What is Financial Planning?

This comprehensive guide will delve into the basics, importance, and key elements of financial planning. It will also provide insight into who needs financial planning and how to get started on your own plan.


Financial planning is a strategic approach to managing your money, which allows you to meet your life goals. Whether you're planning for retirement, buying a house, or setting up a college fund for your children, a well-crafted financial plan is the cornerstone of achieving these objectives.

If you are new to AdvisorFinder

Welcome!  You might want to have a look at the AdvisorFinder blog and read about what a financial planner does.

Definition of a Financial Plan

A financial plan is a comprehensive document that outlines your financial goals and the strategies to achieve them. It serves as a roadmap for your financial journey, detailing your assets, liabilities, income, and spending. The goal of financial planning is to help you see your entire financial picture, so you can make more informed financial decisions, manage your money more effectively, and reach your financial goals faster like buying that house, sending your child to their dream school, or traveling with friends! Some people decide to work with a professional financial planner who is there by there side every step of their financial journey.

What is NOT a financial plan

Before we dive into the 8 main components of a financial plan, it’s important to understand what is not a financial plan! Here are the most common documents or accounts that people think are financial plans, but actually are not:

  • Having a budget: A budget is an important tool for financial planning, but it is not a financial plan in and of itself. A financial plan should include your budget, but it should also include your financial goals, your risk tolerance, and your investment strategy.
  • Having a savings account: Having a savings account is important for building an emergency fund and saving for short-term financial goals. However, a savings account alone is not a financial plan. A financial plan should also include strategies for reaching your long-term financial goals, such as retirement.
  • Having insurance: Insurance is an important part of financial planning, but it is not a financial plan in and of itself. A financial plan should include your insurance coverage, but it should also include other important aspects of your financial life, such as your budget, your savings goals, and your investment strategy.
  • Having a retirement plan: Having a retirement plan is an important part of financial planning, but it is not a financial plan in and of itself. A financial plan should include your retirement plan, but it should also include other important aspects of your financial life, such as your budget, your savings goals, and your investment strategy.
  • Having a 401(k): Having and investing in your 401(k) is great, but it’s not a financial plan! However, it is part of your financial plan.

8 Key Components to a Good Financial Plan

It is important to have all 8 parts of a financial plan because it provides a holistic approach to managing your money and achieving your financial goals. Each part of the plan plays an important role in your overall financial health.

If you don’t account for one of the parts of the plan, you really don’t have a true handle of your financial situation. So, it’s important to have the 8 key components, which are below ⬇️

The 8 main parts to any financial plan include:

Financial goals: What you want to achieve with your money in the short-term (e.g., saving for a down payment on a house) and long-term (e.g., retiring comfortably).

Net worth statement: A snapshot of your financial situation at a specific point in time, calculated by subtracting your liabilities from your assets.

Budget and cash flow planning: The process of creating a plan for your income and expenses to ensure that you are living within your means and saving money towards your financial goals.

Debt management plan: A strategy to pay off debt in a timely and efficient manner, typically by prioritizing high-interest debt and making extra payments.

Retirement plan: A financial plan to save enough money to live comfortably in retirement.

Emergency funds: A savings account set aside to cover unexpected expenses, such as a job loss or medical emergency.

Insurance coverage: A financial product that protects you from financial losses in the event of certain events, such as a car accident or illness.

Estate plan: A plan for how your assets will be distributed after your death.

Who Needs Financial Planning?

You’re probably asking yourself, “do I even need a financial plan?” especially after seeing all those TV commercials talking about free financial planning. And many people think financial planning is only for the wealthy, this couldn't be further from the truth. Whether you’re just starting your career, in the middle of raising a family, or looking forward to retirement, a financial plan is essential for everyone.

So, what are some common stages of life where financial planning can be critical?

Early Adulthood (18-29)

  • Focus: College, First Full-time Job, Debt Management
  • Financial Planning Tasks: Budgeting for college expenses, student loan management, starting a retirement fund, and building credit.

Thirties (30-39)

  • Focus: Homeownership, Family Planning, Career Advancement
  • Financial Planning Tasks: Saving for a down payment on a house, planning for children's education, and increasing retirement savings.

Forties (40-49)

  • Focus: Education Funding, Retirement Planning, Investment
  • Financial Planning Tasks: Funding children’s college education, optimizing investments, and maximizing retirement contributions.

Middle Age (50-59)

  • Focus: Retirement Readiness, Estate Planning
  • Financial Planning Tasks: Assessing retirement readiness, fine-tuning investment portfolios, and starting estate planning.

Early Retirement (60-69)

  • Focus: Retirement Income, Health Care
  • Financial Planning Tasks: Creating a retirement income plan, understanding Medicare, and adjusting investment strategies for income.

