A financial plan is a structured approach to managing one’s financial life. It is not merely a spreadsheet or a collection of investment products—it is a comprehensive framework that organizes income, expenses, savings, risk management, taxes, and long-term goals into a cohesive, actionable strategy. When constructed properly, a financial plan enhances decision-making, reduces uncertainty, and improves financial outcomes (Nissenbaum, Raasch, & Ratner, 2004).

Yet if financial planning is so powerful, why do so few follow through?

The answer often lies not in math, but in mindset. Research shows that even financially literate individuals struggle to plan for the future when they lack self-control, future orientation, or supportive social norms (Tomar, Baker, Kumar, & Hoffmann, 2021). A well-designed plan must account not just for assets and liabilities—but for human behavior. That’s why the best financial plans are often paired with an accredited fiduciary advisor, who offers a simple, visual, and tailored approach to help you make decisions.

At its core, a financial plan helps individuals clarify what matters most and align their resources accordingly. Whether navigating early adulthood, managing a growing family, or preparing for retirement, individuals benefit from a written plan that reflects financial priorities and personal values. In my work as a financial advisor and educator, I have seen that the most significant breakthroughs often come not from more money, but from more clarity.

the purpose of a financial plan

The purpose of a financial plan is twofold: to organize current financial resources and to make informed decisions about the future. This may sound straightforward, but the complexity of modern financial life often makes it difficult for individuals to answer even basic questions such as, "Can I afford this?" or "Am I on track?" A financial plan provides a framework to answer these questions thoughtfully and methodically.

More than a static document, a financial plan is a living tool. It should evolve alongside an individual's life stages, economic conditions, and shifting priorities. According to Nissenbaum, Raasch, and Ratner (2004), regularly reviewed and updated plans yield significantly better financial outcomes over time.

It starts with defining your goals

Goal-setting is the anchor of any financial plan. Without clear goals, even the most sophisticated strategies can lose direction. Goals give context to numbers and bring meaning to saving and investing. They can be short-term (saving for a vacation), mid-term (purchasing a home), or long-term (funding retirement or creating a legacy).

One of the most effective frameworks for goal setting is the SMART method—specific, Measurable, Achievable, Relevant, and Time-bound. Goals should inspire and direct behavior. In my experience, clients who articulate their goals clearly are far more likely to follow through on their plans.

components of a comprehensive plan

A thorough financial plan includes several interdependent elements, each of which contributes to the individual's or household's overall financial health. According to Ernst & Young’s Personal Financial Planning Guide (Nissenbaum et al., 2004), the five essential components are:

1. Cash Flow and Budgeting
   Understanding income and expenses is the foundation of any financial plan. A clear cash flow picture allows individuals to make informed decisions about saving, spending, and giving. Budgeting is not about restriction; it is about intentionality. When individuals budget effectively, they begin to control their money rather than letting money control them.

2. Risk Management and Insurance
   Life is unpredictable. A good financial plan includes appropriate insurance coverage to protect against major disruptions—including illness, disability, death, or property loss. While not exciting, insurance serves as a financial firewall. Emergency savings also fall into this category, with most professionals recommending a reserve of 3 to 6 months of essential expenses.

3. Tax Planning
   Tax efficiency is a core pillar of financial planning. Smart planning reduces unnecessary tax burdens and aligns financial decisions with long-term goals. This includes strategic use of tax-advantaged accounts, such as IRAs and 401(k)s, as well as decisions around capital gains, charitable giving, and income timing.

4. Investment Planning
   Investments must serve the plan—not the other way around. A financial plan defines the purpose, time horizon, and risk tolerance for each investment goal. This helps investors avoid emotional decisions and focus on long-term strategies. Diversification, asset allocation, and periodic rebalancing are all part of this disciplined approach.

5. Retirement and Estate Planning
   A financial plan must consider the future. This includes projecting future income needs, optimizing Social Security benefits, managing required minimum distributions (RMDs), and crafting an estate plan that reflects one’s legacy goals. Planning ahead ensures that wealth is transferred intentionally and tax-efficiently.

Building a financial plan: a step-by-step process

While the components of a financial plan are well-established, the process of creating one can be deeply personal. Below is a common approach used by both individuals and professionals:

1. Establish Goals and Priorities
   Start by asking what matters most. What do you want your money to do for you? What are your non-negotiables? Apply the SMART method in making them more attainable. Writing these goals down is a powerful first step.

2. Gather Data
   Collect all relevant financial information, including income, expenses, debts, assets, insurance policies, and legal documents. The accuracy of your plan depends on the quality of your data.

