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What Is a Financial Plan, and How Can I Make One?

A financial plan organizes how you handle money so you have less stress and more success. Follow these seven steps whether you create your own plan or get help.
Jan. 10, 2019
Advisors, Financial Planning, Investing, Retirement Planning
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A financial plan gives you a road map for handling your money in a way that cuts stress and builds security. It’s crucial for meeting goals, such as buying a house or creating a nest egg that will last long after you’ve collected your final paycheck.

You can make a financial plan yourself — even a very basic run-through of the steps below will help you get a handle on your money.

You may also want to get help. Low-cost robo-advisors let you ease into investing with low or no minimum balances. And getting started is important: Avoiding the stock market hobbles your ability to build a healthy retirement. You can consider hiring a financial advisor later for comprehensive planning as your life gains complexity.

How to make a financial plan in 7 steps

Whether you take the DIY route or seek help, personal financial planning follows these seven steps:

1. Set goals

2. See where your money goes

3. Get that employer match

4. Prepare for emergencies

5. Attack toxic debt

6. Invest to really grow your savings

7. Create a “moat” to protect and grow financial well-being

That’s a good blueprint to use whether you want to make a financial plan on your own or are preparing for your first visit to a financial advisor. Regardless of the path you take, financial planning is important for striking that balance between current needs and long-term goals.

1. The first step in financial planning: goals

Understanding what you want comes first. Make your financial goals inspirational — what do you want your life to look like in five years? What about in 10 and 20 years? Do you want to own a car, or a house? Are kids in the picture? How do you imagine your life in retirement?

You start with goals because they will inspire you to complete the next steps and provide a guiding light as you work to make those aims a reality.

2. See where your money goes

Get a sense for your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan, and can reveal ways to direct more to savings or debt pay-down.

NerdWallet recommends the 50/30/20 budget principles: Put 50% of your take-home pay toward needs (housing, utilities, transportation and other recurring payments), 30% toward wants (dining out, clothing, entertainment) and 20% toward savings and debt repayment.

» Need a jump start? Try this easy-to-use budget worksheet

3. Get your employer match

If you visit an advisor, he or she will be sure to ask: Do you have an employer-sponsored retirement plan like a 401(k), and does your employer match any part of your contribution?

True, 401(k) contributions decrease your take-home pay now, but it’s worth it to put in enough to get the full matching amount, because that match is free money.

» See for yourself: Use this 401(k) calculator to see how you could benefit

4. Make sure emergencies don’t become disasters

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.

Building credit is another way to shock-proof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.

» How are you doing? Calculate your emergency fund needs

5. Tackle high-interest debt

A crucial step in any financial plan: Pay down “toxic” high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

» Explore strategies for paying off debt

6. Invest to build your savings

Investing sounds like something for rich people or for when you’re established in your career and family life. It’s not.

Investing can be as simple as putting money in a 401(k) and as frictionless as opening a robo-advisor account (many have no minimum to get started).

But starting early is key. For example: Say at age 25 you throw $200 into a savings account with a 1.5% annual percentage yield and keep adding $200 a month. At age 67, you’ll have just over $140,000. Not bad.

However, if you invest the same $200 a month and it earns an average of 8% a year — that’s possible for market returns when your timeline is decades — that could grow to more than $735,000 by retirement.

Financial plans use a variety of tools to invest for retirement, a house or college:

  • Employer-sponsored retirement plans. If you have a 401(k), 403(b) or similar plan, gradually expand your contributions toward the IRS limit of $18,500 per year. If you’re 50 or older, the limit goes up to $24,500.
  • Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings. The IRS limits total contributions to $5,500 a year, or $6,500 if you are over 50 — and Roths also have income limitations. But after you’ve had a Roth IRA for five years, you can pull out up to $10,000 in earnings tax- and penalty-free to put toward your first home.
  • 529 college savings plans. These state-sponsored plans provide tax-free investment growth and withdrawals for qualified education expenses. NerdWallet’s 529 tool can help you sort through options.
  • Robo-advisors. These online brokers have made it easier — and cheaper — than ever to build a financial plan and automate payments, either using an IRA or a taxable brokerage account. (Want to know more? Read this robo-advisor guide).

Are you on the right track to retire?

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7. Build a moat to protect your progress

With each of these steps, you’re building a moat to protect yourself and your family from financial setbacks. As your career progresses, continue to improve your financial moat by:

  • Increasing contributions to your retirement accounts
  • Padding your emergency fund until you have three to six months of essential living expenses
  • Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.

» Learn more: Term vs. whole life insurance

Adjust and evolve your financial plan as you go

A financial plan isn’t a static document but a tool to track your progress and adjust as your life evolves. If you want to transition from DIY to having the help of a professional, check out our guide to choosing a financial advisor.

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