The Essential Components of a Solid Financial Plan

fcafotodigital / iStock.com

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Staying on top of your finances is a balancing act. You’re trying to maintain a balanced budget while paying bills, managing debt, building an emergency fund, saving for retirement and pursuing other financial goals. But keeping your financial life in order isn’t as challenging when you break things down into a manageable plan, making sure each piece supports your financial objectives.

If you’re unfamiliar with financial planning, this simple guide will introduce you to the essential components of a solid financial plan.

What Is the Purpose of a Financial Plan?

A financial plan is a tool for outlining, organizing and prioritizing the many different aspects of your personal finances and money goals. Along with budgeting, saving and managing debt, it also includes strategies for insurance, taxes, retirement planning and estate planning. A well-crafted financial plan provides direction, much like a road map, so you know what steps to take and in which order to achieve your financial objectives and monitor how you’re progressing.

Components of a Solid Financial Plan

Here’s a breakdown of the essential components to include in a financial plan. Think of these pieces as mini-plans working together to support your financial well-being.

Financial Goals

Your financial plan should include your short- and long-term money goals — anything you are saving for, such as retirement, an emergency fund, a home down payment, paying off debt, a new car, etc. You’ll typically work toward financial goals simultaneously, so prioritization via your financial plan can improve your chances of success and how quickly you achieve your goals.

Emergency Fund

An emergency fund is your financial safety net for unexpected events like the loss of a job, medical emergencies or significant car repairs. Most money experts recommend having enough in an emergency fund to cover three to six months of essential expenses.

You want to monitor your emergency fund as part of your financial plan to ensure you maintain a high enough balance as your financial situation changes. If you use your emergency fund, you must adjust your budget — and possibly other financial goals temporarily — to free up the necessary funds to replenish it.

Budget

A budget is a financial planning tool for tracking your money and prioritizing essential expenses and financial goals. Monitoring how much money you have coming in and where it goes each month can highlight areas where you might cut back and redirect those funds toward your goals. Since you’ll include most other components of your financial plan in your budget, it’s an excellent tool for making sure you’re covering all of your financial bases.

Credit

Your credit report and score are primary factors in determining whether you can borrow money when needed and how much you’ll pay in interest. Auto insurers and landlords may also use your score to determine your auto insurance premiums or rent. Keeping tabs on your credit score and credit history as part of your financial planning can alert you when to take steps to improve your score.

Debt Management Plan

Managing debt is crucial for maintaining financial health. Developing a clear plan for reducing and eventually eliminating debt can free up more of your income for savings, investments and other goals.

As part of your financial plan, include a list of all your debts, from credit cards to loans. Use it to prioritize the best order for paying off your debts and ensure that your budget reflects your debt goals, like focusing on high-interest debt while making minimum payments on other debts.  

Retirement Plan

Planning for retirement ensures that you have enough income to support yourself when you’re no longer working, and it’s never too soon to start saving. Many financial experts recommend contributing 15% of your income to a retirement account, such as a 401(k), IRA or both, especially if you have an employer-sponsored plan that matches contributions.

If you’re decades away from retirement, it’s easy for your retirement plan to become “out of sight, out of mind.” However, including it in your overall financial plan can remind you to periodically assess the progress of your retirement savings to determine when it makes sense to increase your monthly contributions or adjust your investments.

Insurance

Insurance protects your finances from loss due to unexpected situations like an illness, car accident or natural disaster. Your insurance needs will change during your lifetime, so including it in your financial plan is beneficial. Keeping tabs on your insurance coverage will help you avoid inadequate coverage or paying for insurance you no longer need.

Taxes

Almost everyone who earns income is responsible for filing a tax return. Additionally, other components of your financial plan, such as investments and retirement contributions, affect your tax liability. Understanding the basics of tax deductions and credits can help minimize your tax burden and ensure that you don’t underpay or overpay the IRS.

Estate Plan

An estate plan outlines how you want your assets distributed after your death and designates who will make healthcare and financial decisions for you if you become incapacitated. As you get married, have kids and build wealth, you’ll need to review and update your estate plan, so it is beneficial to include it as part of your overall financial plan regardless of your age or life stage. 

Net Worth

Your net worth is the difference between what you own and what you owe — your assets minus your liabilities. Tracking your net worth as part of your financial plan gives you a snapshot of your financial health and helps you see how your financial situation is evolving and whether you’re moving closer to your goals.

Financial Literacy and Financial Planning

If you’re unfamiliar with any of these financial plan components, take time to learn more about them. The more financial knowledge you have, the better you can use your plan to make informed money decisions. As your financial plan gets more complex and your wealth grows, you might want to work with a certified financial planner to ensure that your plan and goals align.

Share This Article: