What Is a Financial Plan & How to Create It


Financial planning is a crucial aspect of life that helps people visualize their current financial state, set future goals, and create strategies for achieving them. Not only is it about increasing savings and becoming wealthy in the long term, but also about managing your routine financial operations and improving your current standard of living. In this article, we’ll clear up the most important questions about financial planning: what it is, why you need a plan for your finances, and how you can create one that will help you meet your life goals.

The article covers the following subjects:

What is a Financial Plan? Meaning & Definition

A financial plan is a document that involves an evaluation of a person’s current financial situation, their future monetary objectives, and how to meet them. It can be developed individually or with the help of a professional financial advisor. Being a general term, a financial plan may be focused on various areas such as retirement planning, business budget, investment plan, consolidation of debt, taxes, and much more.

Types of Financial Planning

Depending on the timeframe, financial plans can be divided into three groups:

  1. Short-term financial planning implies dealing with current problems and showing results usually within one year. Examples of personal goals here may include reducing or repaying debt, creating an emergency fund, etc. When it comes to company goals, they can involve reaching the target revenue, finding a source of funding, etc.

  2. Medium-term planning is a transition period between short-term goals and long-term ones. It’s usually focused on a span of up to 5 years. This plan implies that the immediate problems (like credit card debt) have been resolved, thus it’s possible to concentrate on more time-consuming objectives like saving for real estate, starting a business, etc. Companies may consider creating a new product line, entering a new market, etc.

  3. A long-term financial plan is usually designed for more than 5 years and requires huge financial resources. Some common long-term goals may include saving for retirement and children’s education, paying off a mortgage, etc. In terms of a business, long-term financial goals can be automation, cash flow optimization, reduction of expenses, etc.

What is the Purpose of a Financial Plan? Why Do You Need It?

Financial planning is an important tool for both individuals and organizations. It allows them to monitor the current financial state and develop an efficient strategy that will help them decide what to do and how to fulfill their goals on short notice. A thoroughly developed financial plan may serve a wide variety of purposes. Some of them are listed here but are not limited to:

  • Retirement plan. By conducting financial planning, it’s possible to analyze average income and develop a saving strategy in compliance with retirement expectations.

  • Investment plan. A financial plan protects investors from impulsive decisions and helps them maintain the previously developed course of action.

  • Education. Since the cost of education is constantly growing, many parents start thinking about it in advance. They determine the sum necessary for decently educating their children and, following the financial plan, gradually move towards a set financial goal.

  • Business planning. Сompanies usually use financial plans to expand their business, diversify their line of products or services, improve the business structure, etc.

What are the Essential Components of a Financial Plan?

When developing a robust financial plan, it’s crucial to take into account key components of your financial life, such as budgeting, saving, estate planning, and others. Let’s have a closer look at the most important of them.

  • Budgeting. It’s impossible to create a financial plan without knowing the details of your income and expenses. At this step, it’s reasonable to calculate your regular earnings and spendings so that you can use the extra money to cover current liabilities (credit card debts, unpaid loans, etc.). Once they are redeemed, it’s possible to move to the saving step and start thinking about using your budget for long-term objectives such as a child’s education. The budgeting part of the financial plan should be reviewed regularly, especially after significant changes in life, such as a new workplace, marriage, the birth of a child, and others.

  • Investing. There are different ways of investing. It can be healthcare, retirement, or a brokerage account. Regardless of the purpose, the investment plan should be developed individually based on personal goals, risk tolerance, amount of available capital, etc.

  • Estate planning. An estate plan includes the details of how the assets should be managed after the owner’s death. It usually includes both legal and financial documents such as a will, health care derivatives, and Power of Attorney.

  • Insurance. This can be considered a type of investment to protect you and your funds in case of emergency. Some common types of insurance involve life insurance (against death risks), child insurance (for their education, marriage, etc.), and others.

  • Retirement planning. This essential part of a financial plan implies accumulating money to live on when retired. Not only does it consider current income and spendings, but also potential expenses, debts, and life expectancy. One of the most popular retirement planning solutions is an IRA (Individual Retirement Account).

  • Tax planning implies analyzing the general financial situation and finding the optimal strategy for paying the lowest taxes. IRA, 401(k), and other retirement plans are possible tools for efficient tax planning.

Importance of Financial Planning

Financial planning is a great tool to manage finances and achieve results more time-efficiently. Moreover, it allows people to feel the process of approaching their goals, thus fostering confidence in their future and the future of their children. It’s important to understand that a financial plan is not only about saving money and controlling your expenditures. It’s a much wider concept that can help to:

  • deal with inflation and protect your funds and assets from losing their value;

  • improve the efficiency of your money management and achieve your financial goals faster;

  • create a retirement fund to ensure a good level of life after leaving your job;

  • create an emergency fund that will help you be prepared for various unexpected scenarios.

What are the Benefits of Financial Planning?

An elaborate financial plan comes with a great number of benefits. Let’s consider the most significant ones.

Increase Your Savings

There is no doubt that it’s possible to save money without a financial plan. However, when you have one, the process of saving becomes faster and more efficient. While developing a plan, you can analyze your income and expenses more precisely, find areas where you can cut costs, and create a more accurate saving strategy.

