4 Steps to Building a Solid Financial Foundation

Building a good financial plan is one of the best ways to eliminate financial stress by getting yourself on a path to reach your financial goals.

Couple lying on a bed with their kids

Whether your goal is to travel the world with your family, buy your dream home or retire comfortably, a financial plan can help you make it happen. A good plan starts with fully understanding your goals. But not all plans are alike. A good financial plan will use a range of  financial options to help you reach your goals, even if something doesn’t go as planned. Seeing how the tools in your plan can reinforce each other to help you minimize taxes and weather potential financial risks can give you confidence that you’re on track to what you want in life, freeing you to more confidently spend on what’s important to you today. 

In our four-step guide to financial planning, we’ll show you some of the key steps that are included in a good financial plan along with money-management tips that you can use today. 

Section 01 Step 1: Understand your cash flow

A good financial plan starts with a snapshot of where you are. We’ll help you look at income coming in every month and expenses going out. Ideally you want a positive cash flow—more money coming in than going out. First, let’s focus on what’s going out. 

How should I allocate my budget?

As you look through your spending, put each expense into one of three categories.

  • Fixed Expenses: These are the necessities, such as housing, child care, health care, food and transportation. They’ll typically claim the largest chunk of your monthly income.

  • Financial Security and Goal Contributions: Once you’ve covered the essentials for today, it’s important to make room in your budget for the future. This could include things like saving for a home, college and retirement. It could also include goals like protecting your income and building an emergency fund

  • Discretionary Expenses: This is everyone’s favorite part of the budget because it includes fun splurges like restaurants, the latest gadgets and vacations. When you start paying close attention to your cash flow, you might be surprised by the amount of money filling this bucket. Discretionary expenses are the easiest to trim, but don’t overdo it. The whole point of planning is to have enough money to enjoy today, too. When we say that financial planning is about tomorrow, sometimes we literally mean tomorrow. 

Striking the right balance: How much should I spend on each category?


Goal contributions


Fixed expenses


Discretionary expenses

Now that you have a snapshot of where you are, it’s time to prioritize. Hopefully you found a few places where you can save money right away, such as an old subscription you no longer need (but are still paying for). Identify the things that are more important to you. Maybe your travel budget is untouchable. Perhaps it’s important to send your kids to college debt-free. Those are expenses to prioritize. You’ll probably find some other things that don’t mean as much. Those are things that you can say no to in order to say yes to the expenses that matter most. 

Money management is a lifelong process. It’s a good idea to revisit your cash flow on a regular basis and especially when you have a big life event, such as a new job, promotion, marriage or new baby.

Section 02 Step 2: Set future goals and save and invest to reach them

Now it’s time to think big and bold … like, lifetime bucket-list bold.  

Retiring by age 60, scaling Mt. Everest, buying a boat, starting your own business, bidding on that Victorian house at the end of the cul-de-sac—whatever you want to do, there’s a pathway to achieving it. Sure, your biggest dreams may come with a big price tag, but that’s why a key pillar in financial planning involves investing your money to grow it over time.  

A financial advisor can help you think through those big goals and what they might cost. Then he or she can recommend the best ways to save and invest for each goal. Because there are so many options, an advisor can help you pick the best ones for you—and show you how they fit into your financial plan.

Connecting with an expert to reach your goals? Good Plan. 

Our financial advisors are here to design a financial plan that will get you to your next goal. And the next. 

Find a financial advisor

Here are some common financial tools that an advisor may recommend for saving and investing:

Tools for saving

  • Savings Account

    How it works: Offered through a bank, a savings account is a safe place to keep your money and may pay a small amount of interest. It’s a good place to put money that you could need to access quickly.

    What it’s for: Growing short- to mid-term savings, building an emergency fund

  • High-Yield Savings Account

    How it works: Typically offered through an online bank, these savings accounts work exactly like the one above except that they pay a higher rate of interest on your money. The only drawback is that these banks may not have a physical location that you can easily get to.

    What it’s for: Growing short- to mid-term savings, building an emergency fund

  • Money Market Bank Account

    How it works: These work like a checking account but often also pay a small amount of interest. This is a good place to put money that you can’t afford to lose and may need to access quickly.

    What it’s for: Everyday expenses, growing short- to mid-term savings, building an emergency fund

  • Certificate of Deposit (CD)

    How it works: A bank or credit union pays a pre-determined amount of interest over a set time span, such as six months or a year. There is usually a penalty for early withdrawal. CDs are a safe place to keep money that you can’t lose but that you won’t need immediately.

