What is Financial Planning and How Does it Work?

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 one way to get started:

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. You don’t know what unexpected event will happen, but something probably will.¹
 
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 If you use ATMs, drill down to estimate where the withdrawn cash went.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.² Remember expenses you only pay occasionally, like:

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 can be a useful planning resource to tell you how much to set aside.³ Or, you could keep it simple: Some planners suggest budgeting between 1% and 4% of your home’s value each year for potential repairs.^4,5
 
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.² 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.⁶ Many recommend saving 20%.^7,8
 
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.^9,10

It’s easier to save when you grab “free money.” Two quintessential examples are retirement savings in tax deferred accounts and employer-matched 401(k) contributions.^11,12 They encourage you to start saving for retirement earlier and benefit from compound interest, dividends, or other investment growth.¹³

You can also explore:

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 control spending.¹⁶
Here are some ways:

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