Financial Planning: Why It's Important and How To Do It

Whether you want to save for retirement, buy a house, or build an emergency fund, financial planning can help you better manage your money so you can make those goals a reality. 

What is financial planning? 

Financial planning is like a budget on steroids. It’s when you sit down, take a long, hard look at your finances, and develop a comprehensive plan that includes saving, investing, retirement planning, and risk assessment. Essentially, your financial plan is the roadmap you’ll create in order to reach those big financial goals. 

Why is financial planning important? 

Financial planning is important for several reasons. First, it will give you a sense of direction so that you know what you’re striving for financially. Without financial goals, you may not be motivated to save and invest for the future. 

Having a solid financial plan can also provide peace of mind. If you know your savings and retirement investments are on track, you’ll be less likely to worry about the future. 

Whether you’re striving to buy a house, pay off your student loans, or put your kids through college, a financial plan can help you get there. 

Goals a financial plan can help achieve 

Everyone’s financial plan will look different depending on their goals. If you’re not sure where to get started, there are a few basic things every financial plan should include. 

• Buying a house. Homeownership is a milestone most of us dream of. Proper financial planning can help you save enough for a down payment or pay down enough debt so you can qualify for a mortgage. According to Bankrate, buying a home in 2024 was 5.5% more expensive than the previous year. On top of that, 78% of people say it’s challenging to afford a home due to the high cost.
• Buying a car. Along with the housing market, cars have also become more expensive in recent years. Since 2021, the price of new cars has increased nearly 20%, and used cars by just over 20%. If you want to afford a new vehicle, you’ll need a financial plan to make it possible.
• Paying for college. To help your kids avoid heavy student loan debt, start saving for their education early. By making college savings part of your financial plan, you can cover more costs upfront and reduce or even eliminate their need for loans.
• Planning for retirement. No one wants to work forever. With a solid retirement plan based on your income and future needs, you can look forward to stepping away from the workforce comfortably. Stick to your plan, and retirement can become a reality. 

9 steps to make a financial plan 

There’s no doubt that a finely curated financial plan is the key to financial success. While everyone’s financial plan may look different, the way you set it up should be fairly similar. 

1. Determine your net worth 

Your net worth refers to all your income and assets, including: 

• Any money in your checking or savings accounts
• Any houses and real estate
• Cars and other vehicles
• Any stocks, bonds, and other investments 

Along with assets, you also need to make a list of any outstanding debts. This can include student loans, your mortgage, credit cards, and personal loans. 

2. Set financial goals 

It’s tough to have a complete financial plan without goals. This includes both long and short-term goals, as both are important to your financial success. 

Short-term goals are things you want to accomplish in the next one to five years. They can include things like building an emergency fund, paying off small debts, putting a down payment on a home, and starting your investment portfolio. 

Long-term goals are things you want to accomplish five years or more down the road. They can include things like starting a business, paying off your student loans, and saving for your kids’ college fund. 

3. Create a budgeting plan 

A budget is a spending plan based on your income and expenses that helps ensure that you have enough money for your needs and wants. Some of the most popular budgets you might want to consider are the pay-yourself-first budget, the 50/30/20 budget, and the zero-sum budget. 

4. Start an emergency fund 

An emergency fund is vital because an unexpected expense can pop up at any time and derail your financial plan. 

To build an emergency fund, save three to six months of expenses and keep the money in a high-interest savings account you can easily access at any time. 

5. Begin a retirement plan 

A retirement plan typically involves saving for retirement through an employer-sponsored 401(k), a Roth IRA, traditional IRA, or other investment vehicle. No matter your age, setting up a retirement plan is key. 

6. Consider a debt payoff strategy 

Debt can either help or hurt your situation, depending on how you manage it. 

Think about it: unless you’re exceptionally wealthy, you won’t be purchasing a house with cash. But buying a house is a major financial goal, so you’ll need to go into debt to achieve it. When taking out a mortgage — or any type of loan — consider the repayment terms. Can you afford to repay the debt (plus interest) as agreed? Do you have a strategy for speeding up repayment? 

7. Plan for taxes 

Strategic tax planning can help you leverage your finances to maximize your annual tax return. With enough planning (or consulting a tax professional), you could minimize your tax liability, boost your tax credits, and rework your deductions to benefit you and your family. 

8. Invest 

Investments can help you build wealth, provide for your kids, and enjoy a more financially secure future. Your investment plan might consist of just your retirement account, or you might diversify your portfolio with stocks, bonds, mutual funds, valuables, or real estate. 

9. Protect the wealth you’ve built 

The final component of your financial plan should be to protect your assets. The best way to do this is by drawing up a will so that you get the final say of where your assets go when you pass away. Without proper estate planning, your heirs will have to deal with probate court — or end up with nothing, altogether.

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Set SMART goals for your financial plan 

If you create a financial plan, make sure it includes SMART goals. SMART is a handy little acronym that stands for: 

• Specific. Clearly define your goals so there isn’t any doubt as to what they are. A specific goal would be saving for an emergency fund or a house, rather than simply putting your money into a savings account with no goal in mind.
• Measurable. You should be able to measure how or when you’ll reach your goals. For example, decide how much you want to save for an emergency and track your progress via an online banking app.
• Achievable. Setting impossible goals will set you up for failure and frustration. Instead, set goals that are attainable and realistic. Rather than saying you want to retire when you’re 50 and have $2 million in the bank, set a more achievable goal of retiring at 67 with $1 million.
• Relevant. There’s no point in setting financial goals that mean nothing to you. Decide what’s important to you and create goals to get you there.
• Timely. Setting goals without a definite timeline will open you up to procrastination. It’s important that each of your goals has a realistic endpoint and timetable. An example of a timely goal would be having $50,000 in your bank account by the time you’re 45. 

Where to get financial planning help 

Creating a financial plan can be a daunting task, especially if you don’t consider yourself to be financial savvy. If you’re struggling with financial planning, it may be worth consulting a financial advisor. They can help you set SMART goals and create a financial plan that will help you achieve them. 

Other great resources you might want to consider include online brokers, budgeting and financial planning apps, non-profit organizations, and credit counseling agencies. 

Tips to stay on track with your financial plan 

Creating a financial plan is only step one of attaining financial independence. Staying on track requires determination, patience, and discipline. 

Here are a few tips that could help you along the way: 

• Set up automatic bill payments to avoid late fees
• Consider combining finances and savings goals with a spouse or partner
• Celebrate when you achieve goals
• Use budgeting apps to keep track of your income and expenses
• Review your budget and bank accounts regularly
• Pay off debt as quickly as possible and put that money toward goals 

Above all, don’t get frustrated with temporary financial setbacks. Maybe you didn’t quite meet one of your goals or you had to deplete your emergency fund. Whatever the case, stay the course! Keep those long-term goals in mind and keep striving for them.