    What it’s for: Growing short- to mid-term savings

Tools for long-term investing

  • 401(k)

    How it works: This is a type of tax-advantaged retirement account that’s offered through employers. You can use a 401(k) to invest in a range of financial products like stocks, bonds or funds. Money goes in without being taxed and grows tax-deferred, but you will owe taxes when you withdraw funds in retirement. A 403(b) or 457 account operates in a similar way. While there are some options to access funds in these accounts, in general, if you take money out prior to age 59½, you will owe a penalty on top of taxes.

    What it’s for: Saving for retirement

  • Roth 401(k)

    How it works: A Roth 401(k) is the same as a 401(k) except that the taxes work a little differently. With a Roth 401(k), contributions are taxed. But then the money is usually never taxed again.

    What it’s for: Saving for retirement

  • Individual Retirement Account (IRA)

    How it works: An IRA works in a similar manner to a 401(k) in that contributions are tax deductible and funds grow without being taxed, but you will owe tax when you withdraw funds in retirement. Unlike a 401(k), which is offered through an employer, anyone can open an IRA. As with a 401(k), there may be a penalty if you withdraw funds prior to age 59½.

    What it’s for: Saving for retirement

  • Roth IRA

    How it works: A Roth IRA is the same as an IRA except that the money you contribute is taxed. It’s then usually never taxed again. With a Roth IRA, you’ll be able to access contributions should you need them prior to age 59½. (You would owe taxes and a penalty if you withdraw earnings.)

    What it’s for: Saving for retirement

  • 529 Plan

    How it works: A 529 plan is a tax-advantaged way to save for education expenses. You may get a tax break when you contribute money, and you’ll usually never owe tax on money taken out of a 529 plan as long as it’s used for qualified education expenses.

    What it’s for: Saving for education

  • Stock

    How it works: Investing in stock is common. Stock is a partial ownership stake in a company. When you own stock, you may share in the company’s profits, and the price of the stock may go up if the value of the company increases over time. Conversely, if the value of the company falls, your stock may lose value. The values of stocks that trade on the open market tend to fluctuate frequently.

    What it’s for: Long-term goals

  • Bond

    How it works: A bond is a loan that you make to a government or company. In exchange for the loan, you get interest payments (known as coupons) for a set period. When that time is over, you receive the amount invested back in full. Bonds can be a less risky way to grow money over the long term. However, they may not grow as much as stocks. Bonds are also not without risk entirely. It’s possible that a company or government could default, failing to make payments.

    What it’s for: Mid- to long-term goals

  • Mutual Fund

    How it works: When you buy into a mutual fund, your money is allocated to a basket of investments. Mutual funds can be set up in different ways with different investment objectives. Some may attempt to follow market indexes, while others may invest for growth. You can put money into mutual funds that invest in international or domestic companies. Mutual funds allow you to diversify your investments with a single purchase.

    What it’s for: Mid- to long-term goals, saving for retirement, saving for college

  • Index Fund

    How it works: An index fund is also a basket of investments; however, these are designed to mirror a specific index, such as the S&P 500.

    What it’s for: Long-term goals, saving for retirement, saving for college

  • Exchange-traded Fund (ETF)

    How it works: An ETF is like a mutual fund or an index fund but with one key difference. With a mutual or index fund, you can only buy and sell once per day at the fund’s closing price for the day. With an ETF, the price moves during the day, and you can buy and sell throughout the day like you can with stocks or bonds.

    What it’s for: Long-term goals, saving for retirement, saving for college

  • Annuity

    How it works: An income annuity allows you to create steady, guaranteed income in retirement.1  While some people use a portion of their savings to purchase an income annuity when they retire, others purchase annuities many years before they retire.

    What it’s for: Retirement

The list above is certainly not exhaustive. As you can see, though, different types of accounts work better for different goals. And they can complement each other. For instance, when you get to retirement, it can be beneficial to have a mix of Roth and traditional accounts. This can allow you to strategically withdraw money in a way that minimizes taxes.

In addition, it’s a good idea to have investments for growth but also safe assets that aren’t impacted by the markets in case you need to access funds at a time when markets have fallen. A financial advisor can get to know you and your goals and show you how to use a mix of different financial tools to reach your goals.

