How to Write a Financial Plan

Every individual, family, or business needs a financial plan.  Below is a comprehensive guide on how to write a financial plan tailored to you and your needs.  Execute these steps and build a roadmap for your journey towards financial independence.

What is a financial plan?

A financial plan is a roadmap of sorts.  It is a written statement, created for an individual, family, or business that helps define how your money will be spent.  It further helps define what will be prioritized from a spending perspective.  Often these financial plans are created when establishing a working relationship with a financial advisor.  It is important to someone helping you manage your finances.  They need an idea of what your goals are and how you prioritize them.

Creating a financial plan requires a long-term mentality

Without a concrete plan, money has a way of getting spent without an endgame in mind.  Even for individuals who have built an appropriate working budget, if we do not have a long-term, goal-oriented mindset (something to strive towards) it is easy to deviate from our path towards financial freedom.  It is of immense import to write down both our short and long-term goals.  It is also helpful to list these goals based on priority.

Financial plan objectives 

What I plan to do with this article is to help you build a financial plan of your own.  I will do so by using my actual financial plan as an example.  I house this document electronically.  It is shared between my wife and I and we review it once or twice a year to make sure we are on track.  It has helped alleviate our financial anxiety, provide a sense of direction, and keep us motivated. 

Follow these steps and create a map that will place you on the fast track towards financial freedom!

What does my financial plan look like?

Before we do a deep dive, I wanted to provide my personal financial plan as an example.  Here is The Motivated M.D.’s family financial plan.  It was originally written in 2019, but I have updated it annually.  Here it is:

Step 1: Create a realistic budget

Before we can even begin to address the long-term goals listed, we need to build a working budget.  A working budget is a spreadsheet tracking every single expense you make monthly.  The purpose is to delineate what your required expenses are and understand where your money is going. 

For my wife and I, we use Google Sheets.  We have chosen this for ease of access, and it is user friendly.  Google Sheets allows us to pull up our budget from any device, at any location, and keep things up-to-date (Microsoft Excel is another great tool).  I make a point to update my budget nightly before bed.  This allows me to see where my money is going each-and-every day. 

Know where your money is going

On a larger scale, this allows me to see how much I need in total monthly (this will become important in the next section regarding emergency funds).  It is helpful to know what my average expenses are on a month-to-month basis. 

Categories for your monthly budget

When building your budget, make sure to be honest with your expenses, and make a category for literally everything.  Some categories to include are:

• Rent/mortgage payments
• Home maintenance costs (upgrades, fixes, furniture, etc.)
• Utilities (power, water, gas)
• Phone bill
• Entertainment (cable, internet, stream services)
• Groceries
• Coffee (Specifically going out for coffee i.e. Starbucks, Dunkin Donuts, etc.)
• Restaurants/Eating out
• Gasoline
• Childcare (Daycare, Nanny, Au-Pair, etc.)
• Insurance premiums (life, disability, umbrella, etc.)
• Student loan payments
• Automobile insurance/expenses (oil change, new tires, upgrades, maintenance, etc)
• Pet (food, vet bills, kenneling/boarding fees, etc.)
• Exercise (gym membership fees, Peloton membership fees, workout class fees, new home equipment, etc.)
• Healthcare (medical bills, co-pays, medication costs, etc.)
• Beauty (haircuts, mani/pedi, etc.)
• Clothing (all clothing shopping)
• Travel (plane tickets, cab fares, Ubers/Lyfts, etc.)
• Miscellaneous (everything else)

This is just a start, but these are some examples of categories that should be included in your budget.  Create an all-encompassing budget that helps you understand where all your money is going on a month-to-month basis.  This will help you begin to tackle your larger financial goals. 

Step 2: Build an emergency fund

The first step, and arguably the most important is to establish an emergency fund.  I have written a prior post on why an emergency fund should be your first financial goal.  That post is a more exhaustive foray into the emergency fund.  However, please give it a read if you have not started building an emergency fund yet.

Guard against disaster

The purpose of an emergency fund is to insure against financial catastrophe.  As I detail in my previous post, we need to be prepared for the unexpected.  Needing a new roof, a new air conditioner, a new car, sudden unemployment…all of these scenarios are unfortunate realities.  To set ourselves up for success we need to build a fund of money that is easily accessible to us at a moment’s notice. 

As I mention in my financial plan, my expectations of this emergency fund are based on living expenses (see why a budget is so important).  I currently keep approximately 3 months living expenses in my emergency fund.  Following the COVID pandemic and spikes in unemployment, some considered 3 months that too small and feel 6 months is more reasonable.  Whatever helps you sleep at night.  The goal is an amount that can cover you for months (emphasis on the pleural here) should the unexpected happen. 

