What is in a financial plan?

Goals are important, but to make them a reality, you need a plan. Financial goals are the same. We benefit from writing down the necessary steps to grow our finances from where they are now, to where we want them to be.

What is a financial plan? 

A financial plan is an actual physical document as opposed to general goals. That document is a detailed plan that covers:

  • Your current financial situation, including any income, debt, savings, assets and investments 
  • Your long-term financial goals and your timelines to meet them
  • Your detailed strategy to reach those goals on time
  • How you plan to use your money once you reach your goal

A financial plan is not a loose outline, it leaves nothing out to make sure your plan is as realistic as possible. 

It is also highly personal. It takes into account your personal situation (if you’re married, single, have children or other dependents), risk tolerance, commitments and any other aspects of your life that can influence your finances. One person’s plan will not look like another’s. And if you are planning as a couple, it will be extra unique. 

It is meant to create a path that, if you stick to it, will lead you to your ultimate financial goal. 

How to make a financial plan

It takes a bit of time and calculations to create a financial plan. A financial adviser can help you do it, or you can take on the task yourself with the following steps:

Step 1: Gather data.

To start creating a financial plan, you must gather data. It will not work if you do not know how much money you have, where your money is coming from and where it is going.

It is a good idea to review all utility bills, credit card statements and spending habits. This sounds draining but you can do this in minutes using a free money management tool, such as Money Dashboard Neon (you plug in your bank and credit account details and your scheduled payments are automatically picked up, labelled and categorised). 

Drop your data into a spreadsheet — it doesn’t need to be fancy. The pen and paper approach also works if you trust your maths. 

Step 2: Prioritise what you want to accomplish. 

We all want to be a millionaire, but a more realistic and important financial goal might be to pay down debt, to own a home, or build a retirement plan. In fact, you may want to do all of those things. 

Whatever your goals are, write them down and prioritise the most urgent and important to you.

You may have short term and long term goals. Some financial plans take months, years, even decades to reach — so be realistic about how much time you think you should take to reach them. 

You may want to have a separate document for short and long term plans. It is also a good idea to make a list that makes it easy to add or remove goals as you go.

Step 3: Plan the steps you need to achieve goals

Now it’s time to create a comprehensive plan to meet your goals and put it into action. 

There is a good chance you will need to make adjustments to your spending and the way you save. This will not always be easy, but if you stick to your plan you should achieve your goals in due course. 

While some smaller goals can be reached by simply putting aside a certain amount of money each month, this is not the smartest or fastest way to grow your wealth. That’s why most financial plans will include all or some of the following elements:

Budgeting — Spending less is the first step towards saving more. Depending on your goal this may mean anything from less shopping to moving to a new home with a lower rent or mortgage. 

Apps like Money Dashboard can show you where your money is currently going, and the results may surprise you. For tips on how to create budget plans, look here and here.

Debt consolidation — Do you have any debt? In your financial plan you should clearly state how long it will take you to pay off your debt and how much you expect to put aside for it.

Paying down debt is often a priority as debt is costly and the interest payments can eat away at your savings. If debt is overwhelming, there are options to ease the burden such as 0% balance transfer cards or debt consolidation loans. For tips and strategies on how to become debt free, look here.

Investing — Let’s be perfectly clear – putting money into a savings account could be one of the worst ways to reach financial goals because it earns little to no interest, it could even lose value as inflation rates rise. 

If you build a financial plan that includes leaving money in a no-interest or low-interest savings account, you will see that it takes much longer to reach your goal than if your money is earning even 2% interest in an investment somewhere else. And there are many ways you can earn much more than 2% interest. 

Consider investing. Opening a brokerage account, a pension account and building an investment plan is usually fundamental to long-term savings goals. Investing can seem overwhelming if you haven’t done it before but getting started is actually fairly easy. I cannot emphasise this enough. 

Some firms will manage your investments for you for a low fee, and if you want to take more control you’ll find many cheap and free sites designed to help beginner investors start small and learn the basics. You can learn more about investment options and how to get started here and here.

