What Is a Financial Plan?

A financial plan is a document including a person’s current money situation and long-term financial goals, along with strategies to achieve those goals. A financial plan starts with a thorough assessment of the person’s current financial state and future expectations and can be made independently or with the help of a certified financial planner.

Understanding the Financial Plan

Whether you’re going it alone or with a financial planner, the first step in creating a financial plan is collecting a bunch of pieces of paper– or, most likely these days, cutting and pasting numbers from different web-based accounts into a document or spreadsheet.

You might complete the following steps as an individual or a couple:

Calculating net worth

To figure out your current net worth, list each of the following:

  • Your assets: This may include a home and a vehicle, some money in the bank, money invested in a 401( k) plan, and anything else of value that you possess.
  • Your liabilities: These might include credit card debt, student debt, an outstanding mortgage, as well as a car loan. Sometimes, you may have access to a grace period or moratorium.

The formula for your current net worth is your total assets minus your total liabilities.

Identifying cash flow

You can’t create a financial plan without knowing where your money is going– and when. Documenting transactions– the flow of cash in and out– will help you figure out how much you need monthly for necessities, how much may be left for saving and investing, and even where you can cut back a little– or a lot.

One way to get this done is to skim through your checking account and credit card statements. Collectively, they should present a relatively complete history of your spending.

If your expenses differ a lot seasonally, then it’s best to look at a whole year– counting up all the expenditures in each category and then dividing by 12 to get an average monthly estimate of your spending. This way, you will not underestimate or overestimate what you spend on utilities, nor will you forget to take into account holiday gifts or a vacation.

Document how much you’ve spent over a year on basic housing expenses like rent or mortgage payments, utilities, credit card interest, and also home furnishings. Include categories for food, clothing, transportation, medical insurance, and non-covered medical costs, then document separately your real spending on entertainment, dining out, and vacation travel.

As you examine your own financial records, your personal spending categories will stand out. You might have an expensive hobby or a pampered pet. Document the costs.

When you add up all these numbers for a year and then divide by 12, you’ll know exactly what your cash flow has been.

Considering your top priorities

The core of a financial plan is an individual’s clearly defined goals. These might include funding a college education for the kids, purchasing a bigger home, starting a business, retiring on time, or leaving a legacy.

Nobody can tell you how to prioritize these goals. However, a professional financial planner might be able to help you select a detailed savings plan and specific investments that will help you tick them off, one at a time.

Special Considerations of a Financial Plan

Financial plans don’t have a set format. A licensed financial planner will be able to design one that fits you and your expectations. Once complete, it might prompt you to make changes in the short term that will help guarantee a smooth transition through life’s financial stages.

The following aspects should be addressed and revised as necessary:

  • Retirement strategy: Regardless of what your priorities are, the plan should involve a strategy for accumulating the retirement income that you need.
  • Comprehensive risk management plan: This consists of a review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
  • Long-term investment plan: A tailored plan based on specific investment goals and a personal risk tolerance profile.
  • Tax reduction strategy: A strategy for reducing taxes on personal income to the extent allowed by the tax code.
  • Estate plan: Arrangements for the benefit and protection of your beneficiaries.

What is the Purpose of a Financial Plan?

A financial plan is created to help you make the best use of your money and accomplish long-term financial goals, whether they are sending your kids to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.

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