A financial plan is vital to financial success. However, many people don’t have one because they think they need to pay a financial advisor to develop a financial plan for them. That isn’t necessarily true. You can develop a financial plan on your own! It is a daunting task, but don’t worry; we’re here to help. This is everything you need to know to starting building and following your financial plan.
Please remember that I’m not a certified financial professional. But sometimes, those folks try to sell you on products you don’t actually need. Unless you have a complicated financial life, you probably don’t need to pay a planner fifty bucks an hour to build a plan for you.
I’m just a normal person who loves finance and wants to help others achieve their financial goals because I want to empower everyone to take control of their own finances the way that I did. I’m here to give you the building blocks you need to build your own financial plan. However, these are just guidelines. If you need specific help, you should see a financial planner.
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What is a Financial Plan?
A financial plan is a roadmap to achieving your financial goals. You can’t set a plan until you set your goals because how will you know what to do with your money if you don’t know what you want or need?
If you aren’t sure about your financial goals, grab our free download, a four-page worksheet/mind map to set your financial goals. It helps you brainstorm what you want out of life and set goals to achieve that. I call it the mind map to financial freedom, but it can be used to identify all of your financial goals.
How Do I Write a Financial Plan?
Now that you have your financial goals ready, it’s time to write out your financial plan. This can be done in a journal or on your computer. I like to journal things out first while brainstorming my plan, then transfer my final plan to an excel spreadsheet or planning template to help me keep track.
Your plan should take into account every aspect of your financial life. When writing your plan, you need to think about your income, expenses, debt, insurance needs, and every other financial thing you can think of. Let’s take a look at some of the items you need to consider when writing your plan.
Your income isn’t just what you make from your nine to five. You should also include any side hustle income, investment income, or passive income that you might have. In addition, you should be thinking about whether where you are now is where you will be in the future. Are you looking towards a promotion or a career change? How will these things affect your income? Do you have a side hustle, or are you thinking of starting one? How much can you realistically make from your side hustle?
When you first write your financial plan, you will have to use your current income for your balance sheet. However, it’s also important to think about what might happen to your income in the future.
Most of us have some sort of debt hanging over our heads, whether from credit cards, student loans, or even a mortgage. The next part of your financial plan should include how much money you owe towards your debt.
Perhaps paying off your debt is one of your top financial goals. If it is, then this is what the majority of your extra income should go towards. If it’s not, it’s still important to pay off your debt, but you may not want to put every extra penny towards it. After you finish writing everything out, you can decide how much extra money should go towards each goal.
Insurance will help you if the unexpected happens. Car insurance, home insurance, rental insurance, and health insurance are things you need to consider in your financial plan. More than likely, you are already paying these bills. Check to ensure that your coverage actually meets your needs. You don’t want to be paying too much for insurance, but you also don’t want to find out that your insurance doesn’t cover it in the midst of an emergency.
The only thing certain in life is death and taxes – so make sure your financial plan accounts for it! Taxes are due whether money is coming out of your paychecks or not. If you start a side hustle or your own business, you will have to make plans to pay the appropriate amount in taxes.
The same is true for investment income. Investment gains are taxable, as is money that you withdraw from a traditional retirement account such as an IRA. However, if your retirement vehicle is a ROTH IRA, you already paid taxes on that income, and you can withdraw tax-free. Knowing the tax Implications of not only your full-time job but any side hustles, investments, or retirement income is incredibly important for long-term financial planning.
Everyone needs a place to live. However, there are lots of different housing options, and whichever you choose may have drastic impacts on your financial plan. Is homeownership one of your financial goals? Would you rather rent? Or maybe, you want to buy an RV so you can travel full time.
There’s no right or wrong method for housing. Your financial plan should not only consider your current cost of housing, but it should also account for whatever your future housing goal might be if it’s different. It should also include any additional costs associated with housing, such as utilities, maintenance, HOA fees, or anything else you have to pay to live in a certain spot.
How are you going to get around, and how much is that going to cost? If you live in a city with excellent public transportation, you may not need a car. If you need a car, you will have to decide what type of car you need, whether you should buy new or used, and what impact buying a car will have on your finances and credit.
You may have already included your car payment in with your debts, but you should also include gas and maintenance as an additional car ownership cost. You may also have realized that you don’t need a car or that if you bought a cheaper, used car, you’d save money each month that could be put towards your financial priorities. These are the things we figure out when we start writing out our financial plans.
Retirement planning is one of the biggest reasons that most people build a financial plan. It’s important to start saving for retirement as early as possible to have enough retirement income to ensure that you can maintain your standard of living.
This might look different for everyone. Many have a target of a million dollars because that’s a nice round number. But the reality is, not everyone will need that much, and some people will need more.
When you create your financial plan, you really need to dive into how much money you will need in retirement. Consider whether you plan to retire early or work a few years past traditional retirement age. Think about healthcare costs in retirement, such as Medicare and long-term care. You should also think about what you want to do while retired. Are you planning to travel, check out all the golf courses, and do all the things you couldn’t do while you were working? Or do you want to relax and take time for yourself? The amount of money you will need in retirement greatly depends on what you want to do while retired.
Investment accounts go hand in hand with your retirement accounts, especially because many people’s only investment account is their retirement account. However, your financial plan should include any investment accounts you might have. Do you have non-retirement brokerage accounts or mutual funds? What is your goal with these accounts?
It’s great to be investing money in non-retirement accounts, but your plan should outline the reason you are doing it. Is it to invest for a home? A child’s 529 plan? Or just for your own personal financial security? It’s important to know why you are doing what you are doing, and your plan will help you figure that out.
