What Is A Financial Plan - And How Can I Make One? (2024)

Whether it’s buying a home, retiring, or supporting your children through university, almost everyone has at least one financial goal.

But achieving these goals doesn’t just happen – that’s where financial plans come in.

A financial plans can act as a roadmap that allows you to stay on track and achieve your goals.

What is a financial plan, and why is it important?

A financial plan is a document that outlines an individual’s financial goals, and the steps they’ll take to meet them.

It typically includes:

• breakdown of your current financial circ*mstances
• outline of your goals
• strategies you’ll use to meet those goals
• budget
• list of the financial products you’ll need.

That said, there’s no universal template and one person’s financial plan could look quite different from another’s.

Creating a financial plan can help you reach your goals faster, and gain insight into your current circ*mstances.

Who needs a financial plan?

Anyone can benefit from financial planning, regardless of their circ*mstances.

Having concrete steps in place to reach your financial goals – whatever they are – can provide motivation, and peace of mind that you are on track to reach them.

A financial plan may be especially helpful if:

• You have recently purchased a home, or plan to buy soon
• Your financial circ*mstances have changed
• You are starting a family
• You are considering your retirement
• You are going through estate planning.

How to create your own financial plan

Although expert help is available from financial advisors – more on this below – in some circ*mstances, creating a financial plan yourself is a sensible option.

Advisors charge a fee for their services, which will eat into the cash you have to work with.

Younger adults might want to consider the DIY route. At this early stage, your goals and circ*mstances could change quickly, so a basic, DIY plan may offer some flexibility.

While there’s no one-size-fits-all approach to financial planning, the following steps could be a good place to start.

1. Define your goals

Understanding your goals is the first step in creating any financial plan. It’s usually much easier to budget and save when your efforts will result in a concrete outcome.

Ask yourself questions about what you want your life to look like, and what you would need financially to make this happen. You might consider:

• Do I want to buy property, and if so when?
• Is starting a family part of my plan?
• Do I plan to get married, and in what sort of time-frame?
• Would I like to start a business?
• Do I want to travel?
• At what age would I realistically like to retire, and what lifestyle would suit me?

It’s a good idea to set yourself short-term, medium-term and long-term goals.

You may also want to consider how professional goals – such as starting a business, taking time out to complete a course or going part-time – factor into your financial life.

Whatever they are, these goals should be specific, realistic and time-bound. Rather than setting yourself the goal: “save up a deposit on my first home,” for instance, you might set a goal to: “save £15,000 for a deposit on my first home within five years.”

2. Understand your current circ*mstances

Once you have defined your financial goals, you’ll need to take stock of your current circ*mstances. This way, you can start to build a roadmap from where you are, to where you’d like to be.

To build a comprehensive understanding, you might consider:

• Income: such as your salary, interest on cash balances, investment returns, rental payments, benefits payments or pension payments
• Assets: including equity in your home, investments such as stocks or bonds, cash savings, and valuable possessions
• Debt: including the remaining balance on a mortgage, personal loans, car loans, credit card balances carried month-to-month or buy now pay later (BNPL) borrowing.

You could write these down in a simple list split into different sections, or keep track with a spreadsheet.

3. Manage your risk

A comprehensive financial plan will usually have contingencies in place to alleviate the financial pressures that come with unexpected events.

When it comes to managing financial risks, there are a couple of key actions you can take:

• Create a ‘rainy day’ fund

Setting aside three to six months’ living expenses in cash savings gives you financial breathing room in unexpected circ*mstances, such as a sudden job loss.

• Consider insurance

In some cases, it could make sense to factor life insurance, income insurance or critical illness cover into your plan.

If you make monthly mortgage payments, or someone depends on you financially, this type of cover can give you peace of mind that, if you were to pass away unexpectedly, become ill or lose your job, your loved ones would be financially taken care of.

Any insurance payments should be factored into your monthly expenses when you come to create a budget.

4. Make a budget

Next, make a monthly budget. Take stock of all your regular expenses – such as housing costs, bills, groceries and travel – and subtract the total from your monthly income.

Your remaining income can be split between non-essential spending, such as entertainment, eating out and new clothes, and building towards the goals you outlined earlier.

If you are unsure where to start, you could consider using the ‘50/30/20’ rule. This budgeting method dedicates 50% of your income to essentials, 30% to non-essentials and 20% to saving or paying off debt.

Creating a budget may be a good opportunity to ask yourself if there are any areas of spending you would like to reduce.

As you consider cutbacks, try to be realistic. Over enthusiastic budgeters might be tempted to put every spare penny towards their savings, but this is unlikely to be sustainable in the long run.