3. Analyze and Diagnose
   Identify gaps, inefficiencies, or risks. This includes assessing debt levels, reviewing savings rates, stress-testing for emergencies, and evaluating investment alignment.

4. Develop Strategies
   Design strategies that address the specific needs uncovered in your analysis. This might include refinancing high-interest debt, increasing retirement contributions, or adjusting your investment allocation.

5. Implement the Plan
   Execution is where many plans fall apart. Automate good behavior when possible—automated savings, investment contributions, and bill payments reduce reliance on willpower.

6. Monitor and Review
   Plans should be reviewed at least annually, and anytime there is a significant life event (e.g., marriage, new job, birth of a child). Adjustments should be proactive, not reactive.

Behavioral considerations in financial planning

Financial planning is as much about psychology as it is about math. Behavioral finance has shown that individuals often act irrationally with money due to cognitive biases, emotional reactions, and social pressures. A written financial plan serves as a behavioral anchor—a tool that reduces the likelihood of impulsive decisions.

Recent research reinforces the role of psychology in retirement financial planning. Tomar, Baker, Kumar, and Hoffmann (2021) identify several psychological determinants that significantly impact whether individuals engage in effective planning. These include future time perspective (the ability to think long-term), self-control, planning attitudes, and financial knowledge. In other words, it is not enough to know what to do; one must also be inclined to do it. Social norms and perceived behavioral control also play an influential role, suggesting that a supportive environment enhances financial planning behavior.

Research has shown that investors with written plans are more likely to stay invested during market volatility, rebalance their portfolios regularly, and avoid the pitfalls of market timing. A plan brings structure, and structure supports discipline.

common mistakes and how to avoid them

Even well-intentioned individuals fall prey to common planning mistakes. These include:

• Neglecting emergency savings

• Underestimating expenses in retirement

• Taking on too much investment risk

• Failing to review insurance coverage

• Overlooking tax implications of financial decisions

• Not discussing financial goals with a spouse or partner

Avoiding these mistakes begins with awareness and regularly revisiting the plan. A good advisor doesn’t just build a plan—they help you adapt it.

the value of working with an advisor

While many individuals can build a basic plan on their own, the guidance of a fiduciary financial advisor can add significant value. Advisors provide objectivity, technical expertise, and behavioral coaching. At Human Investing, we believe our highest calling is to serve as guides—helping clients navigate complexity with wisdom and clarity.

Importantly, not all financial advisors are held to the same standard. A fiduciary advisor is legally obligated to act in your best interest. Yet even among those who use the fiduciary label, fewer than five percent operate without receiving any form of commission (Fisher, 2025). That’s why the true fiduciary standard—free from all commissions—should be the baseline, not the exception.

turn intention into action

A financial plan is not just a document—it’s a decision. It reflects your willingness to take control of your future instead of drifting into it. The most successful outcomes aren’t reserved for the wealthiest or the most analytical—they’re earned by those who start, stay consistent, and make adjustments along the way.

If you’ve made it this far, you already care about your financial future. The next step is simple, but powerful: act. Whether it’s writing down your goals, scheduling time to review your budget, or meeting with a fiduciary advisor, do one thing today that your future self will thank you for.

Your money needs a plan. And now, you have the framework to build one that works.

References
Fisher, P. (2025, February 14). Only 4.92% of advisors are true fiduciaries. Is yours? Human Investing. https://www.humaninvesting.com/450-journal/only-5-percent-of-advisors-are-true-fiduciaries

Nissenbaum, M., Raasch, B. J., & Ratner, C. L. (2004). Ernst & Young's personal financial planning guide. John Wiley & Sons.

Tomar, S., Baker, H. K., Kumar, S., & Hoffmann, A. O. (2021). Psychological determinants of retirement financial planning behavior. Journal of Business Research, 133, 432–449.

---

Disclosures: Human Investing is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. This article is provided for informational and educational purposes only and should not be construed as personalized investment advice. The information contained herein is believed to be accurate as of the publication date but is subject to change without notice. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal. Readers should consult with a qualified financial advisor to assess their individual circumstances before making any financial decisions.

---

Related Articles

Starting From Square One (Or $20 in my bank account)

Picture this: You’ve just graduated college and received your first '“big-kid” job. You have about $20 in your name. Although it is a new concept, with a new job comes new responsibility, and you decide you should probably be more mindful about your spending (and saving) habits. But how do you start?

I had the unique privilege of beginning my career at Human Investing shortly after I graduated. As you can imagine, working at a financial advisory firm meant that before I started contributing to the company’s 401(k) plan, I was given a beginner’s course in investing.

AN ENDLESS MAZE OF DECISIONS

Like many people who join corporate America, I opted into its retirement plan because it was a free benefit I received. I knew saving for retirement was important, and the investment options available to me would benefit my long-term financial plan.

