What Is Financial Planning and How Can It Help Me?

What Is a Financial Plan?

A financial plan is a guide that details your current money situation, as well as your short- and long-term financial goals and the methods you'll use to achieve them.

A comprehensive financial plan involves several components, including:

• Budgeting
• Saving
• Paying off debt
• Retirement
• Other investments
• Insurance
• Estate planning
• Taxes

Depending on your situation, though, you may choose to prioritize some aspects of your financial plan over others. For example, a recent college graduate may not yet need a robust estate plan.

Keep in mind, though, that a financial plan is a living document that should be regularly evaluated and updated. While some elements may not be important to you now, neglecting to make adjustments as you grow older can result in a plan that no longer matches your priorities.

How to Make a Financial Plan

Developing a comprehensive financial plan can take time, especially if you're starting from scratch. Depending on your situation and prime concerns, however, you may be able to start with some elements of your plan and fill in the rest over time.

That said, here are 10 steps you can take to make a financial plan.

1. Assess Your Current Financial Situation

Start by evaluating the current state of your money management. Some of the things you can focus on include:

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

2. Create a Budget

Making a budget involves determining your monthly income and tracking your monthly expenses. You can do this by looking at your income and spending over the past few months. You can also research different budgeting methods to determine how detailed you want your budget to be and how much time you want to spend on it.

It can also help to compare budgeting apps, which can provide you with templates and time-saving tools and resources.

Learn more: How to Make a Budget

3. Set Financial Goals

Once you have an understanding of your situation and your financial means, you can start defining your goals. One way to avoid vague goals is to use the SMART goal approach:

• Specific: Define your goal so you have a clear view of what you're working toward.
• Measurable: Quantify your goal so that you can easily track your progress.
• Achievable: Determine which steps you will take to accomplish your objective.
• Realistic: Evaluate how practical your goal is based on your current situation and why it's important to you.
• Time-bound: Set a timeframe for when you expect to achieve your goal.

4. Build an Emergency Fund

Stashing money in a high-yield savings account may not be the most inspiring financial goal. However, creating an emergency fund can help prevent your financial plan from being derailed by unexpected expenses. Many financial experts recommend maintaining three to six months' worth of basic expenses, but you can determine the right amount based on your preferences and budget.

At the very minimum, focus on building a small buffer, such as $1,000, before you pursue other goals. Using a high-yield savings account for your emergency fund will keep your money accessible while allowing you to save faster than you would with a traditional savings account.

Learn more: How Much Money Should You Have in Your Emergency Fund?

5. Eliminate High-Interest Debt

Any debt with an interest rate of 8% or higher is considered high-interest debt, and costly interest charges could be hampering your progress toward financial aims. As you consider how to tackle your debt, learn about different debt payoff methods to determine the most effective approach for you.

Learn more: How to Pay Off High-Interest Credit Cards

6. Invest for the Future

Using an online retirement calculator can help you get a sense of how much you need to start saving to realize your dreams after you leave the workforce. Depending on your situation, it can start with simply contributing enough to your 401(k) plan to get your employer's matching contribution. Once you've reached your savings goal for retirement, you may consider other investment opportunities, such as real estate or stock investing.

Learn more: What Is an Employer 401(k) Match?

7. Consider Insurance

Not all forms of insurance are required, but it is important to evaluate your current coverage to determine if you're sufficiently protected. You may also want to consider buying new policies based on your needs and those of your loved ones. Some of the different types of insurance coverage include:

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

8. Account for Taxes

If you receive a sizable tax refund every year, it may be a good idea to adjust your withholdings from your paycheck—or, if you're self-employed, your quarterly estimated tax payments. That way, you'll have more money throughout the year to put toward your financial priorities. If your tax situation is starting to get more complicated, it may also help to hire a tax professional who can offer guidance on how to minimize your tax liability.

Learn more: Tips to Make Filing Taxes Easier

9. Start Estate Planning

A basic estate plan can provide guidance on health care directives, guardianship for children, who will receive your assets and other important matters that could come into play if you pass away or become mentally incapacitated. If you don't anticipate a complex situation, consider using online software to craft your estate plan. Otherwise, it could make sense to hire an estate planning attorney.

10. Regularly Review and Adjust Your Plan

Over time, your circumstances and your priorities may change. As such, it's a good idea to evaluate your financial plan at least once a year to track your progress, determine if you're on track and make adjustments to align better with your changing situation and values.

When to Create a Financial Plan

It's a good idea to develop a financial plan as soon as you start earning a regular income, even if your first plan is relatively short and simple. There are also other major life milestones when it can make sense to create a plan if you don't already have one. Examples include:

• Getting married
• Having a child
• Losing a job
• Experiencing a significant increase in income
• Receiving an inheritance
• Buying your first home
• Paying off student loan or credit card debt
• Entering retirement

Benefits of Financial Planning

There are several reasons to create a financial plan, even if you don't have a lot of extra money to work with right now. Here are just a handful of benefits to consider.

Full View of Your Financial Situation

It can be easy to make financial decisions in the moment that don't necessarily line up with what's important to you, so getting a comprehensive view of how you manage your money can be an illuminating experience.

If you don't have a budget, for instance, you may be unaware of how much you spend on impulse buys, which can increase your risk of taking on high-interest debt.

Can Build Confidence

Understanding your situation and creating a framework for accomplishing your goals can give you the confidence to develop money habits that align better with the life you want to live.

For example, if you want to save up for a down payment on your first home, creating a well-defined SMART goal can give you the clarity to move forward instead of putting it off.

Can Improve Your Effectiveness

If you've saved or invested money without an objective behind it, creating a financial plan can help you reallocate your funds in a way that helps you work toward your goals more effectively.

The financial planning process can also help you identify potential opportunities and risks that could affect your financial security. For example, if you have more than enough money in your emergency fund, you may want to invest some of the money to take advantage of better returns. Additionally, if you don't have sufficient insurance coverage, buying a policy or increasing your limits can offer better protection.

Should You Hire a Financial Planner?

It's not always necessary to hire a financial planner, especially if you enjoy managing the financial planning process on your own and have a relatively simple financial picture.

However, it can make sense to hire a professional if you're in one of the following situations and you don't feel comfortable making significant financial decisions on your own:

• Getting married or divorced
• Planning to start a family
• Receiving an inheritance or other major windfall
• Getting a significant increase in income
• Nearing retirement age

It could also help to work with a financial planner if you're simply struggling to define your goals or you need some accountability.

It's often a good idea to work with a fee-only financial planner. Some may charge an hourly rate of $200 to $400, or they may charge a flat fee for the full financial plan, which may cost roughly $2,500.

Building and Maintaining Good Credit Can Help Your Financial Plan

As you establish and work toward your financial goals, it's important to make building a good credit score part of your process. Maintaining good credit can help you not only qualify for lower interest rates on loans but also better rates on certain insurance policies or better rental options.

With Experian's free credit monitoring service, you'll get access to your FICO^® Score^☉ and Experian credit report. These resources can provide much-needed insight into how your money management affects your credit score and the steps you can take to improve your credit.