Start your financial plan by prioritizing an emergency fund, that way you have a strategy should financial disaster strike on your road towards financial independence.

Step 3: Get the employer match for your retirement contributions

As you can see, the next priority, for me at least, is contributing enough towards my retirement accounts to get the employer match.  You should never leave money on the table.  If your employer is willing to match your retirement contribution (to an extent), you should do it.  Every time. 

Now, unfortunately not everyone will have this option.  If that is the case, then you should be trying to save at least 20% in retirement…or more based on your financial/retirement goals.  If you have the fiscal capabilities, you should seriously consider maxing out your retirement accounts. 

I have also previously written a post about the Top 5 Mistakes New Attendings Make.  Here I detail why not maxing out your retirement can be a big mistake.  Do yourself a favor, have this money taken out of your paycheck before it hits your pocket.  You won’t miss it and you will be making an investment in yourself and your future.  Arguably the most important investment you can make. 

Step 4: Back-door Roth IRA (optional)

Now, even though this is an important priority in my financial plan, I do think this is optional.  I say that because saving an extra $6,000-$12,000 annually will mostly be driven by your financial footing and your goals. 

If your goal is to expedite financial independence as fast as possible, then this is less optional.  If you are a high-income earner and are already maxing out your employer retirement accounts, then a Back-door Roth IRA is likely your next best means of saving retirement money long term.  However, if your budget is tight and you are prioritizing paying down debt, then there is an argument to postpone this step.

Again think long-term here…

A lot of what can be argued concerns your return on investment (ROI).  During a strong run in the market, if you are putting your Roth IRA in index funds, then you are likely returning greater than 4% on your investments.  If you are paying off debt with less than 4% interest rate, then it is understandable to weigh the risks and benefits of deferring some debt payment towards a backdoor Roth IRA each year.  This may be something you reevaluate each year as you review your financial plan. 

For me, however, I am incredibly debt averse.  I want my medical education debt gone ASAP.  For this reason, even if I would get a higher ROI with a Back-door Roth IRA, I still would rather put that $6,000-$12,000 towards debt elimination each year instead.  That is a personal choice. 

Remember… paying down debt is a guaranteed ROI no matter what the market is doing.  Just sayin’…

Step 5: Pay off high interest debt (greater than 6%)

This one is important to me…and should be important to you too.  High interest debt, for the sake of this post, is any debt with an interest rate greater than 6%.  This number is obviously negotiable but for me, any interest rate on debt greater than 6% has got to go…immediately. 

You know what falls into this category…credit card debt.  Here is the part where I provide my public service announcement. 

Do not carry any credit card debt! 

Credit cards serve a great purpose.  They allow us to purchase things quickly without having to carry cash.  They also allow us to buy now, and pay later.  This is great…but can become a slippery slope.  For the sake of good personal finance, learn to operate under this mantra… ‘never carry credit card debt.’ 

Say it with me…  ‘Never carry credit card debt.’

If you have accumulated credit card debt, this is the portion of your financial plan where you should focus on eliminating it.  Other high interest debts that come to mind include high interest private loans, and student loans. 

High interest debt is very, very costly

When I was graduating medical school, my student loans were federal and their interest rates ranged from 6-8%.  In total I had approximately $360,000 of medical education debt with an average interest rate of 7.2%.  At this interest rate, my loans were accumulating approximately $26,000 annually…in interest alone!  It was for this reason (and many more) that we chose to refinance our student loans to a lower rate!

High interest debt can drastically hinder your ability to achieve financial independence.  For this reason, it should be a high priority on your financial plan.  Get rid of it as fast as possible.

Step 6: Fund a Health Savings Account (HSA) (optional)

HSAs are beneficial for multiple reasons.  For the sake of a financial plan, they can be another outlet for investing.  However, they can also help offset healthcare costs.  An HSA has many uses that I will not spend too much time on.  The White Coat Investor has already written a really great article detailing the reasons to prioritize an HSA if you are a high-income professional.  The article is titled ‘7 Reasons an HSA Should Be Your Favorite Investing Account,’ and you can find it using the link provided. 

Suffice to say, an HSA is another avenue for investing, saving, and paying healthcare related costs.  These become exponentially more important as you grow older (and grow your family as well).  Consider this while you are building your financial plan.  It may be worth setting aside $3,500 (individual) or $7,000 (family) each year, especially if you have any chronic medical issues. 

Step 7: Pay off low interest debt (less than 6%)

Look…you can break down your prioritization of debt elimination anyway you wish.  However, for simplicity purposes, I choose to have a ‘high interest’ and a ‘low interest’ category.  High interest should be prioritized first as high interest exponentially hinders your ability to eliminate debt. 