Enjoy a Better Standard of Living

Many people associate the process of saving money with great limitations and the necessity to resist the small pleasures of everyday life. However, a well-considered financial plan allows you not only to achieve your financial goals but also to keep or even improve your standard of living. For example, after generating some money by following the financial strategy, you can invest it and, as a result, gain extra income and room for maneuvering.

Be Prepared for Emergencies

Sudden and unforeseen expenses may bring a lot of problems and worries in a person’s life. An emergency plan is one of the key elements of financial planning that allows you to get prepared for all kinds of unexpected life circumstances, such as losing your job, having health issues, etc., and make you feel more secure and independent from your monthly salary. As a rule, an emergency fund should contain enough money to live on at the moment plus cover expenses for the next 3-6 months.

Attain Peace of Mind

Financial planning is not only about managing money to cover regular expenses. It’s a tool that fills you with confidence in your future. Knowing that you don’t have to rely only on your monthly income, plus having a saving plan for providing your family with a good standard of living lets you relax and enjoy peace of mind.

How to Create a Financial Plan: 7 Crucial Steps

Financial planning can be done individually or by a professional financial advisor. If you decide to develop a financial plan on your own, here are the steps to follow.

1. Start by Setting Financial Goals

It’s hardly possible to create a plan without knowing what you want to achieve. When defining financial goals, analyze your current life and ask yourself questions, such as “What kind of life would I like to have now and later?”, “How do I see my life when having a kid or in retirement?”, and “How fast can I achieve this goal?” This way, not only will you realize your objectives but also systemize and prioritize them.

2. Track Your Money And Redirect It Toward Your Goals

Once having set your goals and developed your financial projections, it’s necessary to examine your current cash flow. A clear understanding of how much money is coming into your budget and where you spend it will help you detect potential pitfalls in money management. As a result, you can reorganize your strategy to meet your short-term or long-term goals more effectively.

3. Create a Retirement Plan

Although it always seems like retirement is not coming anytime soon, it’s never too early to start preparing for it. When adding this element to your financial plan, it’s important to consider the approximate age you want to stop working, how much money is necessary to provide for the retirement you are dreaming about, the constant process of inflation, and various investment options. It can be of great help if your employer is willing to sponsor one of the numerous retirement plans such as an IRA or 401(k).

4. Create an Emergency Plan

A robust financial strategy always includes a plan for contingencies. An emergency fund prevents you from getting into extra debt and helps you stay confident even in case of urgent expenses. What’s more, it comes with greater flexibility and a wider choice of options when you need it (for example, a better rate on insurance or a car loan).

5. Pay off Debt

It’s easier to move towards your future goals without numerous debts. Therefore, when creating a financial plan it’s crucial to pay attention to debt management, especially when it comes to high-interest debts. A well-developed strategy of paying back loans with high interest rates (e.g., payday, credit card, auto loans, etc.) will help you avoid paying three or four times the initial amount, thus bringing you closer to your long-term goals.

6. Invest to Build Your Savings

One of the possible ways to generate capital faster is to make your money work. For this, there are various investment options. Although they are commonly associated with tycoons willing to diversify and protect their already huge funds, it’s much more than that. You may consider investing in a big choice of financial assets (stocks, commodities, indices, etc.), retirement plans, and more.

It’s worth noting that investing is usually considered a long-term activity, thus, you need to have savings to cover your current expenses if necessary. What’s more, since any type of investment involves a certain level of risk, it’s important to educate yourself about financial markets and devote time and effort to this activity.

7. Review Your Financial Plan Frequently

Once you’ve developed a financial plan, don’t forget to revise it regularly. This way, you will be able to adjust it to your new financial conditions or new objectives, crossing off the ones that you have already achieved. According to experts, it’s better to do it at least once every six months.

Do Personal and Business Financial Plans Differ From Each Other?

Personal financial planning, as its name suggests, is about managing the finances of an individual or a family. It includes different kinds of financial decisions that can help an individual achieve lifetime financial objectives. 

Business financial planning implies managing finances within a company. If personal financial planning takes into account the wishes, goals, and lifestyle of an individual, business planning has a significantly larger scale. It is aimed at making the right financial decisions for a whole company and its potential growth. In contrast to personal finance, which is focused more on savings and cash flow, business finance deals more with investing, capital structuring, and partnerships.

Business and personal financial planning have different objectives and opportunities. Thus, even if their structure may seem familiar (especially when considering small businesses), it would be a mistake to put them in the same category.

Final Words

Financial planning is an efficient tool to determine, prioritize, and achieve your goals. It usually comprises cash flow, retirement, tax, estate, insurance, and other types of planning that can stretch over different time frames (short-term, medium-term, and long-term). It’s possible to create a financial plan on your own or with the help of a financial advisor. However, in either case, since conditions of life are constantly changing, it’s necessary to regularly review and adjust your financial strategy to new circumstances.

Financial Planning FAQ

A financial plan has to be built in compliance with personal goals, preferences, lifestyle, and risk tolerance. However, the common structure includes financial objectives, a debt management plan, emergency plan, investment plan, insurance strategy, tax, and estate plan.

You can write a financial plan by yourself or contact a professional advisor. If you choose the first option, you need to determine your goals and analyze your budget (income and expenses). After that, you can move to retirement planning, creating an emergency fund, considering insurance options, etc. Once you have your plan ready, don’t forget to review it regularly, especially after important life events, such as marriage, the birth of a child, etc.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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