> **Definition**
>
> A financial plan outlines a person’s current circumstances and long-term objectives and establishes the spending, saving, and investing strategies that will help achieve those objectives.

## What Is Financial Planning?

A financial plan is a document that details a person’s current financial circumstances, short- and long-term goals, and the strategies that can be used to achieve those goals. It can help an individual set priorities, meet obligations, save money regularly, and build wealth toward a secure future.

A financial plan is intended to be in place for many years and can be used to track progress, but it needs to be revised occasionally as the individual's personal and family circumstances change.

A plan can be created independently or with the help of a [certified financial planner](https://www.investopedia.com/terms/c/cfp.asp).

### Key Takeaways

*   A financial plan should be comprehensive and highly customized.
*   It should reflect an individual’s personal and family financial needs and obligations and investment risk tolerance.
*   The plan should be reviewed at least once a year, either independently or with a financial professional, to stay aligned with the individual's changing goals and circumstances.

## How to Create an Investment Plan

Certain steps are necessary to create a [financial plan](https://www.investopedia.com/articles/investing/100116/importance-making-annual-financial-plan.asp) and an [investment plan](https://www.investopedia.com/terms/s/systematicinvestmentplan.asp).

### 1\. Do It Yourself or Get Professional Help

Decide whether you'll create your financial and investment plans on your own or with the help of a licensed [financial planner](https://www.investopedia.com/terms/f/financialplanner.asp). You can certainly build a financial plan, but a financial pro can help ensure that your plan covers all the essentials.  

### 2\. Build an Emergency Cash Fund

Start setting aside money in a liquid account based on what your cash flow allows. Your goal should be to save enough to cover all your expenses for three to six months at a minimum, but preferably for longer in case you find yourself without income due to unexpected events.  

### 3\. Plan To Reduce Debt and Manage Expenses

The faster and more effectively you can [eliminate debt](https://www.investopedia.com/personal-finance/digging-out-of-debt/), the better for the growth of your savings, your standard of living, and the achievement of your specific investment objectives.

Make it a habit to [cut expenses](https://www.investopedia.com/how-to-lower-your-monthly-bills-8759699) whenever and wherever possible so you can add to your savings. Stay on top of what you know you'll have, such as taxes, so always meet those obligations on time.  

### 4\. Manage Potential Risks

Your financial well-being can be affected when accidents, health problems, or the death of a loved one strike. Plan to put into place the appropriate [insurance coverage](https://www.investopedia.com/terms/i/insurance-coverage.asp) that will [protect your financial security](https://www.investopedia.com/uncertain-economy-protect-finances-8759794) at such times. This coverage can include home, [property](https://www.investopedia.com/terms/p/property-insurance.asp), health, auto, disability, [personal liability](https://www.investopedia.com/terms/c/comprehensive-personal-liability.asp), and [life](https://www.investopedia.com/terms/l/lifeinsurance.asp) insurance.  

### 5\. Begin to Invest

Take part in a retirement plan at work that automatically deducts contributions from your paychecks. Plan to maximize your tax-advantaged investing with a personal [IRA](https://www.investopedia.com/terms/t/traditionalira.asp) if and when your income allows.

Consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and future income needs.

### 6\. Include a Tax Strategy

Address the goal of [reducing your income taxes](https://www.investopedia.com/articles/personal-finance/032116/top-6-strategies-protect-your-income-taxes.asp) with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.

### 7\. Consider an Estate Plan

It's important to make arrangements for the benefit and protection of your heirs with an [estate plan](https://www.investopedia.com/terms/e/estateplanning.asp). The details will depend on your stage in life and whether you're married, have children, or have other legacy goals. Again, a professional such as an attorney can help here.  

### 8\. Monitor and Adjust Your Plan

Revisit your plan at least yearly on your own or with a financial professional. Do it more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as necessary.  

![A visual representation of financial planning concepts with text definitions and illustrations](https://www.investopedia.com/thmb/xbHQ1B7ZSbs67dh2gT628vA5mQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/financial_plan_final-e8e690fce7c7406fb4cc607e408681df.png)

*A solid financial plan reflects your goals, needs, and risk tolerance. — Investopedia / Nez Riaz*

## Investment Planning 101

Whether you’re going it alone or with a financial planner, it's necessary to understand how important financial and investment plans can be to your financial future. They can provide the guidance that assures your financial success.

Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet. Then, make some basic calculations to establish where you stand financially.

