Article Summary:

  • A financial plan is a comprehensive tool for effectively managing money, setting and achieving financial goals, and making informed decisions about the future.
  • Building the foundation of a financial plan requires assessing your current financial situation, establishing clear objectives, and analyzing your budget and cash flow.
  • Advanced financial plan steps include managing savings and investments, creating debt repayment strategies, managing risk, and addressing retirement and estate planning. 
  • It's important to regularly review and adjust your financial plan to ensure it remains relevant and accurate. 
  • Consider working with a financial professional who can provide expert advice, insight, and accountability.

Imagine a future where you're not just daydreaming about the life you want, but actually living it. Whether you're hoping to retire early to that house on the beach, find the perfect home for your family, or travel the world, a financial plan is the roadmap that can help get you there.

This powerful tool guides you through effectively managing money, reaching financial goals, and making informed decisions about the future.

It’s a comprehensive document that outlines your current financial situation, helps you set clear short-term and long-term goals, and provides realistic strategies to reach them.

In this guide, we’ll walk through the key components of a financial plan, explain how to create a financial plan of your own, and provide guidance to help ensure the plan remains relevant well into the future.

Creating the Foundation of Your Financial Future

Financial plans are not only for the wealthy or those nearing retirement. Instead, they're an important tool for managing finances effectively, regardless of your financial situation or life stage. Creating and executing a plan as early as possible gives you clarity and purpose. It allows you to take advantage of compound interest over time and helps instill financial discipline that can guide a lifetime of positive spending and saving habits. 

For many, a financial plan is the path to achieving true wealth. Start now, and your future self will thank you — perhaps enjoying retirement on a sun-drenched beach in the Caribbean. 

Creating a comprehensive financial plan can feel overwhelming, but breaking the process into smaller, manageable steps makes it more approachable. Here's how to make it more simple.

Step 1: Assess Your Current Financial Health

Financial planning begins with creating a clear picture of your current financial health. Understand where you are right now by documenting the following: 

  • Income: List all sources of income, including salary or wages, investment income, rental income, business income, and other regular cash inflows.
  • Expenses: Track all expenses for a few months to get a realistic idea of where your money is going. Include fixed expenses (like rent or mortgage payments) and variable expenses (like groceries and entertainment).
  • Assets: List all assets, including savings accounts, investments, and property holdings.
  • Liabilities: List all liabilities, including credit card balances, vehicle payments, student loans, and other debts.
  • Credit: Review your credit score and credit report. If you find any errors on your credit report, correct them as soon as possible.

Next, calculate your net worth by subtracting liabilities from assets. This will give you a snapshot of your financial health and provide a starting point for the plan.

Step 2: Establish Financial Objectives

Next, it's time to dream a little. What does your ideal future look like? Establishing clear financial objectives is your first step towards making these dreams a tangible reality. These short-term, medium-term, and long-term goals will guide many decisions and help you prioritize spending and savings. 

Short-term goals include those you want to achieve in the next year or two, such as building an emergency fund, paying off high-interest debt, or saving for a home renovation. 

Medium-term goals are those you want to achieve in the next three to five years, such as saving for a down payment on a home, starting a business, or funding a child’s education.

Long-term goals are those that may take five years or longer to achieve, such as saving for retirement, paying off a mortgage, or achieving financial independence.

To create effective financial goals, use the SMART method:

  • Specific: Clearly define what you want to achieve and when.
  • Measurable: Assign a dollar amount or percentage to your goal.
  • Achievable: Make sure your goals are realistic, given your current financial situation.
  • Relevant: Ensure your goals align with your values and overall financial plan.
  • Time-bound: Set a deadline for achieving each goal.

For example, while a vague goal such as "save more money" is not helpful for financial planning, a goal to "save $10,000 for an emergency fund within the next 12 months" is far more effective for helping guide decisions.

Step 3: Analyze Your Budget and Cash Flow

Next, analyze income and expenses to ensure you’re allocating resources in a way that aligns with the established goals. Use the information gathered in step one to compare total income and total expenses. If your spending exceeds earnings, look for areas to cut back or reduce expenses. If there’s money left over after covering all expenses, consider allocating it toward your financial goals. For example, you may increase retirement account contributions or make extra payments on high-interest debt.

Be careful not to set yourself up for failure by cutting your expenses too drastically or setting unrealistic goals. Instead, start with small, manageable changes and strive for consistency.

Step 4: Manage Your Savings and Investments

Properly managing savings and investments can help you grow wealth over time and provide a layer of protection from financial setbacks. This typically begins with establishing an emergency fund — an easily accessible savings account that can help you cover unexpected expenses without relying on credit cards or loans. 