Building a savings account is an important part of your financial plan. At the bare minimum, you should establish an emergency fund with three to six months of living expenses in it. However, you should also establish savings accounts for any other short-term goals you might have.
These goals should be laid out in your financial plan. You can even name your savings accounts, so you know what you are saving for. I have separate savings accounts for travel, buying a new car, and a new computer.
Should I Save or Invest?
A question people often ask when developing their own plan is whether they should save or invest. Ideally, you should be doing both. Emergency funds should always be kept in savings because you don’t want to risk that money as you never know when you will need it. After that, you should look at your time frame to determine what method is best. Generally, any money you will need fairly soon, like in the next three to five years, should be kept in savings. You never know what will happen with investment accounts, and you don’t want to risk having to pull your money out during a down market.
However, the timeframe isn’t the only thing to consider when deciding whether to save or invest. You should also be thinking about your risk tolerance and how much you need the money to grow. Savings accounts have pitifully low returns, but no investment is 100% safe. These are things you need to balance when creating your financial plan.
One thing people don’t always consider when creating their plan is charitable giving. When we have enough, we like to give to those less fortunate than us. This is a beautiful goal and an important thing to include while planning your long-term financial needs. Do you want to give a certain percentage of your income? A certain dollar amounts? You may also only want to give when you meet a certain income threshold.
There’s no right or wrong way to think about charitable giving. You don’t even have to do it at all if you don’t want to or can’t afford it. However, if it’s something that you are interested in, you should definitely include it in your financial plan.
What Are the Other Components of a Financial Plan?
Your financial plan is more than just what money you have and what you will do with it. Those are just two components of your financial plan. You should also include your life goals, assumptions, risk mitigation plans, and obstacles that might pop up, and estate planning.
In my opinion, the most important part of any financial plan is your life goals. How will you know what to do with your money if you don’t’ even know what you want out of life? Why would you start saving for a child’s college education when you don’t want to have children? Would you have a savings account dedicated to world travel if you’re a homebody?
Figuring out exactly what you want is paramount to having a successful financial plan. Once you know what you want, you can start planning for it.
We can’t know what the future will hold. This means that there are a lot of assumptions that will be built into your plan. That’s okay. However, it’s important to identify those assumptions so that you can mitigate them to the best of your ability.
Most financial advisors commonly assume that investment returns will be approximately 7% per year. This is the number that many of us use when thinking about how our money will grow, but we need to remember that it’s just an assumption. We don’t know if there will be bad years where returns are much less, or good years we can get much more.
Another common assumption is that we will get to retire on our own terms. Unfortunately, life likes to throw us curveballs. We may get injured and be unable to work, or we might have to leave the workforce to take care of family members.
These are two assumptions that a lot of people might encounter, but every individual probably has a bundle of assumptions specific to them. You should think about which portions of your financial plans are facts and which are assumptions and plan to mitigate any of the assumptions to the greatest extent possible.
Everything we do in life has risks. Insurance is one of the many ways we can mitigate that risk, but it isn’t the only way. We might need to mitigate the risk that some of our assumptions won’t pan out the way we thought they would. How do we respond if our investment returns are weak for a couple of years or if we have to drop out of the workforce?
Having a tentative plan in place to mitigate any risks that we might encounter during the course of our lives is an important consideration in any financial plan.
Your financial plan will ideally span many years. You need to consider what obstacles will pop up over the course of such a long timeframe. In the income section, we discussed the possibility of changing career fields – will that be an obstacle? How will you overcome it?
What are other obstacles in your way on your path to your financial goals? What can you do to overcome them? This is a very personal question. Everyone has a different financial situation, and everyone’s obstacles will be different. It’s important to plan for them because life events happen whether we are ready or not. Those who fail to plan, plan to fail.
The final component of your financial plan is an estate plan. There’s a lot of finality to an estate plan, but if one of your long-term goals is to build generational wealth, then you need to plan for where that wealth goes when you are no longer here.
It’s far better to consider your estate plan when you are young and healthy so that there is no question of what you wanted. Although you should revisit it every year or so to ensure that everything is still correct, getting that foundation nailed down as soon as possible will help ensure your final wishes are granted.
Putting it all Together
As you can see, a lot goes into your financial plan. After you get all of your expenses written down, figure out your exact financial situation, and determine where you want to go in life, it’s time to put it all together and figure out the how.
Sometimes, it’s just a matter of the way you manage your money. You may already be making enough money to meet your goals. Now that you have everything laid out, you need to focus on budgeting and put the money in the correct spot.
It’s not that easy for others. Some people may not be making enough money to afford all of their goals. Now it’s the time to make the hard choices. Do you look for ways to increase your income so you can afford these things, or do you scale back some of your goals? Is there a way to drastically cut your expenses, such as selling your car or moving to a cheaper area?
The “How” will be drastically different for everyone. This is your roadmap to achieving your version of financial success. Finding ways to get from where you are now to where you want to be is the key to solving the puzzle.
When to See a Financial Advisor
At the beginning of this article, I mentioned that many people could build a financial plan without the help of a financial professional. But that’s not true for everyone. If this process and this post was overwhelming for you, it might be a good idea to see a financial advisor for help.
Financial advisors can provide investment advice, act as brokers, and help you find ways to achieve all of your financial goals. They may even be able to help you flesh out your goals and find creative ways to save money or increase your income.
Not all advisors are created equally. In my opinion, it’s best to work with a fee-based advisor. These are the folks who charge an hourly rate to speak with them. They won’t try to sell you products you don’t need, like the commission-based folks. Although all advisors are supposed to have their clients’ best interests at heart, I don’t always trust that when a juicy commission is at stake.
Start Building Your Financial Plan Today!
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