Must-Have Components of a Financial Plan

Andrew Weber is Senior Director of Planning Philosophy, Research and Guidance at Northwestern Mutual.

A good financial plan is about more than just setting aside money or tracking your monthly expenses. It aligns your goals for the future with your actions today and prepares you for financial challenges. A good plan helps you navigate risks like unexpected income loss and medical emergencies, as well as helping you save and invest to reach your long-term goals.

With a strong plan, you can feel more confident about spending money today because you know that you’re on track to reach your goals—and that you’re likely to stay on track even if life throws you a curve ball. Think of a financial plan like a GPS that maps your route, watches out for slowdowns and re-routes you when necessary.

What is included in a good financial plan?

Some of the most common elements of financial planning are:

• Establishing short-, medium- and long-term financial goals,
• Assessing current net worth, savings, income and expenses,
• Setting up a budget,
• Tax planning,
• Retirement planning,
• Choosing investments as well as disability and life insurance policies, and
• Estate and legacy planning.

Bear in mind that financial planning is highly personal. While everyone’s plans will have similar ingredients, the specific recipes will differ based on each unique situation (and likely change over time).

In nearly all cases, a good financial plan goes beyond simple budgeting and saving. It looks at risks like inflation, market volatility, and taxes to make sure you’re protecting your wealth. A plan that uses a range of financial tools to help you grow your wealth and protect it from known risks can better position you to reach your goals.

When you’re ready to build your plan, a Northwestern Mutual financial advisor¹ will get to know you and your financial situation and then show you how all the pieces might come together most efficiently for your needs and goals.

How a financial plan helps you grow your wealth

Some people assume financial planning is all about investing to grow your wealth over time. Building a well-diversified investment portfolio is indeed a major component, but investments alone can leave you vulnerable. That’s why a good plan includes additional tools that reinforce the growth investments can provide while also protecting you from common risks.

Saving for retirement

Whether you have a financial plan or not, you are probably saving money for retirement—maybe in a 401(k) through work or an IRA you have opened on your own. But are you saving the right amount and in the right way? Do you know how a mix of Roth and traditional retirement accounts can help you be more tax efficient? A good plan can help answer these questions and show you how additional financial options beyond your 401(k) and investments can help make your savings go further.

Growing investments

Retirement is a big goal that’s in nearly everyone’s plans. But people invest for many other goals as well, like paying for college or even just taking a big bucket-list trip someday. A financial plan can help you make sure you’re contributing the right amount to different types of investments based on your goals. A financial advisor can make sure the investments are optimized not only for growth but also to be there when you’re ready to take that big trip or start writing tuition checks.

Managing debt

When used wisely, debt can be a great financial tool. But it can also be a drag. Whether you have student loan, credit card, or other debt, a financial plan can help you balance your debt management with what you’re spending today and other goals. A financial advisor can also help to educate you about debt and different strategies to pay it down or manage it. The advisor can also consult on strategies to use debt to your advantage, perhaps to buy a second home or to start a business.

Leaving a legacy

Whether you have a small nest egg or significant wealth, most people leave something behind for loved ones, special causes they care about, or both. A good financial plan helps you be more deliberate about the legacy you want to leave during your life and after you’re gone. By planning your giving strategy, you can often make a greater impact and free yourself to spend down what you’ve earned.

How financial plans help you protect your wealth

A financial plan that focuses solely on growing your wealth can leave you vulnerable. That’s why Northwestern Mutual advisors help you identify potential blind spots and prepare for them. A focus on wealth protection that anticipates potential risks can give you more confidence that you’re on track to reach your goals even if something doesn’t go exactly as planned.

Providing for loved ones

When you have people who depend on you and your income, it’s important to have a plan for them in the event that something happens to you. This is where life insurance often plays a critical role in a financial plan—to replace lost earning potential. Depending on the policy you choose, life insurance may also play additional roles during your life. A basic estate plan is also an important component to make sure that your wishes are carried out. As your needs get more advanced, an estate plan can ensure that your assets transfer to the right people in the right way with the least amount of tax.

Protecting income

Income is an important part of financial planning because it’s what funds all your goals. It’s important to have a plan for what would happen if you were ever sick or hurt and unable to work for an extended period of time. That’s because the impact of having to tap into retirement or other savings if you’re ever in a situation like this can create a huge hole in your financial plan. Both disability insurance and life insurance can be important income-protection tools.

