Financial planning is the process of organizing your money around your financial goals. It helps you manage income, spending, savings, investments, taxes, insurance, and retirement. A well-structured plan provides a practical framework for making informed financial decisions over time.
In particular, you're only a few years from retirement, and your financial plan may be on your mind more than ever. That's where financial planning provides clarity. It helps you evaluate your progress and identify where adjustments may be needed. If you think you started planning too late, don't assume you've missed your opportunity. Instead, it gives you a practical process for making thoughtful decisions as you approach and enter retirement.
More importantly, financial planning goes beyond choosing investments. It brings together your income, savings, spending, taxes, insurance, and retirement strategy into a coordinated plan. As a result, your financial decisions stay aligned with your long-term goals.
If you're still unsure whether your financial plan is on the right track, choosing the right advisor can be difficult. To help you get started, take our free quiz and get matched with up to three fiduciary advisors. Then, compare their experience, services, and fees to find the right fit for your financial goals.
What Financial Planning Actually Includes
A financial plan includes budgeting, cash flow management, debt reduction, saving strategies, investment planning, retirement planning, tax planning, insurance, estate planning, and goal-based financial planning.
Here's how a comprehensive financial plan is structured:
- Cash flow: Every financial plan starts with understanding your cash flow. It evaluates how much you earn, what you spend, and how much you can consistently save or use to pay down debt. Without that foundation, it's difficult to make confident financial decisions.
- Retirement income: Once you have a clear understanding of your cash flow, you can focus on how you'll replace your paycheck after you stop working. This includes income from Social Security, pensions, and withdrawals from retirement accounts. Together, these sources help create a reliable income stream throughout retirement.
- Tax planning: Your withdrawal strategy can affect your tax bill in retirement. For that reason, tax planning also considers when and how you take money from different account types. A thoughtful approach can help reduce unnecessary taxes and preserve your retirement savings.
- Insurance and risk management: Wealth accumulation is only part of the process. Your financial plan should also protect your financial security by including life, disability, health, and long-term care insurance. These policies can reduce the financial impact of unexpected events.
- Estate planning: Your financial plan should also include a strategy for passing on your assets. This includes wills, beneficiary designations, and account ownership. This helps ensure your assets are transferred according to your wishes while reducing stress for your family.
Although each area serves a different purpose, they work best as part of one coordinated financial plan. Together, they help keep your financial plan focused on your long-term goals.
The Financial Planning Process, Step by Step
A structured approach provides a clear path for organizing your financial decisions around your goals. Each stage serves a specific purpose, helping you assess your current position, establish priorities, and refine your strategy as your financial circumstances change over time.
Here are the six core steps of a well-structured financial plan:
Step 1: Define Your Goals
Start by identifying exactly what you want to achieve. Broad goals like "retire comfortably" are too vague to guide major financial decisions. Instead, define your target retirement age, expected monthly spending, and significant future expenses, including paying off your home, helping family members, or relocating. In turn, you can evaluate every financial decision against those goals.
Step 2: Gather Your Financial Information
Bring all of your financial information together into a single summary. This includes your account balances, debts, income, expenses, Social Security estimates, insurance policies, and current savings rate. These details give you a clear view of your overall financial position before moving to the next step.
Step 3: Evaluate Your Current Position
Compare your current financial position with the goals you've established. Review your savings, projected retirement income, investment strategy, taxes, and insurance coverage to identify any gaps. Those findings highlight which areas need attention first and where adjustments will make the most difference.
Step 4: Develop Your Strategy
Build your strategy around the findings from your evaluation. This may include increasing your savings, adjusting your investment allocation, planning your Social Security claiming strategy, reducing debt, or updating your insurance coverage. Each recommendation should align with your financial goals, reflect your priorities, and fit your timeline.
Step 5: Put the Strategy Into Action
A financial plan only works when the recommendations are put into action. This may include opening the necessary accounts, updating contribution amounts, reviewing beneficiaries, purchasing insurance where appropriate, and completing any remaining action items. To keep the process on track, break larger tasks into practical steps.
Step 6: Monitor and Refine Your Plan
Review your plan regularly and revisit it after major life events. Because markets, tax laws, and personal circumstances change over time, periodic reviews help keep your strategy aligned with your priorities. They also give you opportunities to make adjustments when needed.
Only one of these six steps focuses on investments. The other five help you set priorities, organize your finances, make informed decisions, and follow through consistently. Together, they create a financial plan that can adapt as your circumstances change.
A Simple Illustration of Closing a Gap
This hypothetical scenario shows how the financial planning process works in practice. While every financial situation is different, it highlights how the six steps work together to close a gap in retirement planning.
Suppose you're 58 and plan to retire at 65. After reviewing your finances, you find that your savings are expected to cover most of your monthly retirement spending. However, you still face a shortfall during the early years of retirement. This gap becomes clear during the evaluation step. From there, you can develop a strategy to close it. That might include increasing your savings over the next few years, delaying Social Security to receive a larger benefit, and adjusting your withdrawal strategy to help manage taxes. Individually, each change may have a modest impact. Together, they can help close the gap.
