Setting financial goals and making a financial plan

A financial plan is a written picture of where your money needs to go over months and years, built on a budget and organised around goals with real amounts and dates attached. It is not a product you buy and not something only wealthy people have. At its simplest it answers three questions: what is coming in and going out each month, what you want your money to achieve, and how you will get there.

The reason to make one is practical. The ability to make sound financial decisions is, in the words of the Resolution Foundation, "an essential life skill, one that enables people to manage their day-to-day expenditure, cope with unforeseen emergencies and plan for retirement"¹. The Money and Pensions Service describes the outcome as financial wellbeing: "feeling secure and in control. It's about making the most of your money from day to day, dealing with the unexpected, and being on track for a healthy financial future"². A plan is simply the tool that gets you there.

The scale of the need is clear from official figures. Two in five people (41%) aged 55 to 65 and approaching retirement have no financial plan for later life³. This page explains what a financial plan is, what it covers, how to set goals by timescale, and where to get free help building one.

What a financial plan is

A financial plan is a structured way of turning your income into outcomes. It starts from your budget, which is "a list of all the money you have coming in and going out each month"⁴, and then looks forward: what you want to have happen in the next few months, the next few years, and the decades after that. Where a budget describes one month, a plan describes a direction.

The idea sits behind several official frameworks. The UK Strategy for Financial Wellbeing is a ten-year framework aimed at the vision of everyone making the most of their money across life⁸, with goals set for 2030 that bring together organisations from a wide range of sectors⁹. The government's own Financial Inclusion Strategy works along similar lines, strengthening financial education in schools so that all primary pupils learn about saving, budgeting and interest, with older students later taught about credit, loans and managing money responsibly¹⁰. The common thread is that planning is a skill, learned and practised, not a service you outsource once.

A plan also has a defensive side. Working out a household budget matters because it shows how much money is coming into your household, how much is going out, how much is left, the best way to deal with your debts, what affordable offers you can make to creditors, and how to plan future spending¹¹. A plan built on that foundation is what keeps an unexpected bill from becoming a crisis, and it is why free debt advice services treat the budget as the first thing they build with anyone who comes to them¹².

What a financial plan covers

A complete plan covers four layers, each resting on the one before it:

• Day to day: income, essential spending, and a line for the things you cannot plan for. Debt advice services build a part of every budget for "sundries and emergencies" precisely to cover unplanned spending⁵.
• Debt: what you owe, to whom, and what you can afford to pay. A debt management plan, for example, is an agreement between you and your creditors to make a set monthly payment¹³, and the budget behind it should include all living costs like rent or mortgage payments, utility bills and food shopping, but not the payments you make to your debts¹⁴.
• Savings and investments: an emergency buffer first, then saving towards specific goals, and investing for goals further away.
• Protection: insurance, and knowing what compensation exists if a financial firm fails.

On that last layer, the Financial Services Compensation Scheme (FSCS) covers a range of financial products if a UK-authorised financial firm fails, including deposits, insurance, investments, pensions, mortgage advice and certain other regulated services⁷. Its full scope runs to seven different types of business: deposits, insurance policies, insurance broking, investment business, home finance advice or broking, debt management and funeral plans¹⁵. The limits vary by type: for some insurance claims the scheme provides 100% protection for third-party claims, while customers with comprehensive cover, including fire and theft, are covered for 90% of what's owed¹⁶.

A plan does not need to cover everything at once. Most people start with the first two layers, budget and debt, and add the rest as their situation allows. The order matters more than the speed.

Short, medium and long-term goals: how each one shapes the plan

Goals fall into three bands by timescale, and each band shapes the plan differently.

Short-term goals live in months. They are mostly about control: keeping bills paid, building a small buffer, clearing a small balance. These goals are managed almost entirely through the budget, and progress is visible quickly.

Medium-term goals run to a few years. Clearing debt is the classic example: a debt management plan is a way to pay back money you owe based on what you can afford to pay back each month¹², and making one regular monthly payment gives better control over your finances¹³. Saving for something specific, a car, a deposit, a wedding, also sits here.

