How to make a financial plan

Creating a financial plan can help give you a roadmap for your future, so you can feel more confident about reaching your goals.

It can help ease money worries by showing you what's going in and out of your accounts each month. Setting a budget can help you build up your savings or pay down debts that may be causing you stress or affecting your credit rating. You may also feel more prepared to handle any unexpected costs, like car repairs or a broken boiler.

Creating a financial plan can help give you a roadmap for your future, so you can feel more confident about reaching your goals.

It can help ease money worries by showing you what's going in and out of your accounts each month. Setting a budget can help you build up your savings or pay down debts that may be causing you stress or affecting your credit rating. You may also feel more prepared to handle any unexpected costs, like car repairs or a broken boiler.

It’s always a good time to get a grip on your finances, but it’s extra important when you’re faced with big life events or sudden changes in your personal circumstances like those below.

Planning for your retirement

Whether you're getting close to retirement age or just starting out in your career, it's worth thinking about how much money you'd need to live comfortably when you leave your job. Check out our pension calculator to work out how much you might get at retirement.

You can then put a pension plan in place with investment goals to help reach that figure. Generally, the earlier you start saving the better. When you’re young the monthly amount you need to pay into your pension for a certain level of income is much smaller than if you’re closer to retirement. 

Getting married or starting a family

Your big day can be an expensive affair. After a proposal, engagement time can vary, so it's a good idea to put a savings plan in place as soon as possible. If you're planning on having children, a financial plan could help you budget for extra expenses like childcare, life insurance or moving to a bigger home.

Changing jobs or careers

Following a new career or switching to a part-time role could see you bringing home less money. A financial plan will help adjust your budget so you can still meet your savings goals or avoid getting into debt.

Unexpected events

You could find yourself dealing with an unexpected death of your partner, serious illness or divorce. And, this could lead to money concerns like loss of earnings, care costs or legal fees. Having a financial plan in place could help you prepare for times when things aren't quite as rosy. If you're worried about losing your income, you could also consider income protection insurance.

Putting a plan in place doesn’t have to be daunting. Just break it down into a few simple steps. Covering these off can give you the information you need to start putting a plan in place.

1. Decide on your goals

What are your short-term and long-term financial goals? Short-term these could be clearing the balance of a credit card, building a deposit for a new home or hitting a savings amount. Long-term it could be something like putting together savings for your retirement by contributing to a pension, or paying off your mortgage so you can use the money that would normally go into your monthly repayments in other ways.

2. Create a budget

Setting a budget can help make sure you have more money coming in than you're spending every month. There are apps you can download to help track your daily spending. Or you can use a spreadsheet and enter everything you’re spending in a month.  The steps below can help.

What’s going in and out?

Checking your income is easy. That’s anything you earn regularly from things like your job, pension, side hustles, investments or savings interest.

Now it’s time to have a good look at your expenses. These can be categorised as 'essentials' and 'discretionary'. The essentials are the ones you need to pay every month without much flexibility: like rent or mortgage costs, car payments and utility bills.

Your discretionary spending covers expenses you have more choice over. It includes things like your food shopping, clothes, subscriptions, eating out and holidays. By looking through these you’ll see where you could possibly make savings. For example, do you have subscriptions that you’ve forgotten about or barely use? Or do you have regular treats that are surprisingly expensive over the month, like a daily coffee habit? Could you cut back on clothes shopping or find cheaper deals and discount codes online?

Deal with your debt

When you’ve done that, take a look at any debt you have on things like credit and store cards or personal loans (also called unsecured debt). As the interest on any debt is generally much higher than you’ll get on your savings, you should try and pay down any debt first. If you’re in a large amount of debt there are ways to make it more manageable – like bringing it into a smaller monthly payment over a longer time.  You can get advice about debt from the Citizens Advice Bureau.

Sweep your bank account

Once you have a budget for your essential and discretionary spending plus any debt repayments, you can move any money above that into your savings. You can ask your bank to set this up automatically when you get paid. Having to dip into your savings can help you stay disciplined and avoid any impulse buys.

Use the 50/30/20 rule

Another way to create a budget is to follow the 50/30/20 rule. Doing this you divide your income into three parts. 50% goes on essential spending like bills. 20% is put aside in your savings, investments and pension for the future. The remaining 30% you can spend on yourself with things like gym memberships, entertainment and holidays. 

Be ready for emergencies

You should have roughly three months’ living expenses put aside as an emergency fund. Then you’ll have something to fall back on if you lose your job or face large, unexpected bills. Another thing to consider is income protection insurance. This will cover some of your lost earnings if you have a long term illness or an accident that stops you working.

3. Put together a savings or investment plan

You can create a savings plan to help reach your financial goals over a space of weeks, months or years.

Short-term savings

You’ll want a savings account that gives you easy access to your money, so you can withdraw it quickly if needed.

It’s a good idea to compare options and look for the best interest rate available. You might also consider a cash ISA, which lets you keep more of your interest because it’s tax-free

Longer-term goals

For your bigger goals you can look at an investment plan. This can mean putting money into things like stocks, bonds or exchange-traded funds. They can outperform cash savings over a longer time (a minimum of five years is recommended). But they also come with varying amounts of risk. The more adventurous your investments, the bigger possibility of making large profits – or losing what you’ve put in. The value of investments may go down as well as up and you may not get back the amount you invest. You can check how risky you’d like your investments to be by taking a quick quiz using our risk tool.

One way you can save for the long term is in an investment account. Or with something more tax-efficient like a stocks and shares ISA. It also covers money you’d like to pay into your pension.

4. Keep things updated

If you're looking for more information, check out our guide to investment strategies. Once you have a financial plan in place, you’ll need to review it regularly to make sure you’re hitting your targets – or when things in your life change.