What Is Financial Planning?

Wall Street Journal

21-07-2025

What is financial planning?
Financial planning is the process of reviewing your current financial situation and identifying actions you can take to reach your financial goals.
'Financial planning creates structure and strategy as you go through your financial life,' says Chelsea Ransom-Cooper, CFP, chief financial planner and cofounder of Zenith Wealth Partners. 'It's a holistic view and roadmap that includes savings, investing, insurance, estate planning and taxes, while creating a clear path forward.'
With financial planning, you identify how much you should save and invest over time to reach milestones you set for yourself. Your financial plan can also help you plan for taxes and protect your assets through insurance. Finally, financial planning often includes estate planning elements to ensure that your legacy continues.
Why is financial planning important?
Providing a direction for your money and outlining financial steps you can take to reach your goals can keep you on track for retirement and other major life milestones.
'Financial planning is a little different from wealth management or a financial advisor,' says Lissa Lumutenga, CFP, the founder of financial education website Wealth for Women of Color. 'The planning portion of it really takes a person's goals and matches them with what they're doing with their money.'
When you have a financial plan, you have steps to follow to reach goals at different stages of your life, whether you're hoping to buy a home, save for your children's college, go on vacation or retire comfortably.
Key components of a financial plan
When putting together a financial plan, Lumutenga points out that you need to start with your goals.
'Some people go into the planning process with one goal in mind, such as buying a house or sending kids to school, and they need a roadmap to achieve it,' she says. 'In other cases, people want a whole plan that can take them from now until they die, reaching multiple goals along the way.'
No matter your needs, Lumutenga suggests you start by figuring out what you want out of life and connecting those goals and values to how you use money. Once you know your objectives, it's possible to put together a plan.
Ransom-Cooper agrees that setting goals is the first step to creating a financial plan. Once that's done, though, she says the next component is understanding cash flow.
'Look at where you're at right now,' she recommends. 'Does your current income and spending match your goals? If it doesn't align, financial planning can help you identify those discrepancies and change your approach.'
Other components of your financial plan should include:
Actions to take: Once you know where your money stands today and where you hope to end up later, you can take action. This might include paying down debt, setting aside money each month for a home down payment or investing for retirement each month.
Once you know where your money stands today and where you hope to end up later, you can take action. This might include paying down debt, setting aside money each month for a home down payment or investing for retirement each month. Timelines: Map out timelines for certain goals to help you prioritize. For example, if you have high-interest debt, your financial plan might call for you to put more toward debt reduction and a little less for retirement investing. Later, after your debt is paid off, you might shift the money you paid for that goal toward saving for a house and boosting your retirement contributions.
Map out timelines for certain goals to help you prioritize. For example, if you have high-interest debt, your financial plan might call for you to put more toward debt reduction and a little less for retirement investing. Later, after your debt is paid off, you might shift the money you paid for that goal toward saving for a house and boosting your retirement contributions. Asset protection: Don't forget about protecting your assets. Ransom-Cooper points out that the right insurance coverage for your home, car, health and life are all part of making sure that you don't have to raid your retirement or other savings accounts to handle unexpected costs.
Don't forget about protecting your assets. Ransom-Cooper points out that the right insurance coverage for your home, car, health and life are all part of making sure that you don't have to raid your retirement or other savings accounts to handle unexpected costs. Legacy planning: Finally, your financial plan should also include what happens after you pass. You should plan for how you want your money spent and where it should go. This might include getting help from professionals to create a will, healthcare proxy or set up a trust.
When to make a financial plan
Lumutenga suggests that you should make a financial plan once you start thinking about what you want your life to look like.
'Financial planning is about what you want to do in your life as a human,' she says. 'And then it's about figuring out how to get there. Money is key to achieving most life milestones, so financial planning should be done as soon as possible.'
However, you might also want mini financial plans to help you with specific objectives. Lumutenga points out that, depending on your situation, you might need to make a separate plan for debt reduction, reaching financial independence, buying a home or any goals in between.
'The important thing is to remember that these mini plans should fit into your larger financial picture and bigger plan,' Lumutenga says.
Ransom-Cooper recommends starting out with your own goals and planning, but then considering a professional planner if you need guidance.
'You can use tools, like Monarch Money and other budgeting apps, to help you understand your money and make a plan,' Ransom-Cooper says. 'But you need to educate yourself about investing, saving and other parts of your plan to be effective, even if it's as simple as choosing a robo advisor for your retirement account.'
Common financial planning mistakes to avoid
Ransom-Cooper recommends making sure you understand your goals before looking for information.
'There's a lot of general information out there,' she notes. 'Not all of it is relevant to your situation. Don't make the mistake of thinking everything applies to you. Make sure what you integrate aligns with your goals.'
Don't forget to take inventory of everything you have before you start making a plan, Ransom-Cooper adds.
'Too many people start the planning process without first understanding how much money they have in all their accounts and how they handle income and spending,' she says. 'Whether you're doing your own planning or working with a professional, be thorough so you know where you stand and can make a more realistic plan.'
Lumutenga points out that another mistake can be not seeking professional help from a financial advisor or planner when creating a financial plan.
'Many people turn to financial planners because they want guidance or don't know where to start,' she says. 'There are planners who will charge you to develop a financial plan that you can follow on your own. Don't assume it's a waste of money to get help.'
Finally, both Lumutenga and Ransom-Cooper recommend adjusting your plan as you move through life. Your goals and circumstances might change, and that might mean tweaking your financial plan. Don't assume that your plan will remain exactly the same throughout your life. Instead, you should revisit your plan regularly and make adjustments that reflect changes to your situation or priorities.
FAQ
How often should I update my financial plan?
Consider reviewing and updating your financial plan at least once a year to account for changes in your situation and potential adjustments to your goals.
Do I need a financial advisor to create a financial plan?
No, you can create a financial plan on your own. However, a financial advisor or financial planner might provide valuable guidance as you go through the process.
What tools can help with financial planning?
Some of the best budgeting apps include useful planning tools that can help you create a budget that fits into your overall financial plan. You might also be able to receive guidance from a professional.
How does financial planning differ from budgeting?
Budgeting focuses more on day-to-day financial choices and management. Financial planning looks at the bigger picture and helps you figure out how to reach large goals and life milestones. A budget or spending plan is often a part of financial planning.
Can financial planning help with debt management?
Yes, creating a financial plan that includes debt reduction can help you better manage your debt and pay it down. Including debt management in your financial plan can also help you keep working toward other financial goals while paying down your debt.