How to Make a Financial Plan in 10 Steps

1. Assess Your Current Financial Situation

Before you even get started with outlining a financial plan, it’s a good idea to take a snapshot of your current situation. Some things you can take stock of include:

• Monthly income and expenses
• Savings and investment balances and contributions
• Debt balances, interest rates and monthly payments
• Net worth
• Insurance coverages

Evaluating your current situation can help you identify your strengths, weaknesses, opportunities and potential threats to your financial well-being. Understanding these aspects of your circumstances can make it easier to take the next steps.

Learn more >> Money Questions to Ask Yourself Now

2. Create a Budget

If you don’t already have one, make a budget to get even more details about your spending habits. Here are some simple steps you can take to get started.

Determine Your Monthly Income

This may be easy if you earn a salary, but if you have irregular income due to uneven hours or self-employment, take your average income over the past three to six months to get a good idea of how much money you can expect to take in going forward.

Learn more >> How to Budget With Irregular Income

Categorize Your Monthly Expenses

Take a look at your bank and credit card statements over the past three to six months to get a sense of how much you spend. Then, consider categorizing each transaction to understand exactly where your money is going.

One way to do it is to simply assign your expenses to one of two buckets: necessities or discretionary spending. However, if you want to make the most of your financial plan, it can help to break them down further to determine how much you’re spending on things like eating out, streaming subscriptions and clothing.

Track Your Spending

Going forward, you’ll want to set monthly spending targets based on your financial goals—more on those in a minute.

However, creating a monthly spending plan may be ineffective if you don’t actively track your expenses. Unfortunately, doing it manually can be tedious and time-consuming, so consider using a budgeting app. Many budgeting apps directly import transactions from all of your financial accounts into one place, making it easier to stay on top of things.

Learn more >> Why Is Budgeting Important?

3. Set Financial Goals

Now that you have a better sense of your current situation and spending habits, you can start defining your goals and priorities. As you think about what you want to accomplish, you’ll want to create financial goals for the short and long term.

Because financial goals are easily quantifiable, it’s important to make sure that they’re SMART goals:

• Specific: Instead of saying you want to save more, for instance, say you want to save up six months’ worth of basic expenses, and that you’ll set up an automatic transfer from checking to savings every month to accomplish that objective.
• Measurable: You can make your goals measurable by quantifying them. For example, you can use an online retirement calculator to estimate how much you’ll need to save to retire comfortably. Then, you may determine that you’ll need to contribute 15% of your income to a 401(k) or individual retirement account (IRA) to get there.
• Achievable: A goal without a plan for how to get there is just a wish. Identify key steps you’ll need to take to reach your goal. If you want to save $6,000 in a year, for example, you’ll need to save $500 per month to achieve that goal. Determine what you’ll need to do to get there, such as putting aside $250 per biweekly paycheck, or cutting back on $500 per month worth of expenses and funneling the savings into your account. If that amount is not achievable, you may need to adjust the amount you need to save or your timeline.
• Realistic: While it’s important to stretch yourself with your goals, it’s also crucial to make sure that your objectives aren’t too far out of your reach. For example, you may want to pay off your student loan debt, but that may be difficult if you can only afford a payment on an income-driven repayment plan, which may not be enough to cover accruing interest.
• Time-bound: If you want to pay off credit card debt, you can use a credit card payoff calculator to determine how long it’ll take based on your balances, interest rates and monthly payments, and then use that timeline to guide your budgeting. If you have long-term goals like achieving a certain amount of retirement savings, you may want to break them up into milestones, such as contributing a certain amount by the end of each year or saving three times your salary by age 40.

It’s important to note that you can and should work toward multiple goals at the same time. Just make sure you’re not spreading yourself too thin. In some cases, it may make sense to meet certain milestones with some goals before ramping up your effort with others.

4. Build an Emergency Fund

One of the most basic and critical financial goals is establishing an emergency fund. It’s important because unexpected expenses, such as home or car repairs or sudden unemployment, can completely derail your financial plan if you don’t have emergency savings in place.

While experts often recommend having three to six months’ worth of expenses in your rainy-day fund, you don’t necessarily need to have that much saved before you start on other goals. But it’s a good idea to focus on building a small buffer—say, $1,000—before you do anything else.

Also, while three to six months is a good rule of thumb, you can determine your ideal emergency fund balance based on your ability to save and your tolerance for risk.

Be sure to stash your emergency fund somewhere separate from your savings for other goals, but also in an account that’s easy to access in an emergency. A high-yield savings account is a good option, allowing you to earn a higher interest rate on your emergency fund than you’d get in a traditional savings account.

