How to Create a Financial Plan That Works

Managing money effectively is one of the most important aspects of a stable and stress-free life. Whether saving for a home, planning for retirement, or simply trying to budget better, having a solid financial plan can make all the difference. But where do you start?

This guide will walk you through the essential steps to create a successful financial plan.

Let’s Get Straight to the Point

If you’re short on time, here’s a quick summary of what you need to know:

• Set financial goals – Identify what you want to achieve in the short, medium, and long term.
• Track your income and expenses – Use a budgeting system like the 50/30/20 rule.
• Create an emergency fund – Aim for at least three months' living expenses.
• Manage debt – Prioritise paying off high-interest loans like credit cards.
• Save for retirement – Contribute to your superannuation and consider additional investment options.
• Optimise tax planning – Use deductions and tax credits to reduce taxable income.
• Invest wisely – Choose investment options based on your risk tolerance and financial goals.
• Get insured – Protect yourself with life, income, and health insurance.
• Plan your estate – Ensure your assets are distributed according to your wishes.

Now, let’s break these down into actionable steps.

1. Set Clear Financial Goals

Short-Term vs Long-Term Goals

Before making any financial decisions, define your goals. Your financial plan should be tailored to your needs and aspirations.

• Short-term goals (0-3 years): Saving for a holiday, paying off small debts, or building an emergency fund.
• Medium-term goals (3-10 years): Buying a house, starting a business, or investing in higher education.
• Long-term goals (10+ years): Planning for retirement, building generational wealth, or ensuring financial security.

SMART Goals Approach

Use the SMART method to structure your goals:

• Specific – What exactly do you want to achieve?
• Measurable – How will you track progress?
• Achievable – Is this goal realistic?
• Relevant – Does it align with your financial priorities?
• Time-bound – Set deadlines for completion.

2. Track Your Income and Expenses

Understanding Cash Flow

Managing cash flow is essential. The easiest way to do this is by tracking your income and expenses. If more money is leaving your account than coming in, it’s time to reassess your spending.

The 50/30/20 Budgeting Rule

This simple budgeting method helps balance needs, wants, and savings:

• 50% – Needs: Rent/mortgage, groceries, utilities, transport.
• 30% – Wants: Dining out, entertainment, travel.
• 20% – Savings & Debt Repayment: Super contributions, emergency funds, investments.

Helpful Budgeting Tools

• ASIC’s MoneySmart Budget Planner
• Pocketbook (App)
• YNAB (You Need A Budget)

3. Build an Emergency Fund

Why It’s Important

An emergency fund protects you from unexpected expenses like job loss, medical bills, or urgent repairs.

How Much Should You Save?

Aim for at least three months' worth of living expenses. If you’re self-employed or have an irregular income, consider saving six months’ worth.

Where to Keep Your Emergency Fund

• High-interest savings accounts
• Offset accounts (linked to your mortgage)
• Term deposits

4. Manage Debt Effectively

Types of Debt

Not all debt is bad.

• Good debt: Student loans (HECS-HELP), mortgages, and business loans (if they generate income).
• Bad debt: Credit cards, payday loans, and buy-now-pay-later services with high interest.

Debt Repayment Strategies

• Snowball Method: Pay off small debts first to build momentum.
• Avalanche Method: Pay off high-interest debts first to save money in the long run.

5. Plan for Retirement

Understanding Superannuation

Super is one of the most tax-effective ways to save for retirement. The Superannuation Guarantee (SG) rate is 11.5% and will be 12% from 1 July 2025, meaning employers must contribute a certain percentage of their salary to the super fund.

Boosting Your Super

• Salary Sacrificing: Contribute extra pre-tax dollars to reduce taxable income.
• Co-Contributions: If you earn under $58,445, the government may match up to $500 in voluntary contributions.
• Spouse Contributions: If your spouse earns under $40,000, contributing to their super can offset your tax.

6. Optimise Tax Planning

Key Tax Deductions in 2025

1. Work-from-Home Expenses

Claim a fixed rate (67c per hour) or actual costs for:

• Internet, phone, and electricity.
• Office supplies and home office equipment.

2. Self-Education Costs

If related to your job, you can deduct:

• Course fees (excluding HECS-HELP).
• Study materials and travel to classes.

3. Investment Property Deductions

Property investors can claim:

• Mortgage interest, council rates, and insurance.
• Depreciation and maintenance costs.

4. Charitable Donations

Donations over $2 to registered charities are tax-deductible.

Minimising Taxable Income

1. Salary Sacrificing into Super

Redirecting pre-tax income into super (up to $30,000 in 2025) lowers taxable income and is taxed at just 15%.