Section 03 Step 3: Safeguard today and tomorrow

Hitting goals on schedule depends on steady, reliable income—but life, as we all know, is unpredictable. You insure your car or home; you probably have health insurance. But when it comes to your financial plan, have you thought about what would happen if you lost your ability to earn an income? 

This is one of the most critical—and often overlooked—parts of financial planning because without this protection, an illness, injury or the untimely death of a breadwinner in a family can upend your plan. This is a big part of what differentiates a good financial plan. 

It’s a good idea to consider: 

Disability Income Insurance: It’s important to have a plan for what you’d do if an illness or injury ever prevents you from working for an extended period. Disability insurance pays a benefit when you get sick or injured and will replace a portion of lost income when you can’t work. You’ll typically receive disability benefits through your employer, but dig into those details to ensure your benefits align with your goals. Your policy’s benefit may not be enough to cover your long-term income needs (would you insure your home enough to get only 50 percent of its value if it burned down?). If coverage through work isn’t quite enough, you can easily purchase additional coverage. When you have a plan for disability, you don’t have to worry as much about what you’d do if a disability ever prevented you from working.  

Life Insurance: If you have people who depend on you financially, life insurance is an essential part of the plan. This protects your family if you die prematurely, and the benefit that’s paid to your family will help cover their expenses when they can no longer depend on your income. A term life insurance policy is an inexpensive way to maximize coverage within a specified window of time, while a permanent life insurance policy covers you for life and has additional benefits that can become a key part of your financial plan during your life.  

Additional benefits of permanent life insurance

While term life insurance is sort of like renting, permanent life insurance is like owning a home. In addition to the death benefit, the policy accumulates equity, which is known as cash value. You can access your cash value at any time for any reason (it’s important to point out that accessing your cash value will reduce your death benefit). With most policies, cash value is uncorrelated to the financial markets, and it’s guaranteed to grow. This can make permanent life insurance a unique asset that helps you reach multiple financial goals throughout your life—making it a key component of a good financial plan. 

Section 04 Step 4: Manage your debt

Debt gets a bad rap. While it’s true that some debt—like high-interest credit card debt—is a drag on your finances, not all debt is bad. For instance, a mortgage on your home allows you to buy a tangible asset where you’ll live and build value in it over time. Other debt, like student loans or a business loan, may have allowed you to get an education or take advantage of an opportunity.

The first step in managing debt is simply to organize yourself. Gather a list of all your debt and put it into some general categories.

Hand holding credit card
Credit Card
Graduation hat with tassel
Student Loan
Car moving
Car Loan
Paper money stack
Personal Loan
One page paper article
Business Loan

Steps to manage your debt

  • Understand good and bad debt

    Good debt helps your overall financial situation over time. Some examples of good debt include mortgages, student loans or business loans. An example of bad debt is credit cards. While a credit card can allow you to buy something now, if you can’t pay for it right away, that thing you’re buying is going to cost you more than what you paid.

  • Look for lower interest rates

    Whether it’s good or bad debt, see if you can find a way to lower the interest rates you’re paying on the debt you have. This could include consolidating high-interest debts into a single loan with a lower rate. It could also be as simple as calling your lender and asking for a lower rate.

  • Make a plan to pay down bad debt

    If paying down your debt is a goal, figure out how much you can contribute to it each month. It’s a good idea to make the minimum payment on all your debts but to put additional money toward the debt with the highest rate first. Then you can increase payments to the next highest rate after you have paid the first debt off. Another approach is to pay the smallest total debt first to get rid of it.

Let’s say there’s a $679 TV that you want. If you pay cash, that’s the price you pay (plus tax). But if you use a credit card and make only the minimum payments, you’ll end up paying nearly $1,100 over almost five years to pay for the same TV.

How a financial plan can give you confidence that you’re on the right track

Hopefully you’ve got a few nuggets that you can put in practice to improve your finances right away. But now’s the time you may want to consider leveraging a financial advisor. An advisor can help you bring all these pieces and more together to build a plan to that gives you confidence that you’re on track to reach your financial goals. The following video explains a little more about how we approach planning. Then below the video see an example of a family’s budget and how a plan shows them they’re on track for their goals.

Section 05 See a hypothetical family’s financial plan

Now, let’s see how it all comes together in a “real” family’s plan.  

Meet the Douglas family 

Stephen, 36, is a project director at KPS Inc.—he’s pretty sure a job in the C-suite is in the cards within the next few years. Michelle, also 36, is doing just as well, working as a marketing consultant. She’s been pegged for the director role at Kay’s Marketing once her long-time mentor retires within the next few years.  

