How to Make a Financial Plan

How to Make a Financial Plan Step by Step

You can make a financial plan by running the seven-step process that the Certified Financial Planner Board of Standards (CFP Board) sets out in its practice standards, with you acting as both planner and client. One early action is an emergency fund, which the Consumer Financial Protection Bureau (CFPB) calls "one of the first steps you can take to start saving." If you carry high-interest debt too, weigh it alongside that reserve, because neither the CFP Board standards nor the CFPB emergency fund guide ranks one ahead of the other.

We adapted the CFP Board's seven practice standards into household tasks. The wording of the tasks is ours, not CFP Board guidance, and the table below lists the seven tasks beside the standard each comes from.

The CFP Board expanded its process from six steps to seven. A planner develops a recommendation and then presents it to the client. On your own, those two standards become choosing your changes and writing them down.

The Snapshot You Need to Make a Financial Plan

A financial plan starts with a written record of your money today, because the CFP Board's first standard covers gathering both numbers and personal facts about the person being planned for. The CFP Board gives these examples of what a planner collects. Each one becomes a line in your snapshot:

• Income: each paycheck and any other money that arrives during the month.
• Expenses: what leaves your account, including bills that come once or twice a year.
• Savings: the balance in each savings account.
• Assets: what you own, such as a home, a car or retirement accounts.
• Liabilities: every debt, with its balance and interest rate.
• Insurance coverage: the health, auto, home or renters, life and disability policies you hold.
• Estate plans: any will or beneficiary forms you have on file.

The CFP Board's list also covers your goals, your priorities and your risk tolerance. Write a sentence or two on each.

The CFP Board offers these as examples of what a planner gathers, so add anything else that touches your money. To total the assets and liabilities above, use our net worth guide.

Dated Goals and a Test of Your Current Course

The CFPB's emergency fund guide builds a savings habit around three moves: set a goal, make consistent contributions and monitor progress. Use those same three moves for every goal you write down.

Write each goal as one line: what it is, how much it costs and when you want it. Then run the CFP Board's third standard, which compares your current course of action with alternative courses. In plain terms, ask where your money ends up if nothing changes.

To test a goal, use simple arithmetic:

1. Subtract what you have already saved toward the goal from its amount.
2. Divide what is left by the number of months until your date.
3. Compare that monthly figure with what you set aside now.

If the monthly figure is higher than your current saving, sketch one or two alternatives. You could save more each month, cut an expense or move the date later. Our financial planning calculator turns your income and goals into a savings rate, retirement-readiness or net worth number, so you can run each alternative.

When goals compete for the same dollars, rank them with the priorities you wrote in your snapshot. The CFPB's Your Money, Your Goals toolkit offers free tools for setting goals and working through money challenges.

An Emergency Fund as an Early Step

An emergency fund is a cash reserve set aside for unplanned expenses or financial emergencies, such as car repairs, home repairs, medical bills or a loss of income, according to the CFPB. The CFPB calls setting one up one of the first steps you can take to start saving. It also says even a small amount helps you recover quicker and stay on track toward larger savings goals.

The CFPB says how much you need depends on your situation. To set your own target, list the most common unexpected expenses you have had and what each one cost, then set a goal from that total.

If you are living paycheck to paycheck, the CFPB notes that putting any money aside can feel difficult. It adds that even a small amount can provide some financial security. The CFPB lists these ways to build the reserve:

• Create a savings habit: set a goal, make consistent contributions and monitor your progress.
• Manage your cash flow.
• Put away a portion of your tax refund.
• Set up automatic recurring transfers, which the CFPB calls often one of the easiest ways to save.

Pick the one you can start this week.

High-Interest Debt Alongside the Reserve

Neither the CFP Board standards nor the CFPB emergency fund guide ranks paying down high-interest debt against building a cash reserve, so you decide the order inside your own plan. Your snapshot already lists each debt with its balance and rate. In the course-testing step, write out two versions of the plan: one that sends extra money to the debt first, and one that builds the reserve first.

Compare where each version leaves you by your goal dates. If the comparison does not settle it, a nonprofit credit counselor can look at your specifics, and the CFPB explains what credit counseling is. A financial professional can also work through the trade-off with you.

Carrying Out and Reviewing Your Financial Plan

A financial plan changes your money only after you carry it out, and the CFP Board's last two standards are implementing the recommendations and monitoring progress and updating. Turn each change into a task with a date. Open the savings account, set the automatic transfer and list the debt you will pay extra on.

Then put a review date on your calendar. Choose one you will keep, such as the week you file your taxes, and add an extra review when your income, household or debts change. At each review, update your snapshot, check each goal against its date and adjust the plan.

Who this is not for: a household with complex tax, estate or business questions, which may need a professional. Our guides on what a CFP is and how to choose a financial advisor cover that decision. Our answer would change if the CFP Board revised its seven practice standards or the CFPB published new emergency fund guidance.

Our Takeaway

Treat a financial plan as a repeating cycle: list your finances, set dated goals, test your current course, act, then review. Start an emergency fund early, as the CFPB suggests. If you carry high-interest debt, compare a debt-first and a reserve-first version of the plan before you choose.

Households with complex tax, estate or investment questions may need a professional to run the same steps with them. Write down your income, spending, savings and debts today. Pick one goal with an amount and a date, and you can make a financial plan you can start this week.

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