One of the most important steps on the road to financial independence is to create a financial plan. In this plan, you list your financial goals and describe how you plan to achieve them.
Step 1 : calculate your net worth
Step 2 : create a budget
Step 3 : pay off debt (excl. mortgage)
Step 4 : create an emergency fund
Step 5 : build a financial plan
Step 6 : invest and “stay the course”
Financial independence does not happen overnight, as this is a long-term project. To ensure this project runs smoothly, you prepare a financial plan that meets your needs. Good preparation is the basis for financial success!
What is a financial plan?
In a financial plan, you write down all your long-term goal(s) and how you can achieve them. With a solid plan, you also avoid emotional reactions when investing, especially excitement when the stock markets are rising and anxiety when the stock markets are falling.
An investment plan contains the following elements:
- long-term goal(s)
- risk profile and associated asset allocation
- investment plan
With a solid plan, you avoid emotional reactions when investing
Let’s start with long-term goals!
1. Define and plan long-term goals.
To define long-term goals, we use the SMART method (1) :
Specific
Measurable
Achievable
Realistic
Time-bound
I’ll explain this briefly using some examples.
Goal 1 : save for the purchase of a house
SMART : Save 50.000 euros in the next 6 years for the down payment on a house by saving 700 euros a month.
Goal 2 : Invest for financial independence
SMART : Build up a capital of 500.000 euros in the next 25 years by investing 800 euros a month.
Now you are going to write out each goal in detail. In addition to the name of the goal, you determine the term, amount, which action you should take, the method and finally the status.

2. Define your risk profile
Your risk profile is an important part of your financial plan. How much risk am I willing to take? Do I sleep well at night knowing that I could lose half of my invested assets?
You can reduce risk by using diversification and asset allocation.
The degree to which an investor is able and willing to take risk depends on a few factors : investment horizon, stability of income, need for liquidity and possible alternatives if the investment plan should fail.
If you still have a long investment horizon ahead, for example more than 10 years, you can take more risk. After a bear market, when the (stock) market has seen massive declines, there is still plenty of time to recover.
The stability of your income is also important. You can take more risk if you have a stable income in the long term.
You can look at the need for liquidity together with your emergency fund. If you don’t need a lot of extra liquid assets (usually cash) in the short term to deal with an emergency, you can take more risk. If you have a small(er) emergency fund, you should consider taking a little less risk.
The final factor that can affect your risk appetite are the alternatives if the investment plan were to fail. You can, for example, continue to work longer, take a part-time job, or reduce your budget. The more alternative options, the more risk you can take.
You can reduce risk by using diversification and asset allocation.
Diversification means spreading the risks. Suppose you invest in the stock market and buy shares of 1 company. If this company goes bankrupt, you lose the entire value of your investment. But if you invest in 1000 different companies on the stock market, for example using an ETF, when one company goes bankrupt you don’t lose the entire value of your investment.
By determining your asset allocation, you’re going to create an appropriate mix of riskier assets and lower-risk assets. Riskier assets are, for example, stocks or real estate. Lower-risk assets are, for example, cash, short-term bonds or medium-term bonds.
To estimate the possible loss in a stock market crash, we can look at figures from the past : the Bogleheads calculated the cumulative return after inflation in the 2000-2002 bear market (2).

A portfolio of 80% stocks and 20% bonds lost about 35% in these 2 years and a portfolio of 50% stocks and 50% bonds only lost about 14%. We also learn from the past that risky assets can yield more in the long term than lower-risk assets.
Which breakdown do you make between risky and lower-risk assets? This is a personal choice. Some offensive investors opt for 100% risky investments, as these can generate higher returns over time, where more defensive investors build in more security based on a portion of lower-risk assets.
Some rules of thumb to determine the asset allocation, but this is just a possible guide :
Option 1 : Your age in lower-risk assets. For example, if you are 40 years old, the allocation is 60% risky / 40% lower-risk.
Option 2 : Risky assets = 110 minus your age. For a 40-year-old, this means 70% risky / 30% lower-risk.
Option 3 : Risky assets = 120 minus your age. For a 40-year-old, this means 80% risky / 20% lower-risk.
3. Investment plan for each goal
The final part of your financial plan is the implementation of your financial goals. For each goal, you will now prepare an investment plan.
Below you can find an example of such an investment plan.

In the next blog post invest and “stay the course” I will explain this a bit more.
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).
Sources :
(1) Wikipedia. (2021, April 21). SMART criteria. https://en.wikipedia.org/wiki/SMART_criteria
(2) Bogleheads. (2019, November 29). Asset allocation – Bogleheads. www.bogleheads.org. https://www.bogleheads.org/wiki/Asset_allocation