Financial Plan

A document that covers an individual’s current financial situation, short-term and long-term economic goals, and an in-depth strategy to achieve them

What is a Financial Plan?

A financial plan is a document that covers an individual’s current financial situation, short-term and long-term economic goals, and an in-depth strategy to achieve the goals.


Financial Plan


A financial plan should incorporate every aspect of an individual’s finances, which include savings, investing, debt, insurance, taxes, retirement, and an assortment of other factors that will be discussed in more depth below. The plan can be created independently or with the help of a financial planner.


Benefits of Financial Planning

Creating a financial plan is an extremely beneficial way for an individual to evaluate their current financial situation and plan ahead for future objectives and expenses. Listed below are the advantages of creating a financial plan.

  • Better management of personal income
  • Increased preparation for future expenses
  • Clarity in retirement objectives
  • Reduced risk of debt
  • Increased likelihood of achieving personal and financial goals
  • Decrease in stress levels, anxiety, and worry
  • Increased probability of financial success


Producing a financial plan brings forth an assortment of benefits that would not be present previously. Other than time loss, there are no disadvantages to creating a financial plan.


Reasons to Create a Financial Plan

If you are not quite sure if you are ready to allocate personal time to create a financial plan, the following factors should convince you why it is an advantageous idea.


1. Prioritize financial goals

If an individual is saving up for a down payment on a house, mortgage, or car, a financial plan helps organize associated expenses, allowing the individual to plan ahead for a large future purchase.


2. Prioritize personal goals

Personal goals such as a specific savings account balance, portfolio value, or luxury vehicle can be achieved by constructing a financial plan that assigns income effectively to achieve preset goals.


3. Standard of living

The ongoing collection and distribution of finances is a stressful topic for most individuals but can be minimized by the creation of a financial plan. This is because a financial plan is organized, laid out, and provides information on how to reduce debt.


When to Create or Adjust Your Financial Plan

On average, an individual should review and adjust their financial plan every year. However, if you’ve not yet created a financial plan, here are some of the factors that should influence and motivate the idea to begin the process.


1. Change in income

When an individual is granted a change in income, their purchasing power will either increase or decrease. The change will significantly lead to a change in the ability to spend money, invest, and pay off debt.


2. Job change

When an individual lands a new occupation, an assortment of new expenses and costs must be accounted for. For example, a new job may result in an increase in transportation or communication expenses.


3. Change in family dynamics

The creation or adjustment of a financial plan should occur when a change in family dynamics occurs, such as the birth of a child, marriage, or divorce. It is necessary because a number of new expenses will be added, which will affect personal income.


4. Inheritance

Receiving some sort of inheritance could significantly impact the allocation of income towards expenses and investment, which would warrant an individual to either create or adjust their financial plan.


Beyond the criteria above, it is recommended that every individual who is earning should eventually create a financial plan to ensure comfortability, relief, and success.


Steps to Build a Financial Plan

When it comes to actually constructing a financial plan, several elements should be considered and eventually included in the individual’s design. Numbered below are the steps needed to be taken when creating such a plan.

1. Calculate net worth: Before diving into finances, it is recommended that an individual is to calculate their net worth by summing their assets and comparing them to their liabilities.

2. Determine cash flow: Inflows and outflows of an individual’s income must be determined in order to organize funds and locate current and potential debt.

3. Set financial goals: Setting financial goals will create the baseline for the entire plan and will motivate the individual. For example, a financial goal would be to save $10,000 by 2021.

4. Start an emergency fund: Prepare for unexpected events by allocating a certain amount of money to the fund and set it aside.

5. Debt strategy: Start looking at all of the debt that contributes to the reduction of your income and determine the best way to pay off that debt. In such a case, it is most beneficial to design a strategy that pays off the most demanding debt first.

6. Investment strategy: Create an investment strategy that does not rely heavily on risky investments and will bring forth a close to “guaranteed” return.

7. Insurance: Start allocating a portion of income towards health, auto, disability, life, and home insurance to establish security.

8. Retirement plan: To ensure that there is a sufficient amount of money left over once an individual decides to retire, there must be some sort of plan in effect that allocates a portion of income into RRSPs, 401(k)s, IRAs, or other forms of retirement plans.

9. Tax strategy: Not planning for taxes can result in a negative financial impact during tax season. To reduce the impact, allocate a fixed amount of income towards it.

10. Stay on track: It is easy to deviate from the original financial plan that is created. However, if the plan is constructed prudently and effectively, it is unlikely that an individual’s goals are not reached if they decide to stay on track with the plan.


Creating a financial plan is one of the most instrumental things that an individual can do with their income. Once a plan is implemented, the achievement of personal goals and financial freedom now become one step closer.


Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

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