What is a Financial Plan? Steps to Create One

Financial plans take some effort – you need to collect your paperwork, make a budget or two, and think about things you want.

However, having one can help you pay for that dream kitchen or that expensive scuba diving trip in Micronesia.

A good strategy takes the guesswork out of everyday spending and helps safeguard your future.

You might be wondering what a financial plan is and how you make one – read on. 

In short, a financial plan is a roadmap to your future.

At this point, you might feel yourself wanting to tune out at all this talk of “financial” and “future,” but the good news is it doesn’t need to be overwhelming.

A financial plan is a rare opportunity to make something all about us – not something we get to do all that often.

You take your greatest dream or most important goal, and you reverse engineer the process to give yourself the best chance of success. 

Financial Planner vs Do-It-Yourself

Financial Advisor  DIY Plan
Advisors can save you time spent on researching different options DIY means you get to learn from the ground up. It’s time-consuming but worth it. 
Advisor’s experience may offer unique insight, like choosing the best investment strategy for +50 retirement planning DIY saves money as you aren’t paying an advisor’s costs and fees. 
Advisors are trusted professionals, and hiring one may bring you peace of mind  DIY offers more peace of mind because you are in control of your resources
Advisors can be helpful if you’re self-employed or require wealth management DIY is a good option if you are confident in your ability to make the right decisions

Steps to Create a Financial Plan

Creating a financial plan can be time-consuming, but it doesn’t have to be complicated.

Here are six steps to get you started: 

1. Take a Financial Snapshot

When you start writing your first financial plan, it’s recommended to take a complete inventory of your finances by compiling a list of all your assets and liabilities. 

Assets are items that have monetary worth, now or in the future.

These can include cars, investments, collections, and real estate. 

Liabilities are debts owed to creditors.

Money owed can be student loans, auto loans, or credit card debt. 

Gather all your financial documents to ensure you’re using the most current numbers.

If you don’t have the paperwork, you might need to track it down, which might mean making phone calls or logging onto service provider sites.

Start building a budget by listing all your regular expenses like rent, mobile phone and auto loan payments.

From there, go through bank statements or your money app to track spending.

Hopefully, you have an idea of your spending strengths and weaknesses by this point.

2. Identifying Your Goals

Setting goals can be a tough one for people.

You want to pay off your car early, but you also want to save for a down payment.

We have to make choices before we can accomplish goals.

While this might feel frustrating, it doesn’t have to be an either/or situation.

It’s all a matter of prioritization – this means you decide what’s a priority and commit more resources to that goal.

Meanwhile, you can continue working towards the other goal over a longer time frame. 

So, there’s an art and a science to setting goals, and it all starts with SMART – specific, measurable, achievable, relevant, and time-bound. 

Specific – Ask yourself questions to hone in on what you want.

A particular goal helps you visualize how it will look at the finish. 

Use the 5 Ws to help you fill out your goals.

What do I want to accomplish?

Why is this important to me?

Who is part of this goal?

Where is this going to happen?

Which resources will be needed?

Measurable

This one is all about quantifying your goals.

It’s important to know if you’re making progress, but that’s hard to do if you have no way of measuring.

Quantifying is about how much, how many, or how long. 

Achievable

There’s no problem with aiming for the stars, but most things are accomplished in smaller increments.

Goals should be realistic and attainable for them to be helpful.

An achievable goal is a realistic goal; you can visualize yourself completing each step and celebrating that small success. 

Relevant

For a goal to be relevant, it has to resonate with your life.

Ask yourself: Why is this goal important to me? Is this the right time to pursue this goal? Does it fit in with my other priorities?

Time-Bound

The final principle is about tethering your goals to specific times and dates and setting realistic timelines to complete your objectives successfully.

3. Prepare a Financial Plan

Getting a financial plan together is like connecting life-event-dots.

Right now, you are in the beginning stages.

You likely have a money app, saved websites/blogs, and other resources.  

But there’s a gap between where you are and where you want to be.

It’s not enough to create goals – you have to devise the strategies to make it happen.

There are two general approaches to achieving goals when working with money: reallocating current funds or generating new ones. 

For example, you want to save enough money to spend six months in Costa Rica.

An easy place to start is with your spreadsheet – is there anything you can cut out? Perhaps you can make more meals at home or downgrade your mobile phone plan. 

After trimming the budget, you might need to look into making more money.

After doing calculations, you realize another five hours per week at work gets you enough funds for Costa Rica.

4. Fireproofing your Finances

This step is about thinking about how to safeguard your stockpile.

For instance, making a plan to pay off your debt can stabilize your finances in the event of a crisis, like a job loss.

Of course, not all debt is created equal – high-interest loans and credit cards are good options to pay down quickly and early.

Building an emergency fund is another way to improve your money situation.

Every dollar you save is money you don’t have to find when life takes a surprising left turn.

Start small and go from there.

Insurance is about that ‘what-if’ scenario you hope never happens.

Home insurance, auto insurance, and disability insurance protect everything from your lug nuts to your livelihood.

The kind you buy may depend on age, stage of life, and property owned. 

5. Implementing Your Goals

Your financial strategy might be a roadmap, but you are the race car.

Putting your plan into action means making choices in your everyday life. 

Start monitoring your mood and energy levels if you’re new to goal setting.

This reflection gives you feedback on what’s working and what isn’t.

Journaling can help you track your feelings and evaluate your successes and failures. 

Set small goals that are easily accomplished – these little moments will help you deal with the day-to-day grind. 

6. Reviewing & Revising Your Financial Plan

After you’ve spent time writing out your life goals, you probably don’t want to revise anything.

But life happens, and things change – and so should your guiding document. 

The truth is your plan is a living document.

Adjusting your plan to reflect your circumstances will keep you on track.

Changing the program doesn’t always mean redoing the whole thing – it might be rewriting goals, tweaking timelines, or shifting priorities.

Review your plan at both set times and when there’s a life event – it’s the best way to make it work for you.

Woman working on her financial plan

Frequently Asked Questions

  • Is there any point in creating a personal financial plan?
  • Can I create a financial plan if my income is unstable?

Lindsey is a freelance writer specializing in personal finance and business trends. She has a B.A. in psychology and is currently working towards completing her Canadian Securities Course.

When she’s not exploring the relationship between mind and money, Lindsey likes to play vintage video games, read all books, and go skiing.