5. Prioritise and tackle your goals

Once you have a budget in place, you can prioritise and start to tackle your goals.

Everyone has slightly different priorities, but you could consider the following order:

• Establish an emergency fund

Setting aside three to six months’ living expenses in an easy access savings account can help you weather unexpected costs and changing circ*mstances.

• Pay off high-interest debt

If you are paying a higher rate of interest on your debts than you are earning on savings, it could make sense to clear this debt before tackling other goals.

It’s generally best to start with the most expensive debt – typically credit card balances, unplanned overdrafts and payday loans.

• Ensure you’re making pension contributions

When it comes to saving for retirement, the earlier you can start the better.

If you are unsure how much you’ll need to save each month to support your desired lifestyle you can use a pension calculator tool – such as this one offered by the government’s MoneyHelper service – to work it out.

• Save for short and medium term goals

With an emergency savings fund and retirement planning in place, you can turn towards your other goals, such as savings for your children, building a deposit on your first home or planning a holiday.

As you pursue these goals, you’ll need to consider which kind of savings account best fits your needs.

If you’re saving for a deposit on a home, for instance, you could consider opening a Lifetime ISA.

These accounts allow adults aged 18 to 39 to save up to £4,000 per year tax-free, and earn a 25% government bonus (up to £1,000 per year) – provided the cash is used for a deposit on your first home, or your retirement.

When it comes to maximising long-term growth, an investment account will likely be part of the plan, too.

You may not be able to work towards every goal at once.

When one goal is completed – for instance you’ve cleared your credit card debt – you can return to your plan, and begin paying towards your next one.

Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

6. Adjust as needed

There’s no need to update your financial plan constantly, but it’s worth checking in at least once per year, and when your circ*mstances change.

Moving house, starting a new job, getting married, starting a family, approaching retirement or even getting a pet can affect your financial priorities and the amount of money you have to work with.

When this happens, you can simply tweak your plan as needed, rather than starting from scratch.

Financial planning when cash is tight

If essential living expenses leave you with little disposable income to funnel towards your goals, this might not be a realistic approach, but there are still steps you can take that may help improve your financial situation:

• Check for any benefits you’re entitled to
• Assess your budget to see if there’s room to save or earn extra money
• If you’re employed, check you have been enrolled in your workplace pension program. The earlier you can start to save, the better.

Using a financial advisor

While it’s possible to create a financial plan by yourself, you can also seek help from a financial advisor.

According to research from pension provider, Canada Life, almost half of adults (45%) have never received financial advice, however. Of these, more than one in 10 (11%) reported regretting their decision, while 31% believe they have lost money because they did not seek advice.

In exchange for a fee, an advisor can help you create a plan tailored to your specific circ*mstances, navigate complex financial products and manage your money in a tax-efficient way. On average, customers can expect to pay 1.9% in annual fees, FCA data suggests.

According to Alistair Cunningham, a financial advisor and co-founding director of Wingate Financial Planning, advisors can also bring perspective to your planning – asking the right questions and helping you see the bigger picture: “A lot of the value that we add comes from trying to compensate for our foibles as human beings.

“For example, people might think they’ve got a good handle on their spending, but I often find that they underestimate, because they forget about ad hoc expenses such as renovation projects or replacing cars.”

Equally, financial planners have the advantage of years of experience and market data when giving investment advice, helping clients overcome natural risk-aversion to hopefully achieve stronger growth.

Mr Cunnignham adds: “We all know past performance isn’t a guide for the future, but people are often driven by the immediate past, and this can affect their decision-making. An advisor is more able to put emotion to one side than perhaps individuals are.”

Finding a financial advisor

In the UK, these professionals are regulated by the Financial Conduct Authority (FCA), and must meet a minimum educational standard.

A good financial advisor can offer value to virtually anyone, but whether these gains are outweighed by fees depends on your individual circ*mstances.

For this reason, some firms (including Mr Cunnginham’s) offer free consultations to new clients, to help ascertain whether working with an advisor is the right move for them.

Most of Mr Cunningham’s clients receive ongoing advice through an annual appointment, and ad-hoc conversations when a concern arises or their circ*mstances change.

You can find a financial advisor through word of mouth, or searching an online database such as Unbiased or VouchedFor. These tools allow you to filter results by factors such as specialty and location.

You might also consider using a robo-advisor as part of the financial planning process. Robo-advisors are essentially a halfway house between personalised wealth managed ment and DIY investing, which offer tailored portfolios based on your attitude to risk, and keep costs down through automation.

The bottom line

Whether you opt for personalised advice or go it alone, having a financial plan in place can help you meet your goals.

Making a plan gives you greater visibility over your finances, allowing you to nip any issues in the bud and prepare for your future.