Creating a financial plan might seem daunting at first. But breaking it down into clear, manageable steps can make the process much easier.
Whether you are looking to secure your future, you have a specific shorter term goal in mind, or you simply want get a better handle on your finances today, having a clear plan that is tailored to your personal ambitions is the key to achieving your goals.
In our guide, “What is a Financial Plan”, we discussed the importance of financial planning, and highlighted how every life stage can benefit from a sound financial roadmap.
In this guide, we will focus on the step-by-step process of how to make a financial plan, specifically designed for those who are just starting out on the process.
This guide will help you assess your current financial status, set achievable goals, and make informed decisions that align with your aspirations.
How to make a financial plan – your practical step-by-step guide
Each stage in this guide is designed to help you gain clarity over your finances and map out a clear path towards achieving your goals, both short term and long term.
Step 1: Assess your current financial status
The first step in creating a financial plan is to gain a clear and accurate picture of where you currently stand financially.
This involves gathering information on your assets, debts, income, and expenses. By fully understanding your current financial situation, you can make informed decisions and start planning for the future with confidence.
Practical steps:
- List your income sources – whether it is from your job, freelance work, passive earnings or investments.
- List your expenses – split these into essential outgoings (such as mortgage and loan repayments, rent and utilities, groceries and insurance, for example) and non-essential spending (such as entertainment, leisure and holidays). This will give you a clear picture of how your spending aligns with your priorities.
- Take stock of your assets – factor in cash savings, investments, property and any other valuable possessions. These assets will form the foundation of your financial plan, as they represent your current wealth.
- Assess your debts – include the likes of mortgages, credit card balances, personal loans and any other liabilities. Understanding how much you owe, and what your repayment terms are, will be crucial in shaping the next steps of your financial plan.
By reviewing all of these aspects, you will have a comprehensive overview of your financial health. This will highlight where you may need to make adjustments, for example cutting back on unnecessary expenses, or focusing on clearing high-interest debt. Prepared with this knowledge, you can move forward with a clear vision of your starting point.
Step 2: Set clear goals
At Finli, we believe it is important at this stage to shift your focus away from simply accumulating wealth, and instead think about what you want to achieve in life. We feel that money should not be the ultimate goal, but rather a tool to help you fulfil your life goals and aspirations.
When you start with your life goals, your financial plan will become a roadmap to support the things that truly matter to you. This could be creating a certain lifestyle, fulfilling personal ambitions, or securing your family’s future.
Practical steps:
- Define your ideal lifestyle – Think about the lifestyle you wish to have now and in the future. What do you need financially to maintain or achieve it?
- Consider family goals – If you want to start a family, grow your existing family, or support your children or grandchildren through education or buying a home, factor these into your goals.
- Think about retirement – Consider when you would like to retire or semi-retire, and the lifestyle you ideally want to enjoy during this stage of life.
- Dream big – What are your personal ambitions? Whether it is starting a business, buying your first home, or purchasing dream assets like a holiday home or a classic car, your financial plan should reflect these aspirations.
- Plan for personal projects – Do you have passions or personal projects you would like to achieve while you are fit and able, such as travelling the world, learning a new skill, or giving back through charitable work?
By setting clear life goals, you are giving your financial plan a purpose, ensuring it supports what matters most to you and your family. As your life evolves, your goals may change, and your financial plan can adapt accordingly, helping you stay on course to achieve what you truly value.
Step 3: Create a budget
A budget helps you balance your income with your expenses and ensures you are on track to achieve your goals.
Budgeting is not about restricting your lifestyle or cutting out everything you enjoy. Instead, it is about making informed choices that support your financial health, and short and long-term aspirations.
Practical steps:
- Start with your income – You will have already identified your total monthly income in Step 1. Be sure to include all income sources, as knowing exactly how much you have coming in each month will allow you to plan effectively.
- List your essential expenses – Again you will have prepared these in Step 1. These are your non-negotiable costs, such as housing, utilities, groceries, transportation, loan repayments, and insurance. These form the foundation of your budget, as they must be covered every month.
- Account for your non-essential spending – This includes discretionary spending, such as eating out, entertainment, holidays, and hobbies. It is important to track this spending, as this is where you have the most flexibility to adjust your budget in line with your goals.
- Consider allocating money towards savings or investments – You may wish to set aside a portion of your income for savings or investments. This could be for an emergency fund, retirement, or towards the specific life goals you identified in Step 2, such as buying a home or starting a family. Treat this as an essential part of your budget to ensure you are always progressing toward your goals, but always take professional advice when considering your options.