When I received my first paycheck, I learned the importance of contributing to my 401(k), but in a way that was compatible with my cash flow.

A common rule of thumb is to contribute 10-15% of your gross salary to your retirement account if you can (this includes the employer contribution/match). After learning this, I was eager to invest 15% into my 401(k). However, I did not consider other key factors that made up a healthy and holistic financial plan, like funding an emergency savings account or considering other short-term goals (ex: continuing education or buying a home). Although I was so eager to contribute as much as I could to my retirement plan, I ended up contributing much less than expected after assessing my current financial situation.

Unpacking where to start

I share this story because, like most people new to the financial scene, I wanted to manage my money well, and I figured investing all of my excess income would equate to successful money management. What I didn’t do was take a step back and assess my entire financial landscape. Thankfully, Human Investing was there to provide some guidance. That’s why we made this visual. We call it “The Pyramid to Financial Wellness.” Use the visual as a map; start at the foundation and then work your way up. Before continuing, please know that we all have unique financial situations, and not every block may apply to your situation.

LEVEL 1: Build a Foundation

Build a Budget to understand your monthly cash flow: If you’re looking to invest dollars from your paycheck, you need to know how much bandwidth you have at the end of each month. If you don’t currently have any excess dollars, try to get creative. Look at your current spending habits and see if you need to minimize spending in a certain area. Don’t be afraid to rely on savings apps for help. We generally recommend Mint or Digit.

Pay off High-Interest Debt: Focus on higher interest, non-deductible loans first, such as credit card loans. Consider refinancing your loans or reconsolidating your debt to make payments more manageable.

Contribute to your Company-Sponsored Retirement Account: If applicable, contribute enough to receive the employer match. For example, if your employer matches up to 6% of your contribution, try to meet the 6% savings rate.

Build an emergency fund: If something unpredictable happens, make sure you’re prepared. Click here to learn how to build an emergency savings fund.

Level 2: Plant Long-term Seeds

Open a Retirement Account for future savings: Based on your age and tax bracket, start contributing to either an IRA or a Roth IRA. Click here to see if a Roth IRA account is the right account for you.

Continue paying down student loans: If student loan payments are on your horizon, don’t delay! Try to pay off what you can now. Consider refinancing your loans in order to make regular payments more manageable.

Save for a Home: If this is a goal of yours, start saving. Depending on your timeline, try to save in either a High Yield Savings Account (Short-term goal) or a Roth IRA (Longer-term goal).

Level 3: Hone your Monthly Budget

Open up a 529 account for a child or grandchild: If you are hoping or planning to fund your child’s college education, utilizing a 529 account can protect your purchasing power. The same rules that apply when flying apply here too. Put your mask on before taking care of others.

Pay down your mortgage: Target additional mortgage payments if you are able. Consider refinancing your mortgage to possibly find greater savings with lower interest rates.

Save for Short-term and Mid-term goals: Short-term goals include immediate expenses, paying down debt, having an emergency savings fund, etc. Mid-term goals are big purchases that you plan to make before you retire. This includes saving for a house or a car. Avoid borrowing and start planning to save. If you’ve exhausted other savings vehicles (like your 401K and Roth IRA), consider opening a brokerage account.

If you have any questions about how investing can fit into your financial plan, contact us! We are here for you and are excited to cheer you on as you learn to manage your money well.

---

---

Related Articles

The financial world can be a confusing place filled with jargon, technicalities, and little to no guarantees. Research suggests that those who are financially literate tend to have better financial outcomes. Financially literacy is typically measured by asking some core financial concept questions. Let’s walk through some financial literacy questions from the National Financial Capability Study, and explain the why behind the answer. Feel free to guess and score yourself at the end:

Question 1 - interest:

Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

A. Less than $102
B. Exactly $102
C. More than $102

Answer: C, more than $102.

Explanation: The key part here is “After 5 years”. We are told the interest rate is 2% per year. That means every year, 2% gets added to our principal balance. To break it down year by year:

The interest earned increases each year. This is due to compound interest: the original principal ($100) grows, and the interest you earned previously (in year 2, $2) both earn interest. At the end of 5 years, we have $110.41 which is C More than $102.

Why this matters: Interest affects you when you save money to grow it, or borrow money to pay it back later. Knowing how interest can work for or against you is critical for financial success.

Question 2 - inflation:

Imagine the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A. Less than today
B. Exactly the same
C. More than today

Answer: A, Less Than today.

