A financial plan is both an assessment of where your wealth is currently at and where you’d like it to be. It is a way to strategize for short-, mid-, and long-term goals to ensure that your future looks bright (and comfortable). Read on to learn how to craft a strong financial plan to better prepare for what’s ahead.

What is Financial Planning?

Financial planning is the two-fold process of assessing your current financial situation and then, based on that information, making a roadmap for your future financial goals.

Having a solid financial plan is an excellent way to reduce anxiety about money, create a smart budget, ensure you’re putting away enough funds for a rainy day, and solidify your retirement goals.

For those who have historically been on the lower side of the wage gap, such as women, a financial plan can help get past institutional barriers.

In short, a financial plan is one tool that can allow you to build wealth and meet or even exceed your goals for the future.

How to Create a Financial Plan

Get out the calculator. To craft a solid financial plan, you’ll need to take a close look at how much money you’ve got and how much you spend.

Step 1: Assess Your Financial Situation

Before you can plan where your money goes, you’ll need to know how much money you have to begin with. If you’ve never sat down and scrutinized your finances, don’t be scared. Pour yourself an extra cup of coffee and know that this is the first step towards achieving those big money milestones.

The key to understanding your current situation is knowing your net worth. This involves subtracting your liabilities from your assets. Here’s a closer look at what that looks like:

Assets: Calculate the value of everything you own, which can include your home, your car, any money you have put away in savings, investments made to a 401(k)—anything of value that belongs to you.

Liabilities: Add up any debt you owe, including credit card debt, student loans, car loans, and mortgages.

Your net worth can be found by subtracting the title liabilities due from your total assets.

In addition to looking at your net worth, you should complete a cash flow analysis. Calculate your current take home salary (after taxes) and all the bills you need to pay each month, then review the last three to six months of spending, noting how much you spend in different categories (entertainment, food, clothing, etc.). Determine the average you spend in each category, as well as total, so you can better budget.

Step 2: Identify Your Goals

Depending on your age, net worth, and personal situation, your financial goals could be small (e.g. save for a cruise to Hawaii) or large (e.g. retire 5 years early), or anywhere in between. You may have one or you may have 10—the most important part in this step is identifying your goals and how much money you’ll need to make them a reality.

Step 3: Map Out Your Strategy

Now that you have a clearer picture of how much money you have and where you want to go with that money, you can get into the details of how you hit your goals.

Using the S.M.A.R.T. system, you can craft a solid plan. Here’s how that works:

• Specific: Confirm that your goal is concrete and specific.
• Measurable: How much money do you need to achieve this goal?
• Achievable: If a goal seems too unwieldy, break it up into parts so that you don’t feel overwhelmed by lofty aspirations. You can always set new goals down the line.
• Relevant: Can you realistically take the steps necessary to reach your goal?
• Time-bound: Set a goal for yourself, with milestones along the way. This will help keep you accountable and on track.

With this framework in mind, figure out the relevant, measurable steps that will get you to your goal. If your aim is to save for a down payment, you may want to set aside a certain amount of money each month towards that goal, while simultaneously paying off debt to get your credit score up.

If you feel overwhelmed by the process, consider reaching out to a Certified Financial Advisor. They can walk you through the process and help you inch one step closer to that dream vacation or nest egg.

Step 4: Follow Through

With your plan in place it’s up to you to follow through. This can mean setting aside $100 each month, or $1,000. Every dollar counts, and no goal is too small—it’s most important that you have a clear picture of your finances so you can make more informed decisions.

Step 5: Consider Investing

If you haven’t started investing your money, now’s a good time to start. Investing is a broad term, meaning everything from putting money in your 401(k) to buying stocks. If all you can afford right now is to add funds to your 401(k), make sure to contribute as much as your employer will match for the maximum benefit.

Step 6: Revise Your Plan As Needed

Life happens, and situations change. Check in on your plan every six months—ideally with a trusted financial advisor—and revise your milestones and goals based on any cash windfalls or shortfalls. You may also need to rethink your goals, depending on big events, such as the birth of a child or a divorce.

Getting Help With Your Financial Plan

While we have given you the basic steps necessary to outline a financial plan on your own, no plan is fixed, and will require changes as you grow older or as major life events occur. This is one reason you might consider hiring a financial planner.

Online advisor databases, such as Retirable’s, allow you to conveniently meet with an advisor from the comfort of your home, assuming you have a WiFi connection. Your advisor will likely help you invest your money, create a comprehensive financial plan, and check-in with you regularly to adjust the goals and investments as needed.

A less involved online option is a robo-advisor, which won’t help with creating a financial plan, but will assist with investments. This option is usually best for someone who needs help building wealth, not managing it.

If you prefer to meet with someone in person, there should be many local, traditional advisors available. Some may specialize in one area, such as taxes or estate management. Some traditional advisors will only work with clients who have a certain amount of wealth to invest, so be prepared to shop around if you’re just starting out—or look at other options.

Final Thoughts

A financial plan is not just a good thing to have, it’s a critical component of your retirement strategy. Knowing how you can save and invest more money—even if it’s only $10 a month to start—will help you build and grow your wealth. If you need some guidance, schedule a free consultation from a Retirable advisor today.

Frequently Asked Questions

Why is financial planning important?

Financial planning can help you in numerous ways, from figuring out how to pay off high-interest debt to investing for retirement. In addition, it can help you save up a proper nest egg so you can weather any storms, such as recessions or the loss of a job.

What are the 5 components of a financial plan?

When crafting your financial plan, you’ll want to include:

• Your goals (short-term, medium-term, and long-term)
• Assets and liabilities
• Cash flow and expenses
• Insurance planning, to protect your investments and assets
• Milestones to monitor the plan over time, and adjust as needed

Need help making sense of it all?

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