- Review and adjust – Budgeting is not a one-time task. It requires regular reviews. Life changes, goals evolve, and expenses can fluctuate. Revisit your budget every few months to make sure it still aligns with your goals and adjust where needed.
A well-thought-out budget gives you control over your finances, helping you make decisions that support both your immediate needs and your long-term goals. It allows you to live within your means while staying focused on the bigger picture.
Step 4: Build an emergency fund
Before you start investing or making significant financial commitments, it is advisable to build an emergency fund.
This fund provides a safety net, offering peace of mind and financial security when unexpected events occur, such as a job loss, medical emergency, or sudden home repairs.
Having an emergency fund ensures that you can weather life’s uncertainties, without derailing your broader financial goals.
Building an emergency fund is a crucial part of the importance of financial planning, as it safeguards your long-term plans while covering immediate, unforeseen expenses.
Practical steps:
- Aim for three to six months’ worth of expenses – It is usually recommended to aim to save between three and six months’ worth of essential expenses. This range offers flexibility depending on your circumstances, such as job security, whether you have dependants, or the stability of your income.
- Start small and build gradually – If saving several months’ worth of expenses seems overwhelming, do not worry. The key is to start small and contribute to your emergency fund consistently. Even setting aside a small percentage of your income each month will gradually build a solid buffer over time.
- Set up a separate, instant access savings account – Keep your emergency fund in a dedicated account that is separate from your daily spending to avoid dipping into it for non-emergencies. However, it should still be easily accessible when you need it.
- Automate your savings – Consider setting up automatic transfers to your emergency fund each month. This makes it easier to prioritise saving without having to think about it, helping you build your fund gradually and consistently.
- Adjust as your life evolves – As your circumstances change, such as getting a promotion, starting a family, or moving house, reassess your emergency fund to ensure it still meets your needs. Financial planning is an ongoing process, and your emergency fund should evolve along with your goals and lifestyle.
An emergency fund provides peace of mind, ensuring that unexpected events do not impact your long-term goals. It reinforces the importance of financial planning by giving you the confidence to pursue your aspirations, knowing that you have a safety net in place.
Step 5: Plan for savings and investments
Planning how to save and invest to meet your goals is a key part of ensuring long-term financial security.
Whether you are saving for a home, retirement, or a major life event, it is essential to understand how to balance risk with reward, and to choose the right approach that aligns with your financial aspirations.
Savings and investments are both crucial aspects of the importance of financial planning, but they serve different purposes.
Key considerations for savings and investments:
- Short-term vs long-term goals – If your goals are short-term (1–5 years), such as saving for a wedding or a home deposit, it may be better to prioritise low-risk savings options, such as high-interest savings accounts or ISAs (Individual Savings Accounts). These will keep your funds at hand while still earning interest. For long-term goals (5+ years), like retirement or buying an investment property, you may want to explore investments that offer higher potential returns, such as stocks, bonds, or mutual funds.
- Assess your risk tolerance – Every investment carries some level of risk. Higher-risk investments can yield bigger returns, but also come with greater potential for loss. Balancing your portfolio between low-, medium-, and high-risk investments based on your comfort level and life stage is important.
- Diversify your investments – Spreading your money across different types of investments can reduce the risk of loss and increase the potential for growth. A diversified portfolio might include a mix of cash savings, stocks, bonds, property, and sometimes alternative investments such as commodities (depending on your risk tolerance and goals).
- Regularly review and adjust your strategy – Your savings and investment strategies should evolve as your financial situation and goals change. For example, as you near retirement, depending on your situation, it might be wise to shift from higher-risk investments to more secure savings vehicles.
The importance of seeking professional advice
To make the most of your money, and ensure you are choosing the best strategies for your unique circumstances, it is essential to seek guidance from a financial planner. They will provide tailored advice based on your goals, risk tolerance, and current financial situation, helping you build a well-rounded savings and investment plan.
Your financial plan – are you ready to take control of your future?
A well-crafted financial plan is not just about managing your money; it is about aligning your finances with the life you want to live, your personal goals, and your long-term vision.
The importance of financial planning cannot be overstated. It helps you make informed choices, adapt to life’s twists and turns, and stay on track towards your aspirations, whether they involve starting a family, buying a home, or preparing for retirement.
Financial planning is a powerful tool that provides clarity, peace of mind, and the flexibility to navigate the unexpected.
At Finli, we specialise in providing personalised financial advice that considers your financial goals within the context of your life’s priorities. We are here to guide you through every stage of the planning process, helping you adjust as your life evolves, and ensuring your financial plan continues to serve you.
Take the first step today towards building a financial plan that supports your future. Contact us today and let us help you chart the course towards your life goals with confidence.