Long-term goals stretch ten years or more, and retirement is the biggest. These goals barely register month to month, which is why they need to be written into the plan deliberately, with an amount and a date, or they get postponed indefinitely.

The bands interact. Money tied up in a medium-term goal is not available for a long-term one, and a plan that ignores short-term instability will not survive to deliver the long-term results. That is why the order of goals matters: a household carrying expensive debt usually plans to clear that before pushing money into long-term saving, because the debt costs more than the saving earns. The pages on the order to sort out your finances and emergency fund or paying off debt first work through that trade-off.

Timescales also need to flex with life. A goal set for five years' time may need to move after a change in income or circumstances, and that is a normal part of planning rather than a failure of it.

Budgeting: the starting point of a plan

No plan works without a budget underneath it, because the budget is where the plan's numbers come from. A budget is a list of all the money you have coming in and going out each month⁴. A business and household budget is described by debt advice services as an essential tool to help you tackle debt problems¹¹, and the same tool is what tells you how much is genuinely available for goals.

Building one is a short, mechanical process:

1. List everything coming in: wages, benefits, any other income.
2. List everything going out: rent or mortgage, utilities, food, transport, and the irregular bills that only arrive once or twice a year.
3. Include a line for sundries and emergencies, because unplanned spending is certain to happen even if the item is not⁵.
4. Subtract outgoings from income to find what is left.
5. Keep a copy of your budget so you can track how you actually spend your money against the plan¹¹.

Two practical rules make a budget trustworthy. First, if your income varies, budget for your lowest monthly income: you will get a more accurate picture of where you are and what you need to cover your important bills¹⁸. Second, do not understate your spending. If your figures are too low, any payment arrangement you agree with creditors will be higher than necessary and you will find it hard to keep to it¹¹.

For people on very low incomes, the budget may show a gap rather than a surplus, and the plan then becomes about support as well as saving. Budgeting loans exist for help with essential one-off large payments that are difficult to plan for, such as a broken boiler¹⁹, and a budgeting advance is an interest-free loan for people in receipt of universal credit to help with one-off or unforeseen expenses²⁰. In Wales, Individual Assistance Payments can provide white goods and furniture to help people live independently in their home or a property they are moving into²¹. These are not substitutes for a plan, but they belong in one.

The pages on how to make a budget, budgeting methods compared and budgeting for annual and irregular bills cover the mechanics in detail.

Setting financial goals you can measure

A goal that cannot be measured cannot be checked, and a goal that cannot be checked is a wish. The difference between the two is specificity: an amount, a date, and a place in an order.

A measurable goal has three parts. An amount: "save £X" or "clear the card balance of £X". A date: by when, which is what turns a goal into a monthly figure. A priority: which goal the spare money reaches first, because a budget rarely funds them all at once.

Free tools exist to do this. A budget planner can show you how much you spend each month and help you get in control of your finances²², and an online money planner is designed to help everyone understand and manage their money better²². A credit reference report can help you keep track of your finances²². For people dealing with debt, services exist that will review your finances, help you work out a budget, and find out whether a debt management plan is the right solution¹⁴.

The review is part of the goal, not an afterthought. You need to review your finances at least once a year while you are on a plan⁵, and the same rhythm suits any plan. Reviews catch the two things that quietly break goals: figures that were too optimistic at the start, and life changes that made them wrong later. A pay rise, a new baby, a separation or a move each change what the plan can achieve, and a goal that is not adjusted after them simply stops being followed.

Investing as part of a financial plan

Once a plan has a budget, an emergency line and a goal order, investing enters as the tool for goals that are years away. The reason it belongs in a plan rather than alongside it is that investing decisions depend entirely on the plan's timescales: money needed in two years is not invested the same way as money not needed for twenty.

Some products combine several functions. A savings endowment policy is a savings plan that combines life cover, or life assurance, with investing in savings²³. Products that mix insurance and investment are the ones most worth unpicking before you rely on them, because the protection and the investment parts behave differently, and the Financial Ombudsman Service can consider complaints about savings and endowments if something goes wrong²³.