Explanation: They key here is the inflation rate is higher than the savings rate. Inflation is growing at 2%, meaning the price of goods (rent, utilities, food, cars, etc.) is going up by 2% each year. The cost of $100 of goods today will be $102 in 1 year. Your interest on savings is growing at 1% a year. That means in 1 year you will have $101 to spend on goods. In 1 year, you will have $101 to buy $102 worth of goods. Your ability to buy is A less than today.

Why this matters: Even if you keep your money “safe” in the bank or under the mattress, inflation is going to make that money less and less valuable. Thus why investing is so important. Investing can be scary due to downturns in the market, but ultimately the odds are in your favor to grow your money over time. Unless you can save significant portions of your income, growing your savings faster than inflation is critical for being able to retire.

Question 3 - Risk Diversification:

Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A. True
B. False

Answer: B, False.

Explanation: To answer this question correctly, it is important to understand both risk and that a mutual fund owns a variety of companies. They keyword here is safer. Financial markets have two types of risk: market risk and company-specific risk (aka systematic risk and nonsystematic risk respectively).

Market risk refers to risk all companies face. Examples of market risk include a change to the US tax code, a global pandemic, or shifts in consumer tastes like a shift from fast food to organic freshly prepared food. You will always face market risk because every company is exposed to these risks. Company-specific risk refers to risks unique to one company. Examples of company-specific risk include sudden changes in management, a press release about product defects, mass recalls, or a superior/cheaper product released by a rival company. Because you own a variety of companies in a stock mutual fund, you diversify away (i.e. reduce your risk) if any single, specific company has a terrible event.

Why this matters: Don’t invest all your money in one company. Especially if you work for that company, and your compensation is based on the company doing well. By spreading out your investments, you reduce your risk of catastrophic returns, and smooth out the ride so you can sleep at night.

Question 4 - interest of the life of a loan:

A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the interest paid over the life of the loan will be less

A. True
B. False

Answer: A, True.

Explanation: Because of the shorter life of the mortgage loan, you pay less interest. Remember in question 1, interest compounds every year. When you borrow money, that compounding works against you. Therefore, the faster you are paying off debt, the less time for interest to compound and grow the total amount you have to payoff. The monthly payments are typically larger, but the overall interest paid is less.

To illustrate with numbers, let’s look at the difference between a 15 year & 30 year mortgage, assuming a 5% interest rate for both:

Why this matters: You can see from the example how much money is saved by opting for a 15 year mortgage. Can you afford that extra monthly payment? That’s worth investigating, but you’ll never explore your choices if you don’t know what they are. You can also usually get a lower interest rate for shorter term debts, which saves you even more money. Anytime you borrow any amount of money, the faster you can pay it off, the less you will pay total. Even if you don’t get a lower rate on the debt, if you pay off the principal sooner, that means there’s less interest compounding against you. When looking to borrow money, evaluate what term (length of time) works best for you and your budget. You want to minimize your cost of borrowing, but you also want to give yourself enough flexibility that you’re confident you will make all those payments on time, regardless of what life brings.

Question 5 - Bond prices and interest:

If interest rates rise, what will typically happen to bond prices?

A. They will fall
B. They will stay the same
C. They will rise

Answer: A, they will fall.

Explanation: This is the question most people get wrong. A bond is government or corporate debt. The government or company pays you coupons (interest payments) based on the issued interest rate. At the end of the bond’s life, it matures, and you get the principal back.

Imagine Disney issues bonds paying 5% interest, the current market rate. You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures. If interest rates rise next year (say to 8%), and Disney issues new bonds, they will issue them at the new interest rate. Your neighbor Laura decides to buy $1,000, and she gets an $80 coupon from Mickey Mouse every year. Because interest rates rose, the value of your bond paying $50/month goes down in value, less than $1,000, because the $1,000 could buy Laura’s bond paying $80/month. The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000.

Why this matters: Interest rates change over time. This causes bond prices to change. Bonds will still be less volatile than equities, but they do also fluctuate in value. Don’t panic when you see interest rates rise, and your bond prices going down in value. This is both normal and expected. Rising interest rates are also usually a healthy sign for the economy, and so your equities will generally be rising in value to help offset the loss in value of your bonds. The reverse is also true here. Falling interest rates tend to indicate a less healthy economy (think about when rates have dropped significantly & quickly; the 07-08 financial crisis and COVID-19) which means falling stock prices. Because they don’t tend to move together (uncorrelated), bonds and stocks are an excellent pair for smoothing out your investment returns.

How did you do?

If you got some questions wrong, I hope you understand the why behind the answers and how to utilize this knowledge to better your financial life. If you have questions about financial vocabulary or systems you’d like me to blog about, please email me at andrewg@humaninvesting.com. If want to talk to an advisor, please email us at hi@humaninvesting.com.

---

---

Related Articles