A financial plan is a comprehensive picture of your current financial situation, defines your financial goals, and acts as a roadmap to ensure that you achieve your financial goals. Your financial plan will spell out the financial steps you will take to achieve those goals, a timeline, and benchmarks against which to track your progress.

What is financial planning?

Financial planning is a process rather than a one-time event. While creating a financial plan is a positive step at any point, things change over time. Financial planning should be an ongoing process. Your financial plan should be reviewed periodically, revising as needed to reflect your situation and goals changes.

Essential elements of a financial plan

While everyone’s situation is unique, there are several basic elements that should be considered in your financial plan. These generally include:


Budgeting is about what you earn and spend on a monthly, quarterly, or annual basis. In other words, this is about your regular cash flow. Regardless of what stage of life you are in, this is a critical first step in the process. Indeed, if you are spending more than what is coming in, this is an issue that must be rectified. Your cash flow is going to determine the amount you can save and invest to meet your goals.

Retirement planning

Retirement planning is critical whether you are in your first job with many years to go until retirement or in your 50s and closing in on retirement.

For younger individuals, it is critical to start saving for retirement as soon as possible. If you are covered by a retirement plan like a 401(k) at work, be sure to contribute as much as you can to the plan from the start. If there is an employer match, be sure that you contribute enough to earn the entire match as this is free money you don’t want to ignore.

For those closer to retirement, planning entails looking at your retirement spending plan, your various sources of income such as Social Security or a pension, as well as your retirement savings. From there, you will need to develop a plan that matches your spending with a level of retirement income that you can reasonably expect to support.

Risk management planning

Life doesn’t always go as we plan. Things happen—this way, we need to include risk management planning as part of the financial planning process.

Risk management often entails the use of several types of insurance. Depending upon your situation, this could include:

  • Life insurance to ensure that your beneficiaries are taken care of in the event of your death. This can be especially important for young parents and others who have not had the opportunity to create a nest egg.
  • Disability insurance may be more important than life insurance as it provides an income in the event you become disabled, which is more likely than dying during your working years.
  • Property and casualty insurance to protect your home and auto.
  • Umbrella insurance to help protect against a potential lawsuit.

Investment planning

Investing is the key driver that fuels our ability to meet our financial goals for most of us. Investment planning includes how your investments will be allocated among different asset classes or types of investments. It also entails planning how much and where you will invest, including IRAs, a 401(k), and taxable accounts among others.

Tax planning

Proper tax planning can help build wealth. Tax planning involves the best timing for realizing gains on investments, tax planning around your business, and generally, making sure you do things in the most tax-efficient manner possible. While investment decisions shouldn’t be driven by tax considerations, looking at the tax implication of financial decisions can help ensure that you don’t pay more in taxes than is necessary.

Estate planning

Estate planning is the process of setting a plan to distribute your assets in the event of your death. The first step is determining which assets should go to which beneficiary. If you are married, it’s likely your spouse is your primary beneficiary. In other situations, it might be your children or others.

Proper estate planning can ensure that beneficiary designations are up-to-date on IRAs, insurance policies, and other retirement accounts. It’s also important to ensure that investment accounts and property are appropriately titled to ensure that they will be inherited as you desire.

Financial planning in 6 easy steps 

For those looking to do their own financial planning, these six easy steps are a good starting point:

1. Set your financial goals and consider your priorities

This entails determining what’s important to you financially. A short-term goal might be saving for a down payment on a home. Longer-term goals might include saving for college costs for your children or saving for a comfortable retirement.

Determine what’s most important to you, your time frame for achieving that goal and what strategies it will take to achieve your goal.

2. Track your money and determine cash flow

Be sure to track your spending and your income continuously. Things can change, and changes here can impact your ability to achieve your financial planning goals.

3. Build an emergency fund

A critical step as you start your financial planning journey is to build an emergency fund. Many experts suggest that you have at least six months’ worth of your ongoing living expenses saved as an emergency fund. This money should be kept in a liquid, low-risk account so it can be accessed if needed, for example, in the event of a job loss. This will prevent you from having to tap your investments to cover a major unexpected expense.

4. Pay off high-interest debt

Having to make payments on high-interest debt, such as credit card debt, can be financially crippling. It’s essential to do whatever is needed to get this high-interest debt paid off as soon as possible to free up the cash you need to save and invest for your financial future.

5. Invest for the long-term and retirement

It’s essential to begin investing for long-term goals, especially retirement, as soon as possible and to continue investing throughout your working career. If you have a retirement account, like a 401(k) available to you, start as soon as possible by contributing. Increase the amount you save as soon as you can. The power of compounding over time can be the most significant retirement savings advantage for those with many years to go until retirement.

6. Use insurance to protect 

Having the proper types of insurance coverage can help protect you and your family in various situations and is a key part of your financial plan. Life insurance, health insurance, disability coverage, long-term care insurance, property and casualty, as well as liability coverage, are all important types of insurance coverage that can help prevent unexpected life events from derailing your financial planning efforts.

Where to get professional financial planning help

There are many places to turn to for those who feel they need professional help in preparing their financial plan.

A growing number of robo advisors offer financial planning help. In some cases, you may be able to discuss your situation with a financial advisor in addition to using their software to help formulate your plan.

Several financial planners offer financial planning help and advice, often on an hourly basis (fee only).

For more focused, tailored financial planning help, contact a CFP certificate holder. These professionals are trained in all areas of the financial planning process. They can offer advice tailored to your particular needs, including general financial planning, investing, and all of the components mentioned above. Be sure you thoroughly vet any financial advisor you may be considering. Fully understand how the advisor is compensated and the services they provide.

The bottom line

Just like with a business, it’s crucial to have a personal financial plan. The financial planning process helps you look at all aspects of your financial life and creates a roadmap to achieve your financial goals. Financial planning is not a one-time process; your plan should be reviewed periodically to ensure that you are still on track as your situation changes.