To build an emergency fund, follow these steps:

  1. Determine the savings goal: Track your monthly living expenses to estimate the amount needed to cover 3 to 6 months of mandatory expenses. 
  2. Open an account: Set up a separate savings account for the emergency fund.
  3. Create a savings plan: Consider automating savings by setting up regular transfers from your checking account.
  4. Make it a priority: Consider focusing on building the emergency fund before investing or making other financial commitments.

Once the emergency fund is in place, you can begin building an investment portfolio. Depending on your tolerance for volatility and risk, it may include various investment options such as stocks, bonds, real estate, mutual funds, and exchange-traded funds (ETFs).

Step 5: Create a Debt Repayment Strategy

High-interest debt hinders your ability to save and invest for the future. While debt can feel like a roadblock to your dreams, with a solid repayment strategy, it becomes just another hurdle you're more than capable of clearing. If you have credit cards or other high-interest loans, a well-thought-out debt repayment strategy can help save money on interest charges and free up cash to allocate toward other financial goals.

To complete this step, begin by listing debts, including the creditor, balance, interest rate, minimum payment, and payment due date. Then, consider a debt repayment strategy such as the debt avalanche method. This involves making minimum payments on all debts while directing extra funds toward the debt with the highest interest rate. As you pay off each debt, redirect the payment amount to the next highest-interest debt.

Step 7: Plan For Your Retirement

Living the lifestyle you desire in retirement requires a well-thought-out plan. To ensure you have sufficient funds after you're no longer working, complete the following steps: 

  1. Estimate retirement needs: Calculate your estimated annual living expenses in retirement, as well as funds needed for planned purchases and large expenses, such as a vacation home.
  2. Set savings goals: Consider the number of years until retirement to determine the ideal annual savings rate.
  3. Create an investment plan: Evaluate retirement investment options, such as a 401(k), 403(b), Individual retirement account (IRA), Roth IRA, or SEP IRA. Consider tax implications, potential employer matches, contribution limits, and required minimum distribution (RMD) requirements.
  4. Create an investment strategy: Develop a diversified investment strategy for your retirement assets. Make sure the portfolio is appropriate for your age, risk tolerance, and time until retirement.
  5. Plan withdrawals: As you near retirement age, plan a withdrawal strategy. Consider annual expenses, tax implications, and minimum withdrawal requirements.

Step 8: Address Estate Planning and Leaving a Legacy

Estate planning ensures your financial affairs are in order, assets are protected, and loved ones are taken care of according to your wishes. An estate plan can significantly reduce taxes and legal complications, making the asset distribution process smoother and more efficient.

An attorney can help you create the following documents as needed: 

  • Last Will and Testament: Specifies the distribution of assets and can be used to appoint guardians for minor children.
  • Trust Document: Allows you to set terms for how and when assets are distributed to beneficiaries. Trusts can help avoid probate, reduce estate taxes, and provide for minors or family members with special needs.
  • Power of Attorney: Appoints an individual to make financial and legal decisions on your behalf if you cannot do so.
  • Healthcare Directive: Specifies your wishes for medical care if incapacitated and appoints someone to make healthcare decisions for you.

It’s also critical to periodically review beneficiary designations, which specify the distribution of specific assets, such as life insurance death benefits and retirement accounts.

Step 9: Regularly Review and Adjust Your Financial Plan

Review your financial plan once a year and after significant life events, such as marriage, divorce, birth of a child, job change, or receiving an inheritance. Periodic reviews help keep the plan aligned with your current financial situation, goals, and changes in tax laws or financial regulations.

The following tips will help you stay on track during the review process:

  • Assess your progress: Compare your current financial state with the goals established in the plan to identify areas of success and those needing improvement.
  • Re-evaluate your goals: Your financial goals may also need to evolve as priorities change. Reassess the stated goals and make updates if necessary.
  • Adapt to life’s changes: Changes in income, expenses, or personal goals may necessitate shifts in how you save, invest, or spend. Remain flexible and adjust the plan as needed.
  • Optimize your investment strategy: Ensure the investment portfolio aligns with your risk tolerance and time horizon, adjusting as needed to stay on track with the stated financial objectives.

Step 10: Consider Engaging Professional Help

While it is possible to create and maintain a financial plan on your own, financial professionals offer guidance and insights that can more effectively guide you toward achieving the life of your dreams.

Professional guidance becomes even more important when dealing with complex financial situations or significant life changes. Working with a third party can also help ensure accountability, keeping your plan on track even when challenges arise.

To find an advisor suited to your needs, look for a certified professional with a strong track record and transparent fees. Make sure they’re willing to truly listen and understand your financial goals and that their investment philosophy aligns with your personal risk tolerance. It’s often advisable to interview several professionals before making a decision.

To discuss your financial plans in more detail, contact a PNC Investments Financial Advisor today. Call 855-PNC-INVEST to get started.