Financial Planning: What It Is and How to Make a Plan

Liz Manning has researched, written, and edited trading, investing, and personal finance content for years, following her time working in institutional sales, commercial banking, retail investing, hedging strategies, futures, and day trading.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Assessing Your Financial Health

Setting Financial Goals

1. DIY Financial Planning
2. Making an Annual Plan
3. Planning for Retirement
4. Financial Security Before 30
5. Retire as a Millionaire

1. Pay Yourself First
2. Budgeting for Short- and Long-term Expenses

Staying on Target

1. Balance Your Portfolio
2. Financial New Year's Resolutions
3. When Someone Needs a Financial Intervention

What Is Investment Planning?

An investment plan starts with a financial plan. Both identify your financial goals and address the financial resources you have available to meet them.

A financial plan is a document that details a person’s current financial circumstances, their short- and long-term monetary goals, and their strategies to achieve those goals. It can help you to establish and plan for income and spending, debt reduction, and fundamental needs such as managing life's risks such as those involving health or disability.

A financial plan can provide financial guidance so you're prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.

Investment planning involves a thorough evaluation of your money situation including income, spending, debt, saving, and expectations for the future. It can be created independently or with the help of a certified financial planner.

Key Takeaways

• An investment plan documents an individual’s short- and long-term financial goals and includes a strategy to achieve them.
• The plan should be comprehensive and highly customized.
• It should reflect an individual’s personal and family financial needs, investment risk tolerance, and a plan for saving and investing.
• Planning in finance starts with a calculation of one’s current net worth and cash flow.
• A solid investment plan provides guidance over time and serves as a way to track progress toward your goals.

The Fundamentals of Financial Plans

How to Create an Investment Plan

Certain steps are necessary to create a financial plan and an investment plan.

1. Do It Yourself or Get Professional Help

Decide whether you'll create your financial and investment plans on your own or with the help of a licensed financial planner. You can certainly build a financial plan but a financial pro can help ensure that your plan covers all the essentials.

2. Build an Emergency Cash Fund

Start setting aside money in a liquid account based on what your cash flow allows. Your goal should be to save enough to cover all your expenses for three to six months at a minimum but preferably for longer in case you find yourself without income due to unexpected events.

3. Plan to Reduce Debt and Manage Expenses

The faster and more effectively you can eliminate debt, the better for the growth of your savings, your standard of living, and for the achievement of your specific investment objectives.

Make it a habit to cut expenses whenever and wherever possible so you can add to your savings. Stay on top of those that you know you'll have, such as taxes, so you always meet those obligations on time.

4. Manage Potential Risks

Your financial well-being can be affected when accidents, health problems, or the death of a loved one strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property, health, auto, disability, personal liability, and life insurance.

5. Begin to Invest

Take part in a retirement plan at work that automatically deducts contributions from your paychecks. Plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.

Consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.

6. Include a Tax Strategy

Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.

7. Consider an Estate Plan

It's important to make arrangements for the benefit and protection of your heirs with an estate plan. The details will depend on your stage in life and whether you're married, have children, or have other legacy goals. Again, a professional such as an attorney can help here.

8. Monitor and Adjust Your Plan

Revisit your plan at least yearly on your own or with a financial professional. Do it more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as necessary.

Investment Planning 101

Whether you’re going it alone or with a financial planner, it's necessary to understand how important financial and investment plans can be to your financial future. They can provide the guidance that assures your financial success.

Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet. Then make some basic calculations that establish where you stand financially.

1. Calculate Your Net Worth

To calculate your current net worth, subtract the total of your liabilities from the total of your assets. Begin by listing and adding up all of the following:

• Your assets: An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan, and other investment accounts.
• Your liabilities: A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.
  

2. Determine Your Cash Flow

Cash flow is the money you take in measured against the money you spend. You must know your income as well as how and when your money is spent to create a financial plan and then an investment plan. Documenting your cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.

Review your checking account and credit card statements. They should provide a fairly complete history of your income and spending in a wide range of spending categories.

Document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest. Other categories include food, household and clothing, transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.

You’ll know what your monthly cash flow has been and where you can improve it when you've added up all these numbers for a year and divided the total by 12.

Note

Don’t overlook cash withdrawals that may have been used on sundries like shampoo. ATM withdrawals can also highlight where you can cut unnecessary spending.

3. Establish Your Goals

A major part of an investment plan is your clearly defined goals. They might include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals but a professional financial planner should be able to help you finalize a detailed savings plan and specific investing that can help you reach them one by one.