### 1\. Calculate Your Net Worth

To [calculate your current net worth](https://www.investopedia.com/terms/n/networth.asp), subtract the total of your liabilities from the total of your assets. Begin by listing and adding up all of the following:

*   **Your assets**: An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp), and other investment accounts.
*   **Your liabilities**: A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.  
    

### 2\. Determine Your Cash Flow

Cash flow is the money you take in measured against the money you spend. Documenting your [cash flow](https://www.investopedia.com/articles/pf/08/evaluate-personal-financial-statement.asp) will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.

Review your checking account and credit card statements. They should provide a fairly complete history of your income and spending in various categories.

Document how much you’ve paid for housing expenses like rent or mortgage payments, utilities, and credit card interest during the year. Other categories include food, household, clothing, transportation, medical insurance, and non-covered medical expenses. Others can include spending on miscellaneous entertainment, dining out, and vacation travel.  

You’ll know your monthly cash flow and where you can improve it when you've added up all these numbers for a year and divided the total by 12.

### Note

Don’t overlook cash withdrawals that may have been used on sundries like personal care items. ATM withdrawals can also highlight where you can cut unnecessary spending.

### 3\. Establish Your Goals

A major part of an investment plan is your [clearly defined goals](https://www.investopedia.com/financial-goals-for-students-7151682). They might include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals, but a professional financial planner should be able to help you finalize a detailed savings plan and specific investments that can help you reach them one by one.

> **Important**
>
> The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.

## Benefits of Making a Financial Plan

*   A financial plan involves a thorough examination of your income and spending.
*   It can improve your [understanding of your financial circumstances](https://www.investopedia.com/how-your-net-worth-compares-to-others-with-the-same-income-11786083) at all times.
*   It establishes important short- and long-term financial goals upon which you can base your investment planning.
*   It clarifies the actions required to achieve your various financial goals.
*   A financial plan can help you focus on important immediate steps, such as reducing debt and building savings for emergencies.
*   It enhances the probability of [achieving financial milestones](https://www.investopedia.com/half-of-americans-dont-have-a-written-financial-plan-11741158) and overall financial success.
*   It can guide your efforts over time and provide a means to monitor your progress.
*   It can keep you out of financial trouble and reduce any stress and worry you might have experienced in the past.

### Note

Financial planning is a smart way to keep your financial house in order. Regardless of age, earnings, net worth, or financial dreams, it's a money tool. It provides a way to document your financial goals and corresponding investment goals.

## When To Create a Financial Plan

A financial plan is always an advantage for those who want to make sure they manage their finances in ways that are best suited for them. You can create one anytime, whether you've just joined the workforce or been working for years.

However, some circumstances can call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.

*   A new job that results in added income, new expenses, or new opportunities
*   An income change that can affect your ability to pay expenses, pay off debt, or save
*   Major life events such as marriage, children, or divorce can change financial objectives, spending needs, and obligations
*   Health adversities that result in redirecting income and spending away from existing goals
*   An income windfall, such as an inheritance or insurance payment that can affect your efforts to reach your financial goals, such as by providing more money for investing  
    

## What Is the Purpose of a Financial Plan?

A financial plan should help you make the best use of your money and achieve long-term financial goals such as investments, sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.

## How Do I Create an Investment Plan?

You can write an investment plan yourself or enlist the help of a professional planner. Begin with a financial plan. The first step is calculating your net worth and identifying your spending habits. Consider your longer-term objectives and decide on ways to achieve them when this has been accomplished and documented.

## What Are the Key Components of a Financial Plan?

Financial plans aren't one-size-fits-all, but the good ones focus on the same things. You can explore your financial goals and ways to achieve them after calculating your net worth and spending habits. This usually involves some form of budgeting, saving, and investing each month.

Your goal is to ensure you can live comfortably and financially stress-free for the rest of your life. Areas to focus on include an emergency savings plan, a retirement plan, risk management, a tax minimization plan, and a long-term investment strategy.

## What Are the 5 Key Areas of Financial Planning?

The five main areas are estate planning, retirement planning, risk management or self-protection through tools like insurance, tax planning to reduce liabilities, and investment planning to grow wealth.

## The Bottom Line

A financial plan is essential for your financial well-being, both now and in the future. It involves establishing your current financial state, your various financial goals, and methods for achieving them.

It's never too early or too late to create a financial plan. It can help you determine the best way to meet your financial needs through all your life stages, no matter how much money you have.

> **Article Sources**
>
> 1.  Financial Industry Regulatory Authority. "[Start an Emergency Fund](https://www.finra.org/investors/personal-finance/start-emergency-fund)."