7 Steps to Creating a Smart Financial Plan

Updated February 08, 2021

If you want financial security, you’ll need to know how to make a better financial plan. The good news is that it's not hard to create one. Here are seven expert-approved financial planning steps to help you get on track. 

1. Track Where Your Money Is Going

The first – and most important – step to creating a financial plan is to develop a budget detailing where your money goes (expenses/savings) and comes from (income) each month. 

Think of your budget like a monthly money guidebook. Creating a budget doesn’t need to be complicated either. You can create one by:

  • Tracking your income and expenses in a notebook

  • Using a budget template spreadsheet  and updating it weekly 

  • Finding a budgeting app that helps you automatically track your income and expenses. Some options are Mint, Wally, and Personal Capital. 

Carry on this tracking and budgeting for more than one pay period to capture every expenditure. Once you figure out your current expenses, you’ll be able to make better future financial plans. 

2. Set Goals for Your Financial Plan

Once you’re diligently tracking your income and expenses, it’s time to think about the future and how to make a financial plan that gets you to your goals. The first goal, however, should always be to have an emergency fund in the event of a personal financial crisis.  

Then, ask yourself this question: “Where do I want to be 10 years down the road?”

Avoid generic answers like, "I want to be rich." Answer with specifics like: 

  •  "I want to own a house with the mortgage half paid off”

  •  “I want to have an investment portfolio of $500,000”

  • “ I want a college fund for my kids.” 

  • “I want to travel to 15 countries.” 

Setting specific goals helps to stay on track with your financial plan. 

3. Start Saving Now

After you set your major goals, start saving for an emergency fund and then for your bigger goals. This means re-examining the expenses and income you’ve been tracking. You can start saving in one of two ways: 

Cutting Expenses

After looking at your expenditures, determine where you might be spending too much. Are you splurging on entertainment? What about your car payments, vacations, or food?

Look for ways to save here and there, but always keep balance in mind. Your goal is not to eliminate all fun activities but to control your spending so you can free up some of your income for savings. 

Increasing Your Income

You can also save more money by increasing your income. This can be done by asking for a raise, changing careers, picking up a side hustle, or taking on a second job. Just make sure that your extra income is actually being put into a savings account (and not being spent on lattes). 

4. Learn How to Build a Portfolio in Your Financial Plan 

While you save for your short term financial goals, there is a long term financial goal you must keep in mind: retirement. This will be one of your biggest life expenses and it needs to hold a major place in your financial plan. 

You can find the money to invest the same way you did to start saving: Cut expenses and increase your income. The key to investing is to do it consistently over the long term, so start with as little as $50 a month and then increase whenever you can.

For new and seasoned investors alike, the easiest way to start building an investment portfolio is with mutual funds. You can easily find mutual funds that match your particular risk tolerance,  and they’re great to spread out your investment risk. Mutual funds also provide professional money management, which is a great idea if you don't have the time (or expertise) to go it alone.

5. Create Financial Plan Exit Strategies

You’ll want to plan an exit strategy to match every savings and investment goal in your financial plan. An exit strategy has two components: how you allocate money and how you can access that money. 

Say that you want to buy a home within ten years. You’ll probably need to allocate less money towards your investment portfolio and save more money in a short-term account (like a money market account).  When it comes time to purchase your home, make sure that it’s easy to withdraw your down payment money. This means checking the fees and withdrawal penalties of your account. 

Similarly, if you’re going to require college money for children or retirement, be sure to have an exit strategy for that money. Consider an estate plan for your heirs, too. 

6. Keep an Eye on Your Credit

Good credit is essential for finding the best interest rates for financing and the best credit card offers. It’s an important thing to keep track of when making your financial plan. 

 You need to check on your credit score with each of the three big credit agencies: 

You can get a free copy of these official reports once per year at AnnualCreditReport.com.

Make sure that there are no discrepancies between your records and the credit reports. If there are errors, dispute them with the agency reporting them. 

You can also keep track of your credit score during the year with websites like CreditKarma. If you notice a change in the score, it’s an indicator that something has changed with the accounts under your name (like the addition of a credit card or paying off a loan). 

7. Keep Track of Your Financial Plan

Manage your financial plan. The financial planning steps above are not a one-and-done kind of system. You always need to check in with your personal financial situation. 

  • Have your goals changed? 

  • Has your income or debt gone up or down? 

  • What are your current family needs and health? 

  • How have your investments performed? 

Depending on circumstances, it may make sense to review your financial plan quarterly.  Remember: When you review your plan, don’t confuse your long-term goals (retirement) with short-term ups and downs in your personal situation. In a nutshell, don’t change your financial plan without looking at the entire picture. 

Ask an Expert about 7 Steps to Creating a Smart Financial Plan
At InvestingAnswers, all of our content is verified for accuracy by Rachel Siegel, CFA and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about 7 Steps to Creating a Smart Financial Plan.

When Do I Make a Financial Plan? 

You should make a financial plan as soon as possible. Financial plans are essential no matter where your income is at. You can take control of your money and get it working for you by making a financial plan today. 

Who Needs a Financial Planner? 

Financial planners are typically hired when a major event has occurred with your finances. You might consider hiring one if you:

  • Are getting divorced

  • Sell your business 

  • Are in serious debt 

  • Inherit a large sum of money or property

A financial planner will help you navigate these kinds of challenging situations and point you in the right direction by providing a personal financial plan.

Rachel Siegel, CFA
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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years of experience in creating professional financial certification exams and another 20 years of college-level teaching.

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