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Creating a Financial Plan in 3 Steps

Like any good road map that gets you where you’re going, a financial plan is designed to keep you on the path toward your goals—from college and retirement to everything in between.

Financial planning is helpful because it encourages people to do a better job of budgeting, which in turn helps control spending and saving. Those who plan are also better able to spot potential problems and address them in a timely manner. In fact, Schwab’s 2018 Modern Wealth Index survey of 1,000 Americans revealed that those who were following a financial plan ranked highest in accumulating wealth, managing debt and achieving multiple savings goals.

Unfortunately, the same survey found that those folks are squarely in the minority: Only one in four respondents had a formal financial plan. In other words, we like to dream big when it comes to our financial goals, but many of us don’t root those dreams in reality by creating a plausible step-by-step strategy for getting there.

The good news is there are proven tactics for training ourselves to overcome inertia and choose a more predictable path forward.

Tactic 1: Identify your goals

You can’t create an effective plan until you know what you’re trying to achieve, so start by listing each of your goals.

The vaguer your goals, the harder it is to measure your progress toward them, so be as specific as possible. For instance, if one of your goals is to “live comfortably in retirement,” push yourself to define what that means in practical terms. Perhaps you want to pay off your mortgage before you stop working to eliminate your housing payment, or budget for potentially expensive hobbies like golf and skiing.

Think, too, about things like quality health care and even the possibility of working in retirement to supplement your savings (see “The Ins and Outs of Working in Retirement”). Defining clear, actionable goals—and the means to achieve them—can be challenging, so consider enlisting a financial planner to help you think through your vision. He or she can help fine-tune your objectives, determine how to approach your goals in practical terms and even act as a reality check for your vision should you need it.

Tactic 2: Break it up

As with any complex undertaking, it pays to break the task into clear, discrete pieces. Computer programmers, for example, use this strategy when troubleshooting software. They don’t tackle every programming problem at once but rather resolve each individual bug before bringing all the code back together to form a working whole.

It can be helpful to approach financial planning in much the same way:

  • First, rank your financial goals and attach a price tag to each.
  • Next, set a deadline for achieving each goal.
  • Finally, determine how much money you need to set aside per month to reach each goal.

If, after running these numbers, you decide your goals feel unattainable, take a step back and reassess your assumptions. Perhaps that second home needs to be smaller or in a more affordable location than originally envisioned. Or maybe you need to rethink your spending to free up funds for a goal down the road. The point is not to eliminate today’s comforts in order to achieve tomorrow’s dreams, but rather to find a balance that satisfies both near- and long-term needs.

While there are as many priorities, price tags and target dates as there are individual investors, a host of online tools can help you run the numbers, weigh competing priorities and determine the best course of action for you. At, for example, you can find calculators for retirement sand college savings, various worksheets and questionnaires and even sign up for workshops at Schwab branches near you.

Tactic 3: Base it in reality

Guestimates are part and parcel of any planning process—but some are more realistic than others. One way to combat overly optimistic expectations is to pay attention to base rates, or prior probabilities. For example, you can look to the past for historical growth rates in everything from inflation and the S&P 500® Index to specific expenses such as health care and higher education.

That said, base rates are just a starting point, and past performance is never a guarantee of future results. Between 1970 and 2018, for example, U.S. large-cap stocks returned an average 10.1% annually. But many analysts, including those at Charles Schwab Investment Advisory, are projecting much lower returns during the next decade, due to a combination of historically low inflation and interest rates, and relatively high equity valuations.1 If such a scenario comes to pass, predicating your future on past performance could leave you well short of your goals.

It can also help to rerun your projections using a more pessimistic number. For example, if your plan is based on a 7% average annual rate of return over 30 years, how would 6% or 6.5% change your results? If achieving even a slightly lower rate of return would upend your goals, you might consider saving more each month, if possible, to make up for the projected shortfall.

You’re not alone

Dreams are important. They give us goals to go after. But realizing them often involves an honest reckoning of what’s possible and what we’re willing to sacrifice to get there.

Whatever your goals, be sure to root them in a plan that is considered and practical—and be sure to revisit it regularly to ensure your assumptions still hold true.

1Veerapan Perianan, “Why Market Returns May Be Lower and Global Diversification More Important in the Future,”, 02/19/2019.

What You Can Do Next

Important Disclosures:

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.   

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.


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