Financial Planning Process: What it is & How it Works

Financial planning is all about developing a savings and investment plan to help you achieve your goals in life. Some parts of that plan-building process can be tedious—like detailing out your income, assets, and liabilities. And some might be emotional—like figuring out what your life goals really are.

To get your financial planning process started, it’s good to know your personal “free cash flow”—the disposable income and other assets you have to work with. You can start with your statements and pay stubs, and tally your income, assets, and debts. Here’s what you need to get started:

• Assets inventory: bank accounts, investments, home or other property, car, etc.
• Retirement accounts: 401(k)s, 403(b)s, Roth or standard IRAs, or even old-fashioned defined employer pensions
• Social Security: Get a personalized projection of your future Social Security benefits at ssa.gov—though this could change depending on changes to your income and the system itself
• Debts: Student, car, home, and personal loans; outstanding credit card balances 

It’s worth noting that online financial planning tools could simplify this process and streamline future updates.

Next comes identifying your expenses—including your best guesses about surprises. As financial planner Liz Weston writes, “If you have a body, a car or home, sooner or later it is going to cost you.”¹ You don’t know what unexpected event will happen, but something probably will.

You can start by assembling credit card and checking account statements, adding up what you’ve spent in each of the past few months. If you use ATMs, drill down to estimate where the withdrawn cash went. Tracking might be easier if you pay more expenses through a credit card instead of bills and coins, since many card issuers automatically categorize expenses for you. Remember expenses you only pay occasionally, like:

• Car, home, and health insurance  
• Estimated income or property taxes
• Gifts for weddings and other events
• Healthcare checkups

Understanding your health insurance deductibles can help you begin to plan for out-of-pocket health expenses. Don’t forget dental or vision costs insurance might not cover.

Homeowners know boilers, refrigerators, and roofs don’t last forever. The Standard Estimated Life Expectancy Chart for Homes published by the International Association of Certified Home Inspectors is a useful planning resource to tell you how much to set aside.² Or, you could keep it simple: some planners suggest budgeting 1% of your home’s value each year for potential repairs.³ If you have a car, AAA encourages you to budget at least $50 per month for maintenance and unexpected repairs—especially if it’s out of warranty.⁴

Finally, include other major expenses you want or need: vacations, college, a home purchase or upgrade, a new car. Consider establishing separate accounts to save for these.

Tally all these potential annual costs, and divide by 12. The result becomes your basic monthly expense budget. Experts recommend you don’t just file away your budget—use it to track your actual performance. Then, do an end-of-year post mortem to see where you succeeded and failed. Refine next year’s budget to reflect what you’ve learned.

All this budgeting shows what it’ll take to just stay even with expenses. But your financial planning process depends on doing better than that. How much to save depends on your goals and situation, but planners often recommend saving at least 10% of your income. Many recommend saving 20%.^5,6

One common recommendation: ramp up savings until it starts to hurt—see how far you can go before you feel the pain. Automate money transfers from checking to savings or other accounts, so the money isn’t available to spend without an extra step—which gives you time for second thoughts.

It’s easier to save when you grab “free money.” Two quintessential examples are retirement savings in tax deferred accounts and employer-matched 401k contributions. They encourage you to start saving for retirement earlier and benefit from compound interest, dividends, or other investment growth.

You can also explore:  

• Employer-offered flexible spending accounts that let you budget for some out-of-pocket healthcare expenses with pre-tax dollars, thus reducing your taxes
• Cash back credit cards—especially if they offer bonus cash back on expenses you often incur, such as supermarket purchases

Simply tallying income and expenses won’t grow your assets: experts say for financial planning to get you all the way to your goals, you’ll probably need to aggressively control spending. Here are some ways:

• Reduce monthly interest payments by cutting debt and refinancing what’s left.
• Consider buying a certified pre-owned car with a warranty and keep it for a decade instead of leasing a new one every three years.⁷
• Research indicates you can save $800 a year by moving just one restaurant dinner a week to your own kitchen.⁸
• Have home-brewed coffee instead of going to coffee shops, and use filtered tap water instead of bottled.   
• If you’re a smoker, you might save thousands if you can quit—not to mention potential savings on future healthcare costs.^9,10
• Remove insurance coverage you may not need, like collision coverage on older cars.   
• Reduce monthly subscriptions you rarely use.    
• Is it finally time to stop that wireline phone or cable connection?
• Comparison-shop on any expenses left on autopilot.
• Consider replacing brand-name products with generics.
• Adjust the thermostat up a few degrees in summer and down in winter.

As you cut costs, perhaps you can increase revenue, too.

• In an employee-friendly job market, you may be able to earn more by upskilling, moving to a higher-paying job, or asking for a raise.
• Is adding a side hustle practical?      
• If you shop around, you might find better returns on your savings and investments without taking risks you’re not comfortable with—for example, by moving money from an ordinary checking account into a high-yield savings account or CD.