What Is a Financial Plan?

A financial plan is a document including a person’s current money situation and long-term monetary goals, along with strategies to accomplish those goals. A financial plan begins with a thorough assessment of the individual’s current financial state and future expectations and may be created independently or with the help of a qualified financial planner.

Understanding the Financial Plan

Whether you’re doing it alone or with a financial planner, the first step in making a financial plan is collecting a bunch of bits of paper– or, more likely nowadays, cutting and pasting numbers from different online accounts into a document or spreadsheet.

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

Determining Net Worth

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

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

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

Determining Cash Flow

You can’t make a financial plan without knowing where your money is going– and when. Recording transactions– the flow of cash in and out– will help you figure out how much you need each month for necessities, how much might 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. Together, they should give a fairly complete history of your spending.

If your expenses vary a great deal seasonally, then it’s best to go through 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 neglect to account for holiday gifts or a vacation.

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

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

Once 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 Priorities

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

No one can tell you how to prioritize these goals. However, a professional financial planner might be able to help you choose a comprehensive savings plan and specific investments that will help you tick them off, one at a time.

Special Considerations of a Financial Plan

Financial plans do not have a set format. A licensed financial planner will be able to design one that fits you and your expectations. When complete, it might motivate you to make changes in the short term that will help ensure a smooth transition through life’s financial phases.

The following aspects should be addressed and revised as necessary:

  • Retirement strategy: No matter what your priorities are, the plan should include a strategy for accumulating the retirement income that you need.
  • Thorough risk management plan: This consists of a review of the life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
  • Long-term investment plan: A personalized plan based on specific investment objectives and a personal risk tolerance profile.
  • Tax reduction strategy: A strategy for minimizing taxes on personal income to the extent allowed by the tax code.
  • Estate plan: Arrangements for the benefit and protection of your heirs.

What is the Purpose of a Financial Plan?

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

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