The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.

Benefits of Making a Financial Plan

• A financial plan involves a thorough examination of your income and spending.
• It can improve your understanding of your financial circumstances at all times.
• It establishes important short- and long-term financial goals upon which you can base your investment planning.
• It clarifies the actions required to achieve your various financial goals.
• A financial plan can focus your attention on important immediate steps such as reducing debt and building your savings for emergencies.
• It enhances the probability that you'll achieve financial milestones and overall financial success.
• It can guide your efforts over time and provide a means to monitor your progress.
• It can keep you out of financial trouble and reduce any stress and worry you might have experienced in the past.

Financial planning is a smart way to keep your financial house in order. It's a money tool regardless of your age, earnings, net worth, or financial dreams. It provides a way to document your financial goals and corresponding investment goals.

When to Create a Financial Plan

A financial plan is always an advantage for those who want to make sure they manage their finances in ways that are best suited for them. You can create one at any time whether you've just joined the workforce or you've been working for years.

Some circumstances can call for the creation and use of a financial plan, however. They can also serve as signals to adjust existing plans.

• A new job that results in added income, new expenses, or new opportunities
• An income change that can affect your ability to pay expenses, pay off debt, or save
• Major life events such as marriage, children, or divorce that can change financial objectives, spending needs, and obligations
• Health adversities that result in redirecting income and spending away from existing goals
• An income windfall such as an inheritance or insurance payment that can affect your efforts to reach your financial goals, such as by providing more money for investing
  

What Is the Purpose of a Financial Plan?

A financial plan should help you make the best use of your money and achieve long-term financial goals such as investments, sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.

How Do I Create an Investment Plan?

You can write an investment plan yourself or enlist the help of a professional planner. Begin with a financial plan. The first step is to calculate your net worth and identify your spending habits. Consider your longer-term objectives and decide on ways to achieve them when this has been accomplished and documented.

What Are the Key Components of a Financial Plan?

Financial plans aren't one-size-fits-all but the good ones tend to focus on the same things. You can explore your financial goals and ways to achieve them after you've calculated your net worth and spending habits. This usually involves some form of budgeting, saving, and investing each month.

Your goal is to ensure that you live comfortably and financially stress-free for the rest of your life. Areas to focus on include an emergency savings plan, a retirement plan, risk management, a tax minimization plan, and then a long-term investment strategy.

What Are the Five Key Areas of Financial Planning?

The five key areas of financial planning are estate planning, retirement planning, self-protection/risk management such as insurance, tax planning, and investment planning.

The Bottom Line

A financial plan is an essential tool for your financial well-being, both now and into the future. It involves setting down the current state of your finances, your various financial goals, and methods that can help you achieve them.

It's never too early or too late to create a financial plan. It can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages, no matter the amount of money you might have.

1. Yahoo! Finance. "How Much Money Should I Have in an Emergency Savings Account?"
2. Forbes Advisor. "Estate Planning Checklist: Get Your Affairs in Order."
3. Fidelity Investments. "What Is Net Worth?"

The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Assessing Your Financial Health

Setting Financial Goals

1. DIY Financial Planning
2. Making an Annual Plan
3. Planning for Retirement
4. Financial Security Before 30
5. Retire as a Millionaire

1. Pay Yourself First
2. Budgeting for Short- and Long-term Expenses

Staying on Target

1. Balance Your Portfolio
2. Financial New Year's Resolutions
3. When Someone Needs a Financial Intervention

Cross-selling is to sell related or complementary products to an existing customer. Cross-selling is one of the most effective methods of marketing.

Regulation Best Interest (BI) is a federal rule that requires broker-dealers of financial services to recommend only products that are in their customers' best interests.

A certified financial planner holds the certification owned and awarded by the Certified Financial Planner Board of Standards, Inc.

Retirement planning begins with determining your long-term financial goals and tolerance for risk, and then starting to take action to reach those goals.

The Series 65 is an exam and securities license required by most U.S. states for individuals to act as investment advisers.

A financial planner is an advisor who helps clients manage their financial affairs and work toward their long-term financial goals. Many hold a professional designation.

Shot of two women in a business meeting." width="400" height="300" />

• About Us
• Terms of Service
• Dictionary
• Editorial Policy
• Advertise
• News
• Privacy Policy
• Contact Us
• Careers
• EU Privacy

We Care About Your Privacy

We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.

We and our partners process data to provide:

Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)