2. Claiming Tax Offsets

• Private Health Insurance Rebate if earning under $144,000 (singles) or $288,000 (couples).
• Spouse Super Contribution Offset for partners earning under $40,000.

3. Structuring Investments Tax-Effectively

• Holding assets for 12+ months gets a 50% Capital Gains Tax discount.
• Franking credits on dividends reduces double taxation.
• Family trusts distribute income to lower-taxed members.

7. Invest for the Future

Investment Options in Australia

1. Shares – High Returns, Higher Risk

Buying shares lets you own part of a company, earning dividends and capital gains.

• Offers high long-term returns but can be volatile.
• Best for 5-10+ year investments and risk-tolerant investors.
• Blue-chip stocks like Commonwealth Bank and BHP provide stability.

2. Exchange Traded Funds (ETFs) – Diversified & Cost-Effective

ETFs bundle multiple stocks, reducing risk while keeping costs low.

• Tracks indexes like the ASX 200 or NASDAQ.
• Ideal for passive investors and beginners.
• Popular choices: VAS (Vanguard ASX 300) & NDQ (NASDAQ 100 ETF).

3. Property – Passive Income & Growth

Australian real estate provides rental income and capital appreciation.

• Requires a large upfront investment (deposit, stamp duty, fees).
• Best for long-term investors seeking stable growth.
• Key factors: location, rental demand, and interest rates.

4. Managed Funds – Hands-Off Investing

Professionally managed funds diversify investments across markets.

• Actively managed (higher fees) vs. passively managed (lower fees).
• Great for those preferring expert guidance.

How Much Should You Invest?

The amount depends on your income and risk tolerance.

• Beginners: Start with 10-20% of your income in a diversified portfolio.
• Low-risk investors: Focus on ETFs, bonds, or property.
• Higher-risk investors: Can allocate more to shares and growth assets.

8. Get the Right Insurance

Types of Essential Insurance

1. Income Protection Insurance – Replace Lost Income

Covers up to 75% of your income if you can’t work due to illness or injury.

• Benefit period ranges from two years to retirement age.
• Premiums are tax-deductible, making it cost-effective.
• Essential for self-employed individuals and those with limited sick leave.

2. Health Insurance – Reduce Medical Costs and Tax Liabilities

While Medicare covers basics, private health insurance provides faster access to care.

• Avoids the Medicare Levy Surcharge (for incomes over $93,000).
• Covers dental, optical, and physiotherapy.
• Reduces hospital wait times for elective procedures.

3. Life Insurance – Financial Security for Loved Ones

Provides a lump sum payment to your family in case of your death.

• Pays off debts and daily expenses.
• Helps fund children’s education and long-term needs.
• Available through superannuation, but coverage may be limited.

4. Total and Permanent Disability (TPD) Insurance – Protects Against Permanent Disability

Offers a lump sum payout if a severe illness or injury prevents you from working permanently.

• Own occupation pays if you can’t work in your current profession.
• Any occupation pays only if you can’t work at all.

9. Plan Your Estate

What is Estate Planning?

Estate planning involves structuring your finances to ensure a smooth transfer of wealth while reducing tax burdens and avoiding disputes. It includes a Will, superannuation nominations, Power of Attorney, and possibly a family trust to protect and manage assets efficiently.

Steps to Get Started

1. Create a Will – Outline Asset Distribution

A Will specifies how your assets are distributed and appoints an executor to manage your estate. Update it regularly, especially after major life changes.

Without a Will, assets are allocated based on Australian intestacy laws, which may not align with your wishes.

2. Nominate Super Beneficiaries – Super Is Not Automatically Included in Your Estate

Superannuation requires a binding death benefit nomination to ensure funds go directly to your chosen beneficiary. The fund trustee decides if no nomination is in place, which can delay payouts.

3. Set up a Power of Attorney – Assign Someone to Make Decisions if You Cannot

A Power of Attorney (POA) allows a trusted individual to manage your financial affairs if you cannot.

• General POA – Covers temporary financial decisions (e.g., if overseas).
• Enduring POA – Remains in effect if you lose mental capacity.

Choose someone reliable who understands your financial situation.

4. Consider a Family Trust – Manage Wealth and Reduce Tax

A Family Trust can protect assets, provide tax advantages, and ensure structured wealth distribution. It benefits business owners and those seeking to create intergenerational wealth but requires proper legal setup and management.

Conclusion

A strong financial plan isn’t just about saving money—it’s about making your money work for you. You can build a secure financial future by setting clear goals, managing expenses, reducing debt, and investing wisely.

Whether you’re just starting or refining your current plan, following these steps will help you stay on track. Start today and give your future self financial freedom and peace of mind.