Passive income When a landlord earns rental income from a property they let, they are making a “passive income” off of their real estate investment. When you receive a dividend from a stock or bond you purchased, this is also a form of passive income. Similarly, if you wrote a book or song and receive royalties for its use, this is a passive income. In all these cases you have put in time/effort/money upfront, but are financially rewarded for years or a lifetime afterwards. 

The goal of passive income is to make your money work for you. It pays back your upfront investment bit by bit, and over time can provide you with income to support your lifestyle. This can be very handy with retirement planning. A guide to passive income is here.

Retirement planning — No financial plan is complete without a retirement strategy. Just like paying off debt, putting money aside for your retirement will be crucial over time. 

When you retire you will need a retirement income. There are government schemes and personal plans that help you build up your retirement fund as well as workplace schemes. 

Tax planning — Although it is often forgotten upfront, poor tax planning can come back to haunt you. A tax reduction strategy should be planned early on to minimise future taxes on income and any profits.

The tax basics are easily found on the UK government website, and many blogs and forums can help you plan. But it is often worth speaking to a financial advisor about how these might impact your plans and how you can best navigate them. 

Similarly, you may want to think about an estate plan so that your heirs can avoid the worst of inheritance tax. More on that here.

Emergency fund — Make sure to include building an emergency fund in your tax plan. This is a fund you build over time to cover unexpected expenses such as job loss or emergency repairs to your property. 

Emergency fund money should be set aside in a specially marked and easily accessible account, like a savings account with your bank, and is always ready in case you need it. Having an emergency fund means you won’t have to withdraw any investments or delay your bigger financial goals. For tips on how to build an emergency fund and how much to save, read this.

Step 4: Build in some flexibility

There’s only so much prediction you can do as to what will happen in your life and when, so your financial plan should start with consistent items like your rent, mortgage. But make sure to think about how that will change in the future. 

Financial plans are typically flexible, allowing for any possible life changes or unforeseen events. This could encompass an extended hospital stay, a marriage, the birth of a child, a move, a new job and more.

A number of dedicated savings tools are available in the UK for such events that you may want to add to your plan. For example, if you have kids, you may want to adjust your financial plan to include their financial future through investment tools, like a Junior ISAs. With this, you invest in it throughout their childhood and the money and any profits become available to them tax free at 18. 

And if your goals include home ownership and retirement, the Lifetime ISA may be worth a look – this lets you save up to £4000 per year towards those goals, which the government tops up with an extra £1000, giving you a maximum savings in this account of £5000 each year. 

And be sure to put money aside for bigger one-time expenses like a wedding. Weddings can be very expensive and you may not want to spend your emergency money on this.

Step 5: Implement your plan

Planning is all well and good, but means squat if you don’t act on it. Get the ball rolling by setting up any accounts you need and setting automatic deposits and payments into them. 

Step 6: Adjust your plan as necessary

Your life will likely change and so will your goals. It is important to revise your financial plan over the years especially if there are changes in your life such as marriage and kids, or moving house with a different rent or mortgage. Other less obvious changes can impact your plan as well: if your insurance needs change or risk tolerance changes or an illness arises in the family. Here are some helpful considerations if you’re planning on having a baby or budgeting as a couple, or even planning to adopt a pet

If you do not regularly revise, you may find your once perfect plan no longer works for you.  

Talk to a financial advisor

While you can create a financial plan on your own, you don’t have to. A financial advisor can help you create and stick to a personalised financial plan, and they may be able to show you some handy tricks for savings and investment along the way. 

Some general advice can often be found for free. Advice from a specialised adviser may be more costly, but it shouldn’t break the bank and they should be saving you more than they cost. 

Advisers can also arrange yearly check-ins which may help hold you accountable to your goal. And they can be very helpful when you want to make quick updates to your plan due to a change in your circumstances but aren’t sure how to make the appropriate adjustments.

In the UK, the best way to start your hunt for qualified financial advice may be to start for free with Citizens Advice Bureau. The top sources to check for more personalised long-term help include Money Advice Service, Unbiased and VouchedFor.co.uk.

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All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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