the better. If you start saving for retirement in your 20s, you could have 30+ years of consistent contributions to your funds by the time you retire. Generally, the older you are, the more you should try to contribute to your retirement fund. However, a good rule of thumb is to save around 10%–15% of your post-tax income annually in a retirement savings account.

Retirement plan types

There are several types of retirement savings products, the most common being IRAs, Roth IRAs and a 401(k).

  • IRA — A traditional IRA is an individual retirement “arrangement” that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you’ll be taxed at the time of withdrawal.
  • Roth IRA — A Roth IRA is also an individual retirement arrangement opened and funded by you. But with a Roth IRA, you’re taxed upfront rather than at the time of withdrawal.
  • 401(k) — A 401(k) is a retirement account a company or organization offers its employees. While contributions are often pre-tax, your employer sponsored program may also allow you to make post-tax contributions.

8. Start your estate planning

Thinking about estate planning isn’t necessarily fun — but it is important. When figuring out how to create a financial plan, it’s crucial to start estate planning to outline what happens to your assets when you’re gone.

To create a simple estate plan, think about your assets, how you would like to distribute those assets, and who you want to have access to this information.

Using a lawyer for estate planning

An estate lawyer can help solidify your financial plans even after your death. By clearly outlining your estate plan, you can help protect against potential legal battles or missteps that could occur when sorting out your estate. If you plan to use a lawyer for estate planning, here are some things to consider.

  • Find an estate planning specialist. Just like doctors, lawyers specialize in different fields. Working with an estate planning specialist can help you build a solid financial plan.
  • Clarify legal fees. Estate planning fees may vary dramatically depending on the lawyer and your specific needs. Some lawyers charge based on the complexity of the plan while others charge a flat or hourly fee. Have an upfront conversation with your lawyer to determine which method would work best for you.
  • Find a lawyer you trust. Estate planning is a very personal matter, so you should find a lawyer you feel comfortable sharing personal information with.

9. Insure your assets

As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important to building a financial plan that’ll support you long into your future.

Types of insurance

There are several kinds of insurance you might get to protect your assets. Here are some important insurance types to consider when planning for your financial future.

  • Life insurance — Life insurance goes hand in hand with estate planning to provide your beneficiaries with necessary funds.
  • Homeowners insurance — It’s crucial to protect what’s likely your primary asset, your home, against disasters or crime. Homeowners insurance can cover unexpected damage and losses to property.
  • Health insurance — Health insurance requires you to pay a premium in exchange for the health insurer covering all eligible health expenses.
  • Auto insurance — Auto insurance can protect you from costs incurred due to theft or damage to your car.
  • Disability insurance — Disability insurance is reimbursement of lost income due to an injury or illness that prevented you from working.

10. Plan for taxes

Understanding how taxes work can make all the difference for your long-term financial health. While paying taxes can feel unavoidable, you might be able to reduce what you owe by being efficient with your tax planning. Consider the following:

  • How to reduce your taxable income — To help save money, you can capitalize on tax savings investment options like a 401(k) or 403(b) by reducing your taxable income (while putting more money away for your future).
  • How to itemize your deductions Tax deductions are a way to lower taxable income by deducting eligible incurred expenses or losses.

As your tax situation evolves, you might find it helpful to work with a tax professional to understand how to best plan for your specific financial situation.

11. Review your plans regularly

Figuring out how to make a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success.

As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who might have an established career.

It’s always a good idea to reevaluate your financial plan after any significant life changes, like marriage, having kids or losing your job. Every few months or so, take some time to look at your progress and assess any areas you need to adjust. Take the time to celebrate milestones — it may help motivate you going forward.

Consider asking the trusted people in your life for feedback after you make a financial plan. Your best friend might point out some things you’d forgotten about, like your dream of living in a downtown loft.

You can see out a financial adviser who can review and help solidify your financial plan.