Employers can play a part too. The government's Financial Inclusion Strategy encourages employers to offer payroll savings schemes so workers can automatically put aside money each month¹⁰, which removes the monthly decision from the plan and makes the saving happen by default. If your employer offers one, it is one of the simplest ways to fund a medium-term goal.

The pages on investing, ISAs and overpaying the mortgage or investing cover the mechanics. What belongs in the plan itself is the allocation: which goals get saved for in cash, and which get invested, decided by when the money is needed.

Retirement planning and the pension savings gap

Retirement is the goal most often left out of plans, and the one with the highest cost when it is. Two in five people (41%) approaching retirement, aged 55 to 65, have no financial plan for later life³. The consequences of starting late are built into how pensions work: with defined contribution schemes, retiring early means you have had fewer years to pay in, so your pension fund will be smaller, and the fund must provide income over a longer period, so the pension will be smaller²⁴.

A retirement goal in a plan has the same three parts as any other: an amount, a date and a priority. Free tools do much of the work. MoneyHelper offers a free tool to build a retirement action plan, matching you with tailored guidance and next steps²⁵, and its retirement guidance includes a free tool that creates a personalised action plan to follow²⁶. Some pension schemes gradually move your money into lower-risk investments as you get nearer retirement age, a feature called lifestyling²⁷, so the plan's retirement date also affects how the pension itself is invested.

The gap between men's and women's retirement savings deserves its own line in many plans. Women have lower pension wealth than men, and estimates show the gender pensions gap to be larger than the gender pay gap²⁸. Several forces drive it. Pension wealth falls following divorce, and the reduction in wealth is bigger for women than for men²⁹. On average, women live longer than men and so need more pension wealth to have the same amount of income each year²⁹. Awareness is part of the problem: only 41% of women and 44% of men know that a pension forms part of a divorce settlement³⁰.

There are backstops for the worst cases. The Financial Assistance Scheme provides financial assistance to members of defined benefit schemes who lost all or part of their pension if their scheme came to an end between 1 January 1997 and 5 April 2005³¹. But a backstop is not a plan. The pages on pensions and how much to pay into a pension cover the decisions in detail.

Doing it yourself or getting help

Most people can build the first version of a plan themselves, with free tools. Beyond that, the choice is between free guidance and paid advice, and the difference matters. Guidance explains options and how things work; advice recommends a specific product or course of action for your circumstances and is regulated. The page on advice or guidance sets out the distinction.

Free guidance. MoneyHelper is a UK government-backed independent advice service providing resources on its website and free, unbiased money advice via a Freephone helpline³². The Welsh Government describes it as a service that can help you plan and manage your finances and is set up by UK government⁶. Its tools include the free retirement action plan²⁵.

Free debt help. If debt is the obstacle between the budget and any goal, free and independent advice is available before you set up anything with a provider, from organisations such as Advice NI¹³. PayPlan offers free impartial debt advice, discussing ways to make debt more affordable and helping to find a solution³². Business Debtline's My Budget tool is completely free, and doing a budget is the first step to deal with your debts¹¹.

Local and national support. The Consumer Council for Northern Ireland lists free help and support with finances³². Finding Finance is an educational tool provided by Responsible Finance, whose members offer simple affordable loans when the bank can't help³². The Money and Pensions Service now runs its MoneyView survey every year to build a holistic picture of adults' personal finances³³, evidence that the free support network is a permanent part of the landscape, not a temporary scheme.

Paid advice. A financial adviser charges for personal recommendations, and the page on paying for financial advice covers when that is worth it. The general rule from the free services is the reverse of what many people expect: get the budget and the goals down first, because advice is more useful, and cheaper, when you arrive knowing what you want the money to do.

One caution on the wider system: the Treasury Committee assessed the government's Financial Inclusion Strategy as "a welcome first step but it is not a complete plan to tackle financial exclusion in the United Kingdom"³⁴. Support exists, but it is not universal, and a plan that assumes help will arrive is weaker than one that builds on what is already there.