What is a financial plan?
A financial plan is a document that details a person’s current financial circumstances and their short- and long-term financial goals. It includes strategies for achieving those goals.
A financial plan can help you establish and plan for basic needs such as life risks (eg related to health or disability), income and expenses, and debt reduction.
He can provide financial guidance so that you are prepared to meet your obligations and goals. It can also help you track your progress over the years toward financial wellness.
Financial planning involves a thorough assessment of one’s financial situation (income, expenses, debt and savings) and expectations for the future. It can be done independently or with the help of a certified financial planner.
Key takeaways
- A financial plan documents a person’s short- and long-term financial goals and includes a strategy to achieve them.
- The plan should be comprehensive and highly customizable.
- It reflects an individual’s personal and family financial needs, investment risk tolerance and plan for saving and investing.
- Planning in finance starts with calculating a person’s current net worth and cash flow.
- A solid financial plan provides periodic guidance and serves as a way to track progress toward your goals.
Understanding financial planning
Whether you’re going it alone or with a financial planner, the first step to creating a financial plan is to understand how important it is to your financial future. He can provide guidance that ensures your financial success.
Begin your planning effort by gathering information from your various financial accounts into a document or spreadsheet.
Then do some basic calculations that establish where you stand financially.
You can complete the following steps as an individual or as a couple:
Calculate the net worth
To calculate your current net worth, subtract the total amount of your liabilities from the total amount of your assets. Start by listing and adding all of the following:
- Your Assets: Assets are property of value that you own. Assets can include homes, cars, cash in the bank, money invested in 401(k) plans, and other investment accounts.
- Your Responsibilities: Responsibilities are something you owe. Liabilities can include outstanding bills, credit card debt, student debt, mortgages, and car loans.
Determine the cash flow
Cash flow is measured against the money you spend. To create a financial plan, you must know your income as well as how and when your money is spent.
Documenting your personal cash flow will help you determine how much you need each month for necessities, how much is available for savings and investments, and where you can cut back on spending.
One way to do this is to review your checking account and credit card statements. Collectively, they should provide a fairly complete history of your income and expenses across a wide range of spending categories.
For example, document how much you paid during the year for housing expenses such as rent or mortgage payments, utilities, and credit card interest.
Other categories include food, household (including clothing), transportation, medical insurance and non-covered medical expenses. Still others may include your spending on miscellaneous entertainment, dining out, and vacation travel.
Once you add up all of these numbers for a year and divide by 12, you’ll know what your monthly cash flow is (and where you can improve it).
Establish your goals
A key part of a financial plan is clearly defined goals of the individual. This could include funding a college education for children, buying a larger home, starting a business, retiring early, or leaving an inheritance.
No one can tell you how to prioritize these goals. However, a professional financial planner should be able to help you finalize a detailed savings plan and specific investments that can help you reach them one by one.
Benefits of financial planning
- A financial plan includes a thorough examination of your income and expenses.
- It can always improve your understanding of your financial situation.
- It establishes important short- and long-term financial goals.
- It clarifies the actions required for you to achieve your various financial goals.
- A financial plan can focus your attention on important immediate steps, such as reducing debt and building up your savings for emergencies.
- It increases the likelihood that you will achieve financial goals and overall financial success (however you define it).
- It can guide your efforts over time and provide a means to monitor your progress.
- It can keep you out of financial trouble and reduce the stress and anxiety you may have experienced in the past.
When to make a financial plan
A financial plan is always an advantage for people who want to make sure that they manage their money in a way that works best for them. You can create one at any time, whether you just joined the workforce or have been working for years.
In addition, here are some specific examples that call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.
- A new job that results in additional income, new expenses, or new opportunities.
- Changes in income that may affect your ability to pay expenses, pay off debt, or save.
- Major life events such as marriage, children or divorce that can change financial objectives and spending needs.
- Health adversities that result in redirecting income and spending away from current goals.
- A lack of income, such as an inheritance or insurance payment, that may affect your efforts to reach financial goals (such as providing more money to invest and reduce debt).