5. Eliminate High-Interest Debt

You don’t necessarily need to pay off all your debt to become financially secure, and many wealthy people use low-interest debt as financial leverage.

That said, high-interest debt, such as credit card balances, personal loans and some student loans, may be holding you back from achieving your financial goals.

If you have any debt with an interest rate that’s 8% or higher, prioritize paying it off as quickly as possible to expand your budget and make more room for financial objectives that are important to you. Two solid strategies for paying off high-interest debt are the debt avalanche and debt snowball methods.

Learn more >> What Is Debt Consolidation and How Does It Work?

6. Invest for the Future

An important part of a financial plan is investing for the future, particularly retirement planning. While immediate financial needs and short-term goals may make it difficult to save as much as you’d like right now, contributing a little now is a lot better than nothing at all.

At the very minimum, if you have a 401(k) with a matching contribution from your employer, try to max that out to make the most of your employee benefit. Once you reach that, consider putting other retirement contributions into an IRA, where you’ll have more control over your funds.

In addition to investing in a retirement account, look for other opportunities to invest for the future, even if the only reason is to build wealth. Ideas include putting some money in a brokerage account or investing in real estate.

7. Consider Insurance

There are many different types of insurance out there, and depending on your situation, you may not need all of them. However, it’s important to evaluate your situation to determine what you need and how much.

Here are some of the types of insurance coverage to consider:

• Health insurance
• Car insurance
• Renters or homeowners insurance
• Life insurance
• Disability insurance
• Umbrella insurance

You’ll also want to evaluate your current insurance policies and consider shopping around to make sure you’re getting the best deal on your coverage.

8. Account for Taxes

If you’re self-employed, you’ll want to make sure you’re paying your estimated taxes. You may need to include this in your savings goals to avoid a quarterly surprise.

If you’re a W-2 employee, take a look at your withholdings to ensure you’re not overpaying or underpaying. If you receive a large tax refund every year, for instance, you may be able to reduce your withholdings to get more of that money throughout the year to use for financial goals.

However, you may also decide that you prefer a large refund as a sort of forced savings program. If this is the case, set some goals for what you want to do with your tax refund, so you don’t misspend it.

9. Start Estate Planning

Even if you don’t have a lot of assets, it’s a good idea to have some sort of estate plan in place to lay out health care directives, guardianship for your children, power of attorney in the event that you become mentally incapacitated and more.

If your financial situation is still relatively simple, you may be able to create an estate plan on your own using software you can find online.

However, if your situation is getting increasingly complex, it may make sense to hire an estate attorney to help you with the process.

10. Regularly Review and Adjust Your Financial Plan

No matter how much time you spend planning your financial future, it’s almost certain that your circumstances and your priorities will change over time. As a result, it’s important to regularly evaluate your financial plan—at least once a year—to check your progress and reassess your objectives.

As things change, think carefully about which adjustments you want to make. For example, you may choose to change how you prioritize your goals or even eliminate certain goals altogether once you’ve satisfied them. You may also want to add new goals based on your new lifestyle.

If you’ve made mistakes, resist the urge to shame yourself and determine how you can get back on the right track. Whatever you do, try to avoid being complacent about your financial goals. Achieving financial security can be a lifelong pursuit, but ongoing diligence can give you a better chance of achieving your financial dreams.

Frequently Asked Questions

• Do I Need a Financial Advisor?

  As you work to establish your financial plan, you may wonder if it can help to consult a financial advisor. If you’re relatively young and don’t have a lot of assets yet, it may make sense to get started on your own.

  However, as your financial situation becomes more complex and your investments start to grow, it may be a good idea to hire a financial advisor, who can provide expert guidance and help you employ more sophisticated strategies to achieve your financial goals.

• Why Is Financial Planning Important?

  Creating a financial plan is crucial in helping you achieve financial security because it helps you develop a framework for accomplishing your goals. While you can still make progress without a proper financial plan, having that framework can make your efforts more efficient and effective.

Building Credit Can Help Your Financial Plan

As you work toward your financial goals, you may choose to borrow money for certain endeavors, such as buying a house or vehicle, starting a business or managing everyday expenses with a credit card.

One way to minimize your costs related to debt is to build a good credit score. People with good credit tend to qualify for lower interest rates and may also enjoy other benefits. With Experian, you can get free access to your FICO Score and Experian credit report. With these resources, you can learn how to improve your credit and track your progress along the way.