This example provides a practical look at the financial planning process. More importantly, it shows that long-term success rarely depends on a single major decision. Instead, it depends on a series of thoughtful decisions that work together and are reviewed regularly as your financial situation changes.
What "Financial Planning Services" Usually Cover
Financial planning services typically cover investment management, retirement planning, tax planning, insurance, estate planning, and cash flow management. However, the services you get depend on the advisor's expertise, business model, and level of support.
If you decide to work with a financial planner, it's important to understand how their services are offered. Some advisors focus primarily on investment management, while others provide comprehensive planning that includes cash flow, retirement, taxes, insurance, and estate planning. In addition, many offer ongoing planning relationships instead of a one-time financial plan.
More importantly, confirm whether the advisor acts as a fiduciary. Under that standard, they are legally required to act in your best interest. You can also verify the advisor's background and any disclosures through the SEC's Investment Adviser Public Disclosure (IAPD) database before making your final decision.
DIY vs. Working With a Planner
You can create your own financial plan if your finances are relatively simple and you're comfortable managing them yourself. However, as retirement gets closer or financial decisions become more complex, working with a financial planner can provide additional guidance and confidence.
Here are some situations where professional guidance may be worth considering:
- Retirement is approaching: You're about 10 years away and want to coordinate your retirement income, tax, and withdrawal strategies.
- You have multiple account types: You have a 401(k), IRA, Roth IRA, taxable accounts, or a pension, and aren't sure which assets to draw from first.
- A major financial event is ahead: A business sale, large inheritance, early retirement offer, or health event could require significant changes to your financial plan.
- You're struggling to move forward: Putting off your financial plan because it feels difficult to manage is another reason to consider professional guidance.
In each of these situations, the value of working with a financial planner goes beyond technical expertise. They can also help you stay accountable, coordinate important financial decisions, and evaluate your strategy before making major commitments.
If you'd like to explore these topics further, our retirement and tax articles provide more detailed guidance. They explain key concepts and planning strategies with practical insights and examples.
How to Know Your Situation Needs Professional Help
You may benefit from professional help if your retirement income strategy feels difficult to manage or you're unsure how your financial plan fits together. An experienced financial planner can help coordinate these decisions and identify potential issues before they turn into costly mistakes.
For example, consider how you'll turn your savings into a reliable monthly retirement income. Your strategy should support your income for 25 or 30 years while accounting for taxes and the possibility of an early market downturn. If you don't have a clear plan, professional guidance may be worth considering. However, that isn't a sign you've done anything wrong. Instead, it suggests that professional support could help you develop a more effective retirement income strategy.
Additionally, cost is an important consideration because advisors use different fee structures. Some charge a percentage of assets, while others charge flat or hourly fees. Before making a decision, ask exactly how an advisor is compensated and make sure the explanation is clear. After all, fee transparency is a reasonable expectation.
It Is Not Too Late, and the Math Can Work
If you're close to retirement, it isn't too late to build a solid financial plan. In fact, being closer to retirement can provide a more reliable foundation for financial planning. At this stage, you know your income, your spending, and your expected retirement timeline. As a result, your financial plan can be based on actual numbers rather than assumptions.
At the same time, concerns about running out of money are both common and understandable. However, financial planning isn't about predicting the future with certainty. Instead, it's about building a strategy you can review, adjust, and refine over time. Because that strategy is built on your actual numbers and designed to account for potential challenges, it can help you stay on track as your financial needs change.
Not Sure If Your Financial Plan Is on Track? Take Our Free Advisor Quiz to Get Matched
Many people approaching retirement wonder whether they're making the right financial decisions. In particular, uncertainty about retirement income, taxes, investment withdrawals, and long-term planning can make it difficult to know if your plan is on the right track. Without professional guidance, that uncertainty can also increase the risk of missing opportunities or taking actions that could affect your financial security over time.
If you don't want to choose a financial advisor based on guesswork, take our free quiz. It matches you with up to three fiduciary advisors based on your financial needs. You'll be able to review their experience, services, and fees before choosing the advisor that's right for you.
FAQs
What Happens If You Don't Have a Financial Plan?
Without a financial plan, it's easier to make financial decisions that don't align with your long-term goals. You may struggle to prioritize spending, prepare for unexpected expenses, or stay on track for major milestones such as retirement or education. A structured financial plan helps organize your finances, clarify your priorities, and guide more informed financial decisions over time.
Can You Create a Financial Plan Without a Financial Advisor?
Yes. You can create your own financial plan if your finances are relatively simple and you're comfortable managing them. However, if your financial situation becomes more complex or retirement is approaching, professional guidance can help coordinate your financial decisions.
How Long Does It Take to Create a Financial Plan?
The time required depends on the complexity of your finances and how quickly you gather your financial information. A simple financial plan may take a few weeks, while a more comprehensive plan typically takes longer to develop and refine.
When Should You Start Financial Planning?
The best time to start financial planning is as soon as you begin earning, saving, or investing. Starting earlier gives you more time to build savings, prepare for retirement, and adjust your strategy as your financial circumstances change.