Late Retirement (70 and beyond)

  • Focus: Legacy Planning, Health and Well-being
  • Financial Planning Tasks: Finalizing estate plans, ensuring smooth wealth transfer, and planning for potential long-term care needs.

Steps to Create a Financial Plan

Creating a financial plan can be a daunting task, but it doesn't have to be. Here are a few steps to get you started:

  1. Gather your financial information. This includes your income, expenses, assets, and debt.
  2. Set financial goals. What do you want to achieve with your money? Do you want to buy a house, save for retirement, or start a business?
  3. Assess your risk tolerance. How much risk are you comfortable with when it comes to investing?
  4. Develop a financial plan. This should include a budget, a debt repayment plan, an investment plan, and an insurance plan.
  5. Review and update your financial plan regularly. Your financial situation and your financial goals may change over time, so it's important to review and update your financial plan regularly.

If you need help creating a financial plan, you may want to consider working with a financial advisor. A financial advisor can help you assess your financial situation, set financial goals, and develop a financial plan to achieve your goals.

If you need help finding a financial advisor, visit AdvisorFinder to find an advisor who can help you today! With proper planning, you are taking an active role in your financial well-being and setting the stage for a secure future. Don't leave your finances to chance; take control today.

Personal Financial Plan Example (free download)

Download your free 1-page financial plan today and start setting goals toward your financial future. This file is a free downloadable .pdf - provide your email address to get access. ⬇️⬇

Common Mistakes in Financial Planning

The most common mistake in financial planning is not having a plan at all. Many people put off financial planning because they think it's too complicated or because they don't know where to start. However, not having a plan can make it difficult to reach your financial goals.

Here are other common mistakes and how to avoid them:

1. Not Having a Plan at All

Ways to Avoid

  • Start Simple: You don't have to create a comprehensive financial plan in one go. Start with basic budgeting, and gradually move on to setting financial goals and other more complex tasks.
  • Use Templates or Software: Many websites and software applications offer templates or tools to help you create a financial plan easily.
  • Talk to Family and Friends: Sometimes, discussions with family and friends who have gone through the financial planning process can offer valuable insights.

2. Setting Unrealistic Goals

Ways to Avoid

  • Be Conservative: It's better to underestimate your returns and overestimate your expenses.
  • Milestone Goals: Set intermediate goals that are easier to reach. Meeting these goals can help keep you motivated.
  • Regularly Review: Make it a habit to review your goals to ensure they align with your current situation.

3. Not Understanding Your Risk Tolerance

Ways to Avoid

  • Take a Risk Assessment Quiz: Many financial websites offer quizzes that help determine your risk tolerance. Although, these assessments can be misleading!
  • Trial and Error: Start by investing a small amount in various types of assets to understand what you are comfortable with.
  • Consult a Financial Advisor: An advisor can offer a professional assessment of how much risk you can afford to take. AdvisorFinder has hundreds of financial advisors from different backgrounds, firms, and experiences.

4. Not Diversifying Your Investments

Ways to Avoid

  • Educate Yourself: Learn the basics of different asset classes, like stocks, bonds, and real estate.
  • Start Small: You don't need a large amount of money to diversify. Many mutual funds or ETFs offer diversification with a small initial investment.
  • Review and Adjust: As you gain more experience, review your investment mix to ensure it aligns with your financial goals and risk tolerance.

5. Not Reviewing Your Plan Regularly

Ways to Avoid

  • Set a Schedule: Make it a routine to review your plan either semi-annually or annually, or whenever life changes for you..
  • Consult with Your Advisor: If you have an advisor, make reviewing your part of your regular discussions.

6. Not Getting Professional Help

Ways to Avoid

  • Do Your Research: Research and identify a few advisors who specialize in the financial planning aspects that are most relevant to you. We built AdvisorFinder so you can research financial advisors with ease.
  • Find Options of Advisors: Personal recommendations from friends or advisors from AdvisorFinder can be helpful.
  • Start with a Consultation: Many advisors offer a free initial consultation. Use this opportunity to evaluate if their services match your needs.

Reviewing and Updating Your Financial Plan

A financial plan is not a set-it-and-forget-it document. It should be reviewed at least annually or whenever there's a significant change in your financial situation, such as a new job, marriage, or birth of a child.

Financial plans can be very helpful in understanding your financial situation and planning for the life you want to live.


If you have any questions or still need help, we are here to offer you support in your search for a financial advisor. For questions related to this article please ask us via the live chatbot.

For questions related to using AdvisorFinder, please contact our support.

If you are looking for a financial planner, visit the AdvisorFinder marketplace