What Is a Financial Plan?

A financial plan is a written compilation of the steps you need to take in order to meet your long-term financial goals.

With sound planning, you will be able to effectively manage your assets, liabilities, income, and expenses.

Financial planning can help you make more informed decisions about investing or saving for retirement, buying real estate, participating in tax savings plans, starting a business, providing financial protection for yourself and your family members.

Key Components of a Holistic Financial Plan

An effective financial plan will detail your various financial aspects such as savings, tax payments, investments, and retirement.

Here are some of the points that are being assessed in the financial planning process:

Goals and Objectives

When you start developing your financial plan, it is helpful to review your goals and objectives first.

These should be realistic and should help you know where you really want to go next.

Net Worth Statement

You must know your net worth or the total value of all your assets minus liabilities.

The net worth statement will help you in determining how much money you have, where it is deposited, and whether its current state makes sense in relation to your plans for the future.

Cash Flow Projection

Your cash flow projection will show where you are today financially and what effect this has on your goals for tomorrow.

After creating a cash flow projection, you are able to see if there are any gaps between income and expenses that may need attention.

These gaps can be closed by better budgeting or perhaps additional sources of income.

One-Year Plan/Budget/Forecast

A one-year plan is basically a budget.

It will show how much money you have to spend and predict what your financial status will be like in the shortest time possible (e.g.: one year).

Long-Term Plan

After assessing your finances over a period of 12 months, it is helpful to look at where you are headed for the next 5 or 10 years.

A long-term plan can help you determine goals and objectives so that you know if and when to stop working and start enjoying life.

Debt Management Plan

If you have outstanding credit cards or loans, it is important to learn how to manage your debts.

When you create a debt management plan, you will see which of your debts are well managed and which ones need attention fast.

As the name implies, this will also help you reduce (if not eliminate) future liabilities before they pile up too high.

Risk Identification/Assessment

Every effective plan must identify all possible risks that may interfere with your goals and objectives.

So if there is anything that can possibly go wrong, then take measures now in order to prevent financial losses in the future (e.g.: natural calamities).

There are various types of insurance products that can help protect assets like cash, real estate, and investments from these risks.

At the end of the day, there is no such thing as a perfect financial plan.

However, being aware of what you need to do in order to accomplish your goals will certainly help a lot in avoiding costly mistakes that can lead to a downward spiral over time.

Investment Plan

In order to take steps towards achieving your goals, you will need to invest time and money.

Your investment plan should include the strategies that you will use in saving, investing, and spending money wisely.

This may entail a budgeting program or setting aside a portion of your income for investments.

Retirement Plan

Retirement is the one goal that you are not sure if you will achieve.

Even if your health permits it, there is no guarantee that you will live long enough to enjoy it.

As such, it is important to think about retirement when planning for your future in order to set up a sustainable income in a time when you cannot work anymore.

Insurance Coverage

It is advisable to secure different types of insurance policies either through your employer or independently.

Insurance can cover you and your family from financial losses in times of sickness, accidents, and other shortfalls that may happen along the way.

Also, insurance can help provide for dependents who may not be able to work when you pass away.

For instance, life policies protect the survivors financially if something happens to them while disability insurance can provide them with a paycheck till they are settled into their new situation.

Emergency Funds

It is important to have a cash reserve that can be used for emergencies.

Emergency funds are also known as “rainy day” or “disaster” funds.

Insufficient income, loss of employment, medical expenses, and unavoidable financial predicaments are just some of the reasons why you need an emergency fund in place at all times.

As a rule of thumb, experts suggest having around 6 months’ worth of living expenses set aside.

Estate Plan

An estate plan is a legal document that contains all the information about your assets, liabilities, and wishes for when you pass away.

Your beneficiaries are the people who will receive your assets in accordance with your wishes written in the will.

It is important to have an estate plan so your loved ones are financially protected after you are gone.

Implementation Strategy

In order to reach your dreams, you will have to follow a step-by-step plan.

Your implementation strategy should include the specifics as to how you are going to reach your goals as well as the time frame for every milestone.

You can create a timeline with major milestones that need to be achieved along the way plus a series of action items that you must take in order to accomplish each task properly.

Guidelines for Effective Financial Planning

When developing a financial plan for yourself or for a business, it is important to think about the following guidelines:

Goal Setting

What do you want to accomplish with the help of your financial plan?


Do not be biased when thinking about succeeding financially because this might blind you from other possible avenues that would lead to success.

Information Gathering

Receive information from credible sources who know a lot about the subject in question.


Take action and follow your plan consistently in order to achieve success.


Regularly monitor your progress and determine how well you are doing based on your financial plan.

How to Create a Financial Plan

Here’s an outline of some major steps involved with making a financial plan:

Step 1: Put together all your personal information including income, net worth, family size and composition, liabilities (credit cards), assets (property), debts (home loans), insurance status, etc.

Step 2: Assess how much money you have after paying taxes and covering expenses.

Step 3: Determine how much you must invest in assets (stocks, bonds, mutual funds) to meet your financial objectives.

Use the capital asset pricing model (CAPM) to determine how much you need to save if you want a certain amount of money after a certain period of time like 10 years or more.

Step 4: Decide how much risk is acceptable for your investments and remember that the greater the risk, the greater the potential for returns on investment. Remember also that excessive risk-taking can lead to losses rather than gains.

Step 5: Keep track of all your investments using investment tools so you receive regular updates about your portfolio including market value, performance over time, and risk and return.

Step 6: Set your goals with dates attached to them such as when you want to retire, send your child to college, or buy a new house.

Step 7: Create a savings plan that includes all your goals with timelines and milestones.

For instance, the money you need to save for retirement should be set aside before you can spend on other goals such as buying a new house or taking that once-in-a-lifetime vacation.

Step 8: Review your spending habits and look into areas where you can cut costs from your monthly budget.

Final Thoughts

It is possible to achieve financial success if you have a plan at hand and persevere throughout the journey towards better finances.

Be patient with yourself because it usually takes time to see real results from making changes to your lifestyle and spending habits.

Just stay motivated by reading books about finance, visiting finance websites, checking out personal finance podcasts, and talking to other people about money matters when possible.

Speaking with a financial advisor near you will also be very helpful because these professionals are highly trained in the whole process.

It is important to have an emergency fund because unexpected financial blows can help derail other plans for achieving success financially. If you do not save money regularly then any issues that come up may force you into debt which will likely take time before it can be reversed. An emergency fund acts as an insurance policy against taking out loans for things that can be handled with your current resources.
Experts say that a good emergency fund should equal 6 to 12 months of your salary.
Ideally, you must be able to generate 50% of your gross monthly pay before taxes and other deductions when you retire.
It is advisable for everyone to create a financial plan because it can help with saving money, spending smarter, and making better decisions financially.
It is necessary to update your financial strategy on an annual basis at the very least but ideally, monthly updates are better.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.