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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.
Aug. 20, 2019
Advisors, Financial Planning, Investing, Retirement Planning
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A financial plan is a comprehensive document that includes details about your cash flow, savings, debts, investments, insurance and other elements of your financial life. A good financial plan takes the stress out of setting and prioritizing goals, and maps out clear strategies for achieving them.

How to make a financial plan

You can make a financial plan yourself, or you can get help from a financial planning professional. No matter which route you go, financial planning starts with 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

We’ll go through the details of each step below. But first, a question…

Do you need financial planning help?

Financial planning isn’t one-size-fits-all. If you’re not the DIY type — or if you want professional help managing some tasks and not others — you don’t have to go it alone. There are financial planning services to fit every budget. What kind of help do you need?

I’m looking for portfolio management only: Robo-advisors offer simplified, low-cost online investment management. Computer algorithms build an investment portfolio based on goals you set and your answers to questions about your risk tolerance. After that, the service monitors and regularly rebalances your investment mix to ensure you stay on track. Because it’s all digital, it comes at a much lower cost than hiring a human portfolio manager. (Sound right for your needs? See our top picks for best robo-advisors.)

I want holistic financial planning and investment advice: Online financial planning services offer virtual access to human advisors. A basic service would include automated investment management (like you’d get from a robo-advisor), plus the ability to consult with a team of financial advisors when you have other financial questions. More comprehensive providers basically mirror the level of service offered by traditional financial planners: You’re matched with a dedicated human financial advisor who will manage your investments, create a comprehensive financial plan for you, and do regular check-ins to see if you’re on track or need to adjust your financial plan. Facet Weath, Grove and Personal Capital are examples of services in this space.

I need specialized help and/or want to meet with an advisor face-to-face: If you have a complicated financial situation or need a specialist in estate planning, tax planning or insurance, a traditional financial advisor in your area may fit the bill. To avoid conflicts of interest, we recommend fee-only financial advisors who are fiduciaries (meaning they’ve signed an oath to act in the client’s best interest). Note that some traditional financial advisors decline clients who don’t have enough to invest; the definition of “enough” varies, but many advisors require $250,000 or more.

» What will all this cost me? See our guide to types of financial planning services and their costs

Regardless of the path you take, a basic run-through of the following steps will help you get a handle on your money.

1. Start by setting financial 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. Here’s how much you should contribute to a 401(k).

» 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).

» See a step-by-step explainer on how to invest money

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 $19,000 per year. If you’re 50 or older, the limit goes up to $25,000.
  • Traditional or Roth IRA. These tax-advantaged investment accounts can further build retirement savings by up to $6,000 a year (or $7,000, if you are over 50). This NerdWallet IRA guide will help you choose the right type of IRA and show you how to open an account.
  • 529 college savings plans. These state-sponsored plans provide tax-free investment growth and withdrawals for qualified education expenses.
  • 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.

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. You can always start with one service (such as a robo-advisor) and move into more comprehensive online financial planning (hiring an online or in-person financial planner) as your life gains complexity.

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