Creating a Financial Plan: What, why, and how

Financial planning might sound boring. Yet what it can do for your financial future is anything but dull.

A financial plan is a guide for reaching your goals and dreams—it gives you a picture of where you’re at, where you want to go, and how to get there. 

The good news is, financial planning helps anyone, no matter their financial situation. And creating a plan is easier than ever. You most likely have access to the resources, tools, and information necessary to get started.

Below, we’ll cover the various parts of financial planning and discuss how to create a plan. 

Whether you develop your own or hire a financial planner, the important thing is to have a strategy to reach your goals.

What is financial planning?

Financial planning starts by looking at your financial situation right now. It ends with specific strategies to reach your financial goals.

Broadly, it consists of strategizing for:

• investing
• education
• insurance
• risk management
• employee benefits
• taxes
• retirement
• estate planning

Through the process of financial planning, you'll take stock of where you are currently, define your money goals, and create a plan for carrying them out. 

You can do financial planning on your own or hire a professional to help you. But creating a financial plan isn’t a one-and-done task.

Consider financial planning an open-ended process that shifts as your life unfolds. Tweaking it along the way will help you feel more in control—and reach your goals faster.

4 Simple Steps to Financial Planning

The financial planning process defines your current economic situation and then creates goals, strategies, and tactics to address any future money needs for yourself and others you support or care about.

Step 1: Assess your current financial situation.

First, gather financial information to determine your financial circumstances. Assembling this data will take a little research if you’ve never done it before. But it's usually not much more complicated than logging into your accounts.

You’ll look at your net worth, monthly cash flow, and insurance coverage.

Calculate your net worth. 

Your net worth is the big picture of where you stand financially. And it provides the baseline for how to devise your money goals.

If you’ve never figured your net worth, it will take a little time initially, but updating it later is more effortless. 

Net worth is a straightforward formula: Net worth = Assets – Liabilities.

• Assets are things like your home, savings, retirement accounts, and anything else you own of value.
• Liabilities are things like your mortgage, student loans, car payments, and other debts.

Figure out your monthly cash flow. 

To carry out your financial plan, you have to know how you’ll fund your dreams. That’s why this step is as critical to the financial planning process as net worth.

In this step, you can find opportunities to save more so you can set realistic money goals. 

Calculate how much money is coming in and going out each month. Using one month of data is helpful, but a few months is even better to get a more focused financial picture.

If you don't have a budget or track spending, use bank and credit card statements to gather information.

You can also use the free financial tools at Personal Capital to easily calculate your net worth and track your budget.

Step 2: Define your financial goals.

This step might be the most enjoyable step of the financial planning process (besides the results!). Here is where you decide what’s most important to you and set your money goals. 

What do you want your life to look like?

Work backward from there to determine your money goals and investment strategy. When you're married it's important to do this together. While you might each have your own, most should be shared financial goals.

You’ll have short, mid, and long-term goals. And you might have a lot of them.

In this case, you’ll want to rank them in order of what needs to happen first. Assess the data gathered in step one to help you organize your goals.

Here are some things to consider when setting your financial goals:

• Do you need an emergency fund? 
• Should you save or pay off debt?
• Do you want to save for a down payment, do home repairs, or buy a car?

• Should you start investing? Use a compound interest calculator to see what impact your investing can have.

• If you support family members, consider how this fits into your plan.

• Do you want to take a traditional retirement, retire early, or take a sabbatical in the future?

• What lifestyle do you want when you retire?

Step 3: Create your financial plan and put it into action.

In this step, devise the strategies to help you reach your financial goals. You’ll base them on the data gathered in Step 1 and the goals set in Step 2. 

Savings and investing goals

You will have short, mid, and long-term savings goals. First, decide where the money for these goals will come from (from Step 1).

Each goal might need different savings or investing methods. Rank goals and determine how much you need and where to save for each one.

You might not be able to start on some of your plans right away. That’s okay. Start with the most urgent and important first, and as you gain momentum, add more!

Where will you save?

High-interest savings and money market accounts work well for short and mid-term goals.

Open a CIT Savings Connect account today

Certificates of Deposit (CDs), bonds, and index or exchange-traded funds are better for longer-term goals.

Just remember that any money invested in the stock market carries some risk.

You might consider creating a financial mission statement to keep you on track with your money goals! It’s a visual reminder of why you’re saving and what you want.

Rebalance your portfolio

If you have investments, the distribution of stocks, bonds, and commodities fluctuate.

When your portfolio shifts away from your desired allocation—or doesn't align with your goals—you’ll want to rebalance your investments.

An investment policy statement (IPS) is one of the best things you can do to keep your investments in line with your goals.

Your IPS states your investing goals, diversification strategy, and guidelines for making changes. It’s the roadmap to help you reach your long-term financial goals.

Step 4: Review and revise.

Financial planning isn’t set it and forget it; it should change with life changes.

As life and financial circumstances shift, review and revise your financial plan. Life events, like marriage, birth, death, disability often call for revisions.

In other words, monitor your financial plan as time goes on. A yearly review is usually enough, but if you have a significant change, revisit it then.

Do you need a financial planner?

A financial planner can help you set your financial goals and assist with savings and investment strategies. But you don't need a financial advisor to carry out your financial plan.

Some people prefer to go it alone and handle their own finances. Others want someone else to handle things.

Still, others take a middle-of-the-road approach. They might manage the day-to-day tasks and use a robo-advisor or financial planner for creating an investment portfolio.

If you decide to go it alone, there’s excellent information available to help you learn what you need to know.

Saving and investing your own money doesn’t require a professional. If you want to handle it, you definitely can!

Still, you may not have the time, energy, or desire to create and carry out your financial plan. Or perhaps you want a more objective opinion from someone with expertise.

If you don’t want to DIY a financial plan, hiring a pro might be for you.

If you decide you need investment advice and would like to hire a financial planner, you want someone you can trust!  It pays to do your research and talk to a few before hiring someone.

One of the questions you’ll want to ask a potential advisor is if they are a fiduciary—fiduciaries are legally obligated to put clients’ interests first.

Also, be sure you understand how they get paid. Fee-only financial advisors get paid for their services. Others get paid commissions from the financial products they sell. 

Final thoughts on financial planning

As you can see, a financial plan helps you know where you are, where you want to go, and how you will get there.

Though it takes some time and effort, it's worth it!

With a plan, you'll be able to meet your financial needs now and in the future; you'll feel more in control and less stressed. Best of all, it becomes your guide for designing the life you want.  

Next: Building Your Financial House