How to Prepare a Financial Plan

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Updated: May 3, 2019

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A financial plan is a saving instrument that can help you plan for major purchases or retirement. Whether you're saving for your children to go to college or working towards a down payment on a home, a financial plan can help you determine how much you'll need to start saving now to meet that goal. By framing your monthly expenditures and savings in the context of an overall plan, it will be much easier to meet your goals and attain financial security.

Part 1
Determining Your Goals

  1. 1
    Assess your current financial situation. In order to write a financial plan, you'll first have to have a clear picture of where your finances are now. To do so, start by calculating your net worth. To do so, you will need to calculate your total assets, which include everything from money in checking or investment accounts to your equity in your house and car. Then, you'll have to calculate your liabilities, including how much you still owe on your house and car, and any other outstanding debts like student loans or unpaid bills. The different (assets - liabilities) is your net worth.[1]
  2. 2
    Make a budget. Start by noting every expense you have over the course of a month. If it helps, carry around a small notebook and record every time you spend money, including the amount spent and what you spent it on. At the end of the month, write down your expenses and separate them into categories like living expenses, entertainment, and so on. Then, compare the total of these amounts to your monthly, after-tax income.
    • The point here isn't to cut expenses, but rather to simply identify where you spend your money. You will have the option to cut expenses later on in your planning if you need to do so.
    • Budgets can be made using a spreadsheet program, a personal finance app, or by hand.[2]
    • If you have any debts that are increasing in size or currently going unpaid, prioritize paying these first over putting money into savings. Your debts will likely increase at a faster rate that your savings can, so be sure to take care of these first.
  3. 3
    Identify your goals. Be clear about why you are implementing a financial plan and what you hope to accomplish with it. What are you saving for? This can always be multiple things, like saving for a car in a few years while continuing to save up for the down payment on a home down the road. Think about everything you want to accomplish within the scope of your financial plan and be sure to include it.
    • If it helps, split up your goals into short term (under 2 years), medium term (2 to 5 years), and long term (over 5 years), goals. For example, maybe you want to pay off your credit card debt in the short term, save for a down payment on a house in the medium term, and save for retirement for the next 40 years.[3]
  4. 4
    Clarify each goal. Look at your goals and try to assign an estimated cost to each one. Be specific: your goals shouldn't be to "have a lot of money," but rather to "have $100,000 in a retirement account" or "pay off the house completely in 10 years." This will help you plan your monthly savings amounts. In addition, make sure that your goals are attainable given your expected income and other goals.[4]

Part 2
Making a Plan

  1. 1
    Analyze potential returns. Any leftover money you have each month can be invested or put into savings, where it will earn interest. Depending on where you put the money and how long you are saving for, this money can earn a significant amount of interest over time. Calculating exactly how much interest you will earn can be tricky, but it's safe to estimate that a good stock portfolio can earn you 8 or 9 percent per year on average. However, there may be years of economic downturns that will earn small or negative returns, and no returns are guaranteed.[5]
    • Investment accounts can be useful for retirement savings, college funds, and other long-term goals. This type of account is not recommended for short or medium term goals.
    • For more, see how to invest in stocks.
    • A savings account will earn significantly less money than an investment account. However, the money in savings will be easier to access in an emergency and at very low (almost non-existent) risk for loss.
  2. 2
    Calculate monthly savings or contributions to meet your goals. Once you know what type of return you will get, if any, you can calculate how much you need to input each month using a compound interest calculation. If you are not investing, and instead paying off debt, you can estimate how much you will need to pay each month using the same calculations (just make the "principal" input a negative number). If you have multiple savings goals, add up the monthly cost of each to arrive at a total number.
    • If you are saving for retirement, be sure to take into consideration any contribution matching that your employer offers. This can reduce your side of the savings burden.[6]
  3. 3
    Come up with several savings strategies. Next, you'll have to figure out options for getting that extra savings amount each month. Come up with several ways to do this. For example, you could look through your budget and see if there are areas where you can cut your expenses. Alternately, you can take on a second job or otherwise increase your income. Your strategies can either focus on cutting expenses, earning more income, or a combination of the two.
    • You can also consider moving your savings directly to an investment account. This might introduce more risk but give you the chance to earn more interest.[7]
  4. 4
    Figure out which strategy is best. Identify several specific strategies that can be used to reach your goals and compare them to each other. For example, would it be more unpleasant to cut out your entertainment expenses or work more hours each week? Look at the pros and cons of each option and decide for yourself which course of action to take.[8]
  5. 5
    Prepare your financial plan. Write down exactly how you plan to go about saving each month. Make a well-defined target for saving, both in amount and time. Set milestones for your goals and points in your timeframe to reassess your plan. If you're married, discuss the financial plan with your spouse and make sure they are on board.[9]

Part 3
Implementing Your Plan

  1. 1
    Start your plan immediately. Immediately start using the strategy you decided on to start working towards your goals. Keep yourself in check by reviewing your budget each month to make sure you saved enough and the savings went to the right places. In order to do certain parts of your plan, you may need the help of a professional. For example, you will likely need to hire an investment broker to invest your savings in securities (stocks or bonds).[10]
  2. 2
    Track your progress. Keep track of milestones as you go along. For example, take note when your investment account reaches half or a quarter of your goal value. Celebrate any achievements, like a reached milestone or the completion of a short term goal. This can help you stay motivated to complete your longer term goals.[11]
  3. 3
    Review your plan if necessary. It's inevitable that your situation will change unexpectedly, for better or for worse, over the course of a long term financial plan. You may get a big promotion and earn more, or you might lose your job. You expenses might unexpectedly jump. In any case, you'll have to reevaluate your financial plan to address changes in your situation. If necessary, go through the planning process again to figure out a new way to deal with changing circumstances.[12]
    • You may also find that your chosen strategy is ineffective in helping you reach goals. In this case, reevaluate your strategies and select a new one that you think will be more effective.
  4. 4
    Create an exit strategy. This is your plan for taking money out of savings to make a large purchase or to fund your retirement. Think of how you will take the money out when you need it, and if there will be any tax consequences for doing so. Figuring this out may require the assistance of a tax professional.[13]

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    • Professional financial planners can charge as much as $2,000 for making a financial plan for you. Save some money and work it out yourself.[14]

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    Categories: Managing Your Money | Budgeting

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