What Is A Financial Plan? (And How To Create One In 6 Steps)

By Indeed Editorial Team

Published 27 July 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.

Individuals and organisations create financial plans to make quantitative and qualitative decisions about their finances, which help them achieve their professional goals. You may benefit from these plans in various situations, like utilising resources to continue business operations, saving for a down payment for a house, or investing for retirement. Learning more about what these plans are and how to create one can help you make informed financial decisions. In this article, we answer the question "What is a financial plan?", share why it is important, along with its benefits, show you the steps to create one and also briefly explain the process of financial planning.

What Is A Financial Plan?

The answer to the question "What is a financial plan?" is that it is a document that guides you or an organisation to achieve its financial objectives. An effective financial plan aligns with your goals and helps you to make decisions that assist you with your financial aspirations. It is a structured document that includes information about your current finances and financial goals. This document serves as a blueprint that you may follow to make financially informed decisions to ensure progress towards accomplishing your respective financial goals.

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Importance Of A Financial Plan

Creating a financial plan is important because it helps you to set priorities to manage your money better. This document may allow you to build a secure financial future and achieve your financial goals. Here are some common purposes for a financial plan:

  • Debt management

  • Asset planning

  • Investment strategies

  • Emergency savings funds

  • Income and retirement planning

  • Getting married

  • Raising a family

  • Starting a business

  • Funding education

  • Risk management

  • Tax liability reduction

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Benefits Of Creating A Financial Plan

Below are some of the most common benefits of creating a financial plan:

Reduced uncertainty

When you create an effective financial plan, you can ensure that better stability in your financial decisions. Following such a plan ensures you take the steps that help you grow financially. With this assessment, it becomes easier for you to determine if your current spending and investment habits complement your goals. Regular review of your financial plan helps you to make necessary adjustments to your financial habits to achieve your desired results.

Short-term targets for long-term goals

A financial plan usually includes your long-term goals. An efficient way to achieve them is to convert these into short-term targets. This action helps you to evaluate your performance periodically and determine if your growth strategies are resulting in positive outcomes. When you analyse the long-term goals in your financial plan, you can monitor your progress better.

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Improved results

A financial plan offers you a coherent plan of action, which you may use to assess your areas of improvement and deliver anticipated results. This plan serves as a guide and method to evaluate your actions and performance that contribute to your financial well-being. This is the reason individuals and companies hire financial advisors, as these professionals help them create a growth plan.

Staying motivated

Financial plans have goals, along with the expected periods, in which an individual or an organisation intends to achieve them. When you look at your goals and assess your performance, you are better able to match your efforts with your growth plan. This can motivate you to do better if your performance is yet to reach the expected levels or to accomplish your goals within the set timelines.

Setting expectations

A financial plan for a business enables the organisation to set expectations for the employees. With targets and goals that are there in the financial plan, the organisation conveys to teams and departments what the senior members of the organisation plan to achieve. This guides staff members and allows them to evaluate their strengths and areas of improvement, helping them to raise their performance levels accordingly.

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Components Of A Financial Plan

Here are some important components of the financial plan to keep in mind when designing the document:

Net worth

Understanding the current financial status of yourself or your organisation helps you to create an efficient financial plan. This evaluation includes the assessment of both the assets and liabilities. A comparison between the assets and liabilities allows you to determine the net worth, which you may use as the first step to creating a financial plan.

Current cash flow and operating costs

Cash flow is the amount of money coming in and going out of a company and is important to determine the success of varied business operations. To create a strong financial plan, it is necessary to consider both revenue and expenses. Reviewing the current sources of income and expenses allows you to evaluate the organisation's financial position effectively.

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Future cash flow and liabilities

Assessing and monitoring your future cash flow in your financial plan allows you to take informed financial decisions that match your financial objectives. It allows you to manage risk in your investments, as you are better able to evaluate the expected returns against potential losses that you may cover with the future cash flow. Your assessment of an organisation's liabilities also helps you to make prudent investments.

Financial targets

Another essential component of an effective financial plan is the targets that you set to achieve your goals. A good financial plan includes periodic financial targets with specific timelines for achieving those. Different departments of an organisation, like operations, sales, marketing and human resources, put the requisite efforts to achieve set financial targets.

Expenditures, savings and investments

When you create a financial plan, you detail your current finances and future goals. This helps you to better control your expenditures, manage savings and maximise investments. It also helps you to optimise your spending habits and expenditures and use your assets to create other channels of income.

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How To Create A Financial Plan

Below are some steps you may follow to create a financial plan:

1. Set goals

The motive for creating a financial plan is to recognise your long-term goals and take actions to achieve them. Write these goals clearly in the document. A detailed financial plan ensures that you have included all the important financial goals, as this helps you to create reliable plans and take effective steps to achieve periodic targets. You may also assess your performance regularly to review your progress.

2. Assess finances

The analysis of your financial position is an important consideration when designing a financial plan. Fully understand your earnings and take into consideration your debts. A financial assessment gives you an overview of your assets, monthly expense and other major liabilities. While preparing this assessment, consider comparing your income with different financial components, like liabilities or net assets.

3. List priorities

You are more responsible in your spending habits when you note your priorities, as you are better able to understand the factors that affect your financial growth. Your priorities guide your expenditures and enable you to direct your resources towards the activities that truly enhance your finances. Your priorities may help you optimise your efforts towards achieving your short-term and long-term goals. Consider prioritising value creation over satisfying the urge for instant gratification.

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4. Make a spending and savings plan

Once you have determined your current financial position and future financial goals, develop a plan that guides your expenditures and savings. This plan includes a budget, which outlines the amount of money you expect to earn and the amount you expect to save, spend or invest. Employ different financial tactics while developing this plan, as these techniques help you to make beneficial decisions.

5. Prepare for emergencies

Preparing for emergencies means having a contingency plan. Sometimes, it is impossible to predict future circumstances and their outcomes. Adding a contingency plan to your financial plan allows you to build an emergency fund. Having an emergency fund for unforeseen expenses, like medical bills, helps you to manage your finances without affecting your financial plan.

6. Seek professional guidance

If you are not familiar with finance, you may seek the guidance of professional financial planners. These planners use their money management expertise to help you create a strong financial plan. They are adept at leveraging different financial growth opportunities, like mutual funds, real estate investment and debt management.

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Process Of Financial Planning

Below is a process of effective financial planning:

  • Understand your requirements. Know your current circumstances, financial goals and any potential impediments to formulate strategies to help you solve different financial challenges.

  • Develop a financial plan. Depending on your goals and current finances, you may focus on a single objective, like planning your retirement or buying a house. This plan may require a complex strategy and requisite adjustments based on your income if you have multiple goals.

  • Implement the plan. Apply the financial solutions and follow the strategies in the plan to help you achieve your objectives. Measure the efficacy of your plan by evaluating your performance against set targets.


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