Stephen and Michelle met in college, and that experience was so important to them that they want to fund a substantial amount of tuition for their children, Vincent, 5, and Gloria, 2. When they’re older, the couple wants to retire without financial worry.  

Here’s how the couple incorporated the financial principles above to set them on a course toward their goals.  

Cash flow and current picture 

Stephen’s salary is $100,000, and Michelle brings home $75,000 annually, which breaks down to $10,759 of household income each month after taxes. They have $45,000 in cash, split between a joint savings account and a CD. They have $98,000 in non-qualified investments—stocks, mutual funds and 529 college savings plans for Vincent and Gloria ($4,000 each). Together, they have $165,000 combined between their 401(k)s and Stephen’s IRA. Stephen still has an outstanding student loan totaling $15,000, and they have a $335,000 mortgage, but other than that they have no debt. Stephen and Michelle both have term life insurance policies worth $700,000 and $500,000 respectively.  

Given the Douglases’ current assets and debts, they have a net worth of $481,000. 

The Douglases’ goals 

When the Douglas’s meet with their Northwestern Mutual financial advisor, they learn that for the most part, they’re on a great track. They have a nice cash cushion; they’re saving for retirement, and they have no high-interest debt to speak of. Really, the focus is on securing the future and ensuring nothing knocks them off track.  

Of course, retirement is a goal. The Douglases have also identified paying for their kids’ college as another important priority. Then they want to make sure they have enough for priorities today and that they’re protected in case something happens to one of them. 

Saving for future goals 

The Douglases’ financial plan shows them that with their current retirement assets and monthly contributions of $1,300, they could have more than $2.8 million in retirement assets by the year when they plan to retire (assuming 5.1 percent growth each year). Meanwhile, by contributing $650 each month, they could have more than $115,000 for each of their children’s college education. 

Safeguarding today and tomorrow 

While the Douglases have a healthy amount of savings, their advisor discusses with them a plan to contribute more to get to about six months’ worth of emergency savings. In addition, their plan suggests they should opt for a mix of term and permanent life insurance to get to about $1.2 million in death benefit for Stephen and about $925,000 for Michelle. In addition to the increased death benefit, this will allow the couple to take advantage of the additional benefits that come with permanent life insurance. 

Here’s what the couple’s current cash flow looks like: 

Fixed Expenses: $6,000 

  • Mortgage: $1,800 

  • Health insurance: $1,000 

  • Child care: $600 

  • Property taxes: $600 

  • Groceries: $500 

  • Utilities: $250 

  • Cable/Phone/Internet: $250 

  • Student loan payments: $200 

  • Car maintenance/Gas: $150 

  • Car insurance: $150 

  • Parking: $100 

  • Gym: $100 

  • Home maintenance: $100 

  • Homeowner’s insurance: $100  

  • Housekeeping: $50 

  • Medical/Dental/Prescriptions: $50  

Financial Security and Goal Contributions: $3,027 

  • Retirement contributions: $1,298 

  • Gloria and Vincent’s college funds: $642  

  • Stephen’s life insurance (term and permanent): $292 

  • Michelle’s life insurance: $253 

  • Stephen’s disability income insurance: $46  

  • Michelle’s disability income insurance: $114  

  • Emergency fund contribution: $335 

Discretionary Spending: $1,781 

  • This is money the couple can spend however they’d like, from going out to dinner to taking a vacation. But given that they have their other goals covered and they’ll be able to see how they're making progress toward them, they won’t have to feel any guilt spending this money each month. 

A financial plan brings it all together 

The example above is a very simplified explanation of how a good financial plan brings your financial picture together—making sure you’re prepared for obstacles along the way. An advisor can work with you to understand where you are today and where you want to go. Then the advisor can help you take the right steps to make sure you’re on the path to reach your goals. 

But the true benefit of a plan is that you can see how one area affects another. For instance, knowing that you’re on the path to save enough for college and retirement should empower you to spend your discretionary funds today—guilt-free. Your advisor can also show you how different parts of your plan reinforce each other. For instance, if the markets have a bad year when you retire, you might be able to lean on life insurance cash value to create income without jeopardizing your investments.2

Remember, the process doesn’t end with the plan or a single meeting with an advisor. Your life is going to change. That promotion to vice president might come 10 years sooner than you thought. Your music hobby turned into a music shop. Your advisor will be with you every step of the way, prepared to tailor your plan to fit each stage in your life.