Managing taxes

While all of us should pay the taxes we owe, why pay more than you need to? A financial plan can help you protect your wealth from taxes in numerous ways. This could include simple recommendations about using tax-advantaged accounts that are available for certain goals (like a 401(k) to save for retirement or a 529 plan to save for college). Your advisor can help you use a mix of different financial options to limit the amount of taxes you’ll owe now—and in retirement. And if you have more significant wealth, you can explore more advanced tax strategies to ensure you and your family keep as much of your wealth as possible.

Creating a lifetime of income

Saving for retirement is great. But what happens when you get to retirement? A financial plan helps you use a range of financial options that reinforce each other in order to create a reliable stream of retirement income. By using multiple options, the plan prepares you for key retirement risks—including market volatility, taxes, inflation, and the possibility that you may live longer than you expect.

This is where financial products beyond investments can really shine. Permanent life insurance, which grows cash value that typically won’t decline with the markets, can help you weather down markets in retirement. It also has unique attributes that can help you better manage your taxes in retirement. Income annuities can also help by ensuring you have a reliable stream of income that you can’t outlive.

Independent research has found that, when combined with your investment strategy, these products can help ensure better financial outcomes in retirement. With broader strategies to protect against common risks, you can worry less about things like market volatility and taxes—and spend more time enjoying life.

Financial planning mistakes to avoid

A good financial plan can also be defined by what you don’t do. Let’s take a look at three common financial planning mistakes and ways to avoid them.

1. Emotional investing

When investing, it’s easy for emotions to take over every now and then. A market dip can send investors into a panic. FOMO—the fear of missing out—can make the latest meme stock look irrationally attractive. But acting on these emotions can weaken your long-term financial plan. Selling after a dip can cause you to miss out on a potential rebound. And volatile assets, like crypto, that skyrocketed yesterday could fall back to earth tomorrow. In many cases, investing based on emotions means abandoning a well-designed plan and trying to time the market to maximize gains and minimize losses, a maneuver that can backfire all too easily. The solution is to construct a plan that accounts for volatility and manages risk and do your best to leave it be. If you’re ever feeling nervous after a dip or you’re becoming obsessed with the latest FinTok trend, contact your advisor, who can remind you of the value of sticking to the plan.

2. Using AI the wrong way

AI chatbots such as ChatGPT can offer a quick way to do some basic research—for example, defining key investment terms. But when it comes to advice or planning help, they are simply the wrong tool for the job. Their potential to pass on incorrect or biased information makes AI tools unusable for creating a complex, tailored financial plan from scratch. For that, there is no substitute for human expertise.

3. Procrastinating

Time is a major force in financial planning. The principle of compounding can make saving more powerful and debts more burdensome as time goes on. That’s why the best time to get your financial life in order is right now. The sooner you begin chipping away at your debts and adding to your savings, the better. If you have waited longer than you would have liked to create a financial plan, there may be options available to accelerate your savings. Your financial advisor can show you opportunities to get back on track with catch-up contributions or other strategies.

A financial plan developed with a Northwestern Mutual financial advisor brings it all together

While there may be an item or two on this list that jumped out at you, the reality is that you’re probably already doing things like saving for retirement and managing debt. Maybe you also have some life insurance.

A financial advisor from Northwestern Mutual will get to know you and what you’re already doing. They will ask questions to uncover what’s important to you and make recommendations based on your life. Your advisor will build a plan that brings these financial components together so that the individual pieces work more efficiently based on your goals. And most importantly, if your goals change, your plan can evolve with you over time.

Your advisor can help you prioritize what you’re saving for future goals and what you’re spending today. When you see how you’re on track to reach your future goals, it’s common to gain more confidence about what you’re able to spend now.

That’s what makes a Northwestern Mutual financial plan unique. You’ll have confidence that comes from a plan that includes strategies to grow your wealth—and to protect it.

This publication is not intended as legal or tax advice. Financial representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

All investments carry some level of risk, including the potential loss of principal.

The products and services referenced are offered and sold only by appropriately appointed and licensed entities and financial advisors and representatives.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.