Guide: How to build a financial plan.

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Financial planning is the process of creating a plan that focuses your financial arrangements on reaching medium and long term goals, without sacrificing too many of your current needs and wants.

Step 1 – What are your Goals?

This first step may seem obvious. But often, trying to think too far ahead can be difficult.

Retirement might seem like it’s a long way off – but the sooner you start planning, the easier it’ll be for you to shape what it looks like. Think about what you want your life to look like in 5 years, 10 years, 20 years time and so on.

Do you want to own a car or a house?

Do you have children? If so, do you want to build a fund for education etc?

When would you like to retire and what could retirement look like?

In our view, your goals need to be realistic, but also exciting. Your financial plan could be with you for decades – things won’t always be easy. The goals you set today will motivate you to stick to your plan, so it’s important that they are meaningful to you.

Group your financial goals into:

  • Short term goals – to be achieved within the next 5 years. For example, saving for a wedding, holiday, house deposit or a car.
  • Long term goals – to be achieved at least 5 years in the future. For example, education costs or a career break.
  • Retirement

Later, we’ll look at how you might decide where to invest or save money to achieve these three types of goals.

Step 2 – Track your Cash Flow

Before putting together your financial plan, you’ll need to get a sense of your income and outgoings.

Take a look at your bank statements and create a spreadsheet. Include income in one column and commitments in the other.

Think about what you can sacrifice to free up funds to achieve more important long term goals. Check that you are getting the best value out of any existing credit commitments or utilities. If you are paying for services you do not use, cancel them.

Allocate your monthly outgoings into 3 categories:

  • Current Needs and Debt Repayment – housing, utilities, food and other bills
  • Current Wants – entertainment, holidays, going out and hobbies
  • Savings

Step 3 – Budget

Use the numbers you’ve put together above to create a budget.

A common rule of thumb is to allocate your Net (after tax) household income so that 50% of it goes towards your current needs, 30% of it to your current wants and 20% towards saving and investing to fund your financial plan.

Remember, this is just a rough guide – you may need to commit much more than this to meet your financial goals!

If you can’t put away 20% to fund your financial plan, that’s ok, commit what you can for now and focus on managing your outgoings and improving your income so that you can set aside more in the future.

Step 4 – Get Free Money From Employer Matching

It’s estimated that some 3.2 million workers are missing out on £2bn a year of free employer cash.

This is Money

One of the first things we ask new customers: Are you making the most of your workplace pension scheme?

The government has set minimum levels of contributions that must be paid into your workplace pension by you and by your employer.

If your employer chooses to only pay the minimum amount of pension contributions (figures as of 2020), it could work out as follows:

  • You pay – 5% of your qualifying earnings
  • Your employer pays – 3% of your qualifying earnings

In some cases, your employer may offer an even higher level of matching. For example, it’s not uncommon for larger companies to match or double your contributions far beyond the minimum levels.

Check with your employer what their policy is and do whatever you can to make the most of it. This might mean sacrificing an element of the ‘current wants’ or ‘savings’ section of your budget – but might be worth it in the long run.

Step 5 – Prepare for Emergencies

One of the first things you’ll need to do with the portion of your income you’ve set aside towards your financial plan is create an emergency fund. It’s up to you how big a fund you build, but you should aim to save enough to cover small emergencies.

A reasonable target would be to save 2-3 times your monthly income. This will mean that you wont have to take out credit should your boiler blow up, you are unable to work or your car breaks down.

Using an emergency fund rather than taking out a loan or a credit card to pay for emergencies could improve your credit score and help you receive better rates on your mortgage.

Step 6 – Pay Off High Interest Debt

Short term debts like loans and credit cards can significantly damage your chances of achieving your long term financial goals. Interest rates on some credit cards can be upwards of 18%pa, resulting in you paying 2-3 times what you borrowed. It may make sense to consolidate high interest debts onto a lower rate to reduce the amount you pay to borrow the money.

Once you’ve built up an emergency fund, focus on repaying these high interest debts. When you’ve tackled these, you can start to look at investing to build your savings.

If you’re struggling with debt, you can find help here.

Step 7 – Invest or Save to Achieve your Financial Goals

Having laid financial foundations, it could now be appropriate to start looking at investing or saving some of your regular income. If you already had savings above and beyond your emergency fund, you could look at focusing these towards your financial plan too.

One of the most important things to think about is the relationship between risk and reward:

This graph shows how higher risk investments are likely to be more volatile than lower risk investments.

When investing you should be thinking about which ‘tax wrapper’ is most appropriate – tax wrappers include ISAs, LISAs and Pensions. Within your chosen tax wrapper, you’ll probably invest your money. Which investment you use should be driven by your financial goals, attitude to risk and capacity for loss.


Step 8 – Reinforcing your financial plan

With every step you’ve taken so far, you’ve started to build a plan and secure your financial future. As your career progresses you’ll want to further reinforce your financial plan by:

  • Increasing your pension contributions
  • Adding to your emergency fund as your outgoings grow
  • Consider taking insurance to protect you or your family in the event something unexpected impacts your financial situation, such as death, critical illness or loss of work.

Do you need help?

We think financial planning is fun, but many don’t! If you would like some help creating and running your financial plan, get in touch with Exley Financial Planning for more help.

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