Nowadays, most home mortgages and student loans fall into my ‘low interest’ category.  Despite my categorization of this section as ‘lower interest’ debt, that should not denote a laissez-faire mentality.  This is still debt that should be paid off.  However, you generally are able to suffer the blow of lower interest accumulation if it is less than 6% (preferably less than 4%). 

Continue to refinance your debt

For me, I often look for opportunities to continues to refinance these debts.  You should really consider refinancing high interest debts, but you should continue to look for lower refinance rates if debt is less than 6% interest too.  I wrote a prior article on why we chose to refinance our student loans.  In that article I detail how we capitalized on historically low interests’ rates during the COVID pandemic and refinanced a second time.  This is an example of how keeping your hand on the pulse of the market can save you tens-of-thousands of dollars. 

High interest debt should unequivocally take priority, but lower interest debt elimination should be paid off in a timely fashion.  If the majority of you debt falls here, still give it the priority it deserves. 

Step 8: Save for large purchases

Here is where some of the fun beings.  We all have financial goals.  Inevitably some of those goals will include large ticket purchases (i.e. a house or new car).  Here is your opportunity to make these important expenses a priority. 

As you can see, this still falls lower on the priority list.  Making sure you have your other financial priorities in place first is vital to finding success and reducing anxiety during a home buying/car buying process.  Having an emergency fund built as well as an elimination plan for your high interest debts should take priority over larger purchases. 

Be honest and transparent about your expenses

As a father and husband, I too understand the need to expand your house size as your life grows.  However, in keeping with the motto ‘live below your means,’ you need to think rationally about what you can afford.  Consider your needs when it comes to large purchases.  Are you being realistic?  How much will this affect higher financial priorities?  If you are considering reaching into your emergency fund for these purchases…then you are not ready for this expense. 

Short-term investing funds (I use Vanguard) can be great vehicles to save for these expenses.  Make sure you are adherent to a budget, contribute to your retirement, pay off higher interest debt, and then consider the feasibility of your larger item purchases.  If you know what they are, list them here.  Make a realistic goal for how much needs to be saved and when you intend to make this purchase. 

Step 9: Save the rest…and invest!

I will summarize the remaining portions of my financial plan to say this.  After you have a well written plan for all the steps listed above, what remains…save!  I use ‘save’ here to encompass a multitude of things.  First, I would push for you to make sure you are saving at least 20% of your monthly income.  This can be in the form of retirement savings.  However, for higher income individuals who may need other vehicles for savings, here is your opportunity to invest.

Obviously, your retirement accounts will be invested for the long-term.  After you have maxed out retirement accounts, after your backdoor Roth IRA conversion (or Roth IRA contribution based on your income) …even after your HSA; invest what remains. 

Often you will no longer have many tax-advantaged options.  Here is the time in your financial plan to consider real estate investing.  Here is your opportunity to build a larger investment portfolio.  This may even be your time to discuss diversifying your portfolio further.  Whatever you choose to do, here is your chance to explore and have fun.  If you made it this far you earned the right to experiment a little. 

Step 10: Review regularly

Last, but certainly not least is to maintain what you have created.  Life will always keep you ‘on your toes’.  There will be market volatility.  There will be disaster.  Your ability to ‘stay the course’ will dictate your success expediting financial independence. 

Hopefully, as you grow in your profession, your income, and your understanding of finances, you will be able to tailor this list to fit your needs.  My hope is that, with time, you will be able to mark many of these steps as ‘complete.’  Doing so, you will be further solidifying your financial foothold as well as freeing up income to be diverted elsewhere…to other goals!

I try and pull out my financial plan once or twice a year.  It can be incredibly motivating to remind myself of my long-term goals.  More inspiring is seeing what I have completed, or the progress I have made!

Take home points

Building a financial plan can be a daunting task, but it doesn’t have to be.  Creating a document that helps make your financial goals visible is an important exercise.  Here I have done my best to outline steps, in order of priority, that should be considered when creating your own financial plan.  Of course, everyone’s financial situation is different.  Take what I have provided above and augment it to fit your needs. 

I hope you have found this article helpful!  Now go out and chase down financial freedom! As always…

Stay motivated!

The Motivated M.D.

Additional resources on how to write a financial plan:

Financial Planning for Doctors. You Need an Investing Plan! (White Coat Investor)

The White Coat Investor’s Financial Bootcamp (White Coat Investor’s Dr. Jim Dahle)

Create Your Own Comprehensive Financial Plan (Physician on FIRE)

Ten Steps to Creating a Solid Financial Plan for Yourself (clever girl finance)

What is a Financial Plan and How to Make One (The Motley Fool)

A Financial Plan for Busy People (Smart Money MD)

Create Your Financial Plan: Without the Long Hours or Sleepless Nights (Ryan Inman, MBA and Taylor Inman M.D.)

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