What Is a Financial Plan? (Plus How To Make One in 6 Steps)

By Indeed Editorial Team

Published January 3, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A financial plan is a guide an individual or organization can use to make financial decisions in pursuit of their goals. You may create a financial plan for an employer, or you might create a personal financial plan for how to spend the money you earn in your career. Learning the important elements of a financial plan and how to use one can help you make more informed financial decisions. In this article, we discuss what a financial plan is, its common components, the benefits and uses of financial plans and how to create your own.

What is a financial plan?

A financial plan is a structured document containing an organization's or individual's financial standing, goals and tactics to achieve them. It provides an assessment of current financial standing and a plan for how to meet desired targets. The financial plan may serve as guidance to the individual or organization on financial decisions in order to maintain progress toward long-term goals.

Related: Budgeting vs. Financial Planning: What's the Difference?

Why are financial plans important?

Creating and following a financial plan may allow you to meet your personal or professional financial goals. Financial plans are versatile documents that you may use to complete a variety of objectives, which can increase their value. Common purposes for a financial plan include:

  • Debt management

  • Estate planning

  • Investment strategizing

  • Retirement planning

  • Risk management

  • Tax liability reduction

Benefits of creating a financial plan

There are many reasons you may choose to create a financial plan. Some of the most common benefits provided by financial planning include:

Reduced uncertainty

Creating a financial plan and following it may allow you to create stability and certainty. By using a detailed plan when attempting to achieve goals, you develop a set of expectations. This can help you assess whether your current spending and investing habits are likely to allow you to achieve your goals or if you may benefit from making changes.

Short-term targets for long-term goals

Often, financial goals feature long-term targets. Creating a financial plan can help you convert the long-term goals into short-term actions and expectations. This allows you to more easily monitor your performance results and determine if you are on course to meet your overall goals or if you could benefit from making adjustments.

Improved results

The improved focus and clarity provided by a financial plan can help to improve results as you progress toward your goals. By providing clear guidance and a method of assessing the effectiveness of your financial efforts, it may allow you to achieve higher results. This is why successful organizations commonly invest in their financial planning department, as it can have the effect of improving results throughout an organization.

Maintaining motivation

Setting goals in your financial plan can help to maintain the motivation you or others in your organization require to meet your target. With a financial plan in place, the actions you take have a clearly defined result. This allows those responsible for carrying out the plan to see the benefits of their actions, which can help keep motivation on a project elevated.

Setting expectations

Creating a financial plan for a business can help you establish expectations for staff members. By providing targets and tactics to employees and departments, the plan explains what you or others in senior positions expect from them. This guides staff members and allows them to assess their own performance to identify if they are in a situation where they need to raise their levels.

What to include in a financial plan

When creating your financial plan, it's important to ensure it includes key planning elements, such as:

Net worth

In order to effectively plan financial decisions, it's beneficial to understand the current financial standing of yourself or your organization. This includes both the value of any assets held and of any liabilities owed. By comparing total assets to total liabilities, you identify current net worth, which creates the starting point for your financial plan.

Current cash flow and operating costs

Cash flow for the individual or organization you are creating a plan for is another key consideration. As with net worth, it's important to consider both positives and expenses. By comparing current sources of income to current expenses, you can identify the current net income for the organization.

Related: Net Cash Flow Formula (With Examples)

Expected cash flow and liabilities

In addition to understanding current cash flow, it's beneficial to assess the expected future cash flow and liabilities as well. Because many financial goals are long term, assessing future values allows you to make more informed decisions based on realistic expectations over the course of the financial plan. This can be particularly important for plans with calls for actions that may have a significant impact on cash flow levels, such as making new investments.

Financial targets

The targets you hope to achieve with your financial plan are a critical component of the planning process. When creating a plan, you may include multiple financial targets, as well as goals that cover a range of time frames. This provides the achievements you seek to reach through your planning.

Related: 10 Examples of Finance Goals (And Why They're Important)

Spending, savings and investment plans

With your current finances and future goals noted, your plans create the framework you intend to follow to get from the former to the latter. Plans within the overall financial plan may cover any financial actions you intend to take. Common areas to address with plans include how you intend to spend your money, how you intend to save your money and ways you may choose to invest your money.

Alternative options and responses

Although not required, it can be beneficial to include alternative plans and responses in your financial plan. This provides options when determining what to do at crucial points during the execution of your plan. It can also help you respond to an event of unforeseen circumstances.

Related: Learn About Being a Financial Adviser

How to create a financial plan

If you're interested in creating a financial plan for yourself or your employer, follow these steps:

1. Consider professional guidance

If you are not a financial professional, consulting with a financial planner may be beneficial when creating your financial plans. This allows you to benefit from their expertise and may result in more effective financial plans as they can identify options or considerations you may not be aware of. For large organizations, you may have access to a finance department. When conducting a personal financial plan or a financial plan for a smaller employer, this may involve contracting with an outside financial planner.

2. Set your goals

The primary purpose of a financial plan is to help you achieve your long-term financial goals. In order to do so, it's important to state them clearly as part of the financial plan. The more details you provide with your financial goals, the more information you have available to you when creating your tactics to achieve them and to assess progress toward them in the future.

3. Assess your finances

Your initial finances are an essential consideration when creating a financial plan. A business with access to significant cash reserves and high income has different financial options than a small business with more modest levels or a company currently paying off debts. You may choose to complete this step prior to setting your goals or concurrently, making adjustments to your goals as needed upon further assessment.

4. Note your priorities

When operating a business or a personal budget, there may be circumstances in which you face a choice about sacrifices that prioritize one option over another. In situations like this, it could be beneficial to have pre-established priorities for your different financial goals. This can help you or others in the organization make more informed choices when faced with a decision on financial spending or investment.

5. Create spending and savings plans

After determining your current and projected finances along with your goals, you can create your specific plans within the overall financial plan. Depending on the complexity of the finances you are creating a plan for, this may include a small or a significant number of financial tactics. This provides the primary guide you and others can use to enact the plan when making decisions under its framework.

6. Prepare for emergencies

Adding contingency plans to your financial plan is an optional step which may be beneficial. Although you cannot predict all potential circumstances you may encounter throughout your plan, having emergency responses in place may help with your decision-making, particularly when facing decisions under time pressure. You may also include alternative plans for non-emergencies, but which go into effect if predefined circumstances arise throughout the plan's execution.

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