What is a financial plan?
A financial plan is a document that describes a person's current financial situation and his short- and long-term monetary goals. It includes strategies to achieve these goals.
A financial plan can help you identify and plan for basic needs, such as managing life risks (such as those related to health or disability), income and expenses, and debt reduction.
It can provide financial guidance so you are prepared to meet your obligations and goals. It can also help you track your progress over the years in financial wellness.
Financial planning involves a thorough evaluation of one's money situation (income, consumption, debt and savings) and expectations for the future. It can be made independently or with the help of a certified oneFinancial planner.
Key learning points
- A financial plan documents one's short- and long-term financial goals and includes a strategy for achieving them.
- The plan must be comprehensive and highly customized.
- It should reflect an individual's personal and family financial needs, tolerance for investment risk, and plan for saving and investing.
- Planning in finance begins with a calculation of one's current net worth and cash flow.
- A solid financial plan provides guidance over time and serves as a way to track progress toward your goals.
Basics of Financial Planning
Understanding a financial plan
Whether you do it alone or with a financial planner, the first step is to create a financial plannerfinancial planis to understand how important it can be for your financial future. It can provide the guidance that guarantees your financial success.
Start your planning efforts by gathering information from your various financial accounts into one document or spreadsheet.
So do some basic calculations that will determine where you stand financially.
As an individual or as a couple you can go through the following steps:
Calculate the net worth
To calculate your currentnet value, subtract the total of your debts from the total of your assets. Start by listing and adding up all of the following:
- Your belongings: An asset is a property of value that you own. Assets can include a house, a car, cash in the bank, money invested in a401(k)-planand other investment accounts.
- Your obligations: A responsibility is something you owe. Liabilities can include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.
Determine the cash flows
Cash flow is the money you take in, measured relative to the money you spend. To create a financial plan, you need to know your income and how and when your money will be spent.
Document yourpersonal cash flowhelps you determine how much you need to spend on necessities each month, how much you have available for savings and investments, and where you can cut back.
One way to accomplish this is to review your checking account and credit card statements. Taken together, they should provide a reasonably complete story of your income and expenses across a wide range of expense categories.
For example, document how much you paid during the year for housing costs, such as rent or mortgage payments, utilities, and credit card interest.
Other categories include food, household (including clothing), transportation, health insurance, and non-covered medical expenses. Still others may include your expenses for miscellaneous entertainment, food, and vacation travel.
If you add all these numbers together for a year and divide by 12, you will know what your monthly cash flow has been (and where you can improve it).
When recording your cash flow history, don't overlook withdrawals spent on everything from takeout to shampoo to soda. ATM withdrawals can also reveal where you can save on unnecessary expenses.
Determine your goals
A large part of a financial plan belongs to an individualclearly defined goals. This may involve financing a university education for the children, buying a larger house, starting a business, retiring on time 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 create a detailed savings plan and specific investments that will help you achieve them one by one.
The key elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
Benefits of a financial plan
- A financial plan takes a detailed look at your income and expenses.
- It can improve your insight into your financial situation at any time.
- It sets important short- and long-term financial goals.
- It clarifies the actions required of you to achieve your various financial goals.
- A financial plan can focus your attention on important immediate steps, such as reducing debt and building your emergency savings.
- It increases the likelihood that you will achieve financial milestones and overall financial success (however you define it).
- It can guide your efforts over time and provide a means to track your progress.
- It can keep you out of financial trouble and reduce the stress and worry you may have experienced in the past.
Reason for a financial plan
Financial planning is a smart way to keep track of your financial housekeeping. It is a monetary instrument for everyone, regardless of age, income, wealth or financial dreams. It provides individuals with a way to document their personal goals and associated financial goals. It can keep people on track to meet ongoing financial needs and important financial goals.
When do you make a financial plan?
A financial plan is always beneficial for those who want to make sure they are managing their finances in a way that is best for them. You can create one at any time, whether you are just joining or have been working for years.
In addition, here are some special cases that require the preparation and use of a financial plan. They can also serve as a signal to adjust existing plans.
- A new job that results in extra income, new expenses or new opportunities
- A change 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 goals and spending needs
- Health problems that cause income and expenses to be diverted from existing goals
- An unexpected income, such as an inheritance or an insurance payout, that could impact efforts to achieve your financial goals (such as providing more money for investments and reducing debt)
How to create a financial plan
Creating a financial plan requires certain steps. In addition to calculating your net worth, determining your cash flow, and setting financial goals as described above, here are additional plan elements/steps you can include.
Do it yourself or get professional help
Decide whether you want to create your financial plan yourself or use a licensed planFinancial planner. While you can certainly create a financial plan, a financial professional can ensure that your plan covers all the essentials.
Build an emergency fund
Based on what your cash flow allows, you can start by setting aside enough money in a checking account to cover all your expenses for at least six months (preferably twelve) if you lose income due to unexpected events.
Plan to reduce debt and control expenses
If you have debt, the faster and more efficiently you can eliminate it, the better it will be for growing your savings, your standard of living, and achieving specific financial goals.
Make it a habit to cut back on expenses whenever possible so you can grow your savings. Additionally, keep track of expenses you know you will have, such as taxes, so that you always meet these obligations on time.
Manage potential risks
Your financial well-being can be affected by accidents, health problems or the death of a relative strike. Make sure you get the right insurance coverage that will protect your financial security at such times. This cover may relate to home,property, health, car,handicap,personal responsibility, Inwooninsurance.
Planning to invest
Participate in a pension planworkwith which the premiums are automatically debited from your pay slip. And plan to maximize your tax-advantaged investment with a personal investmentIRAif your income allows it.
Also consider how to allocate other disposable income into a taxable investment account that can grow your net worth over time. Your investment plan must take your investment into accountrisk toleranceand future income needs.
Add a tax strategy
Solve the goal of lowering your income taxes with tax credits, tax credits, tax loss harvesting, and all other options legally available to taxpayers.
Consider an estate plan
It is important to make an arrangement with one for the benefit and protection of your heirsestate plan. The details depend on your stage of life and whether you are married, have children, or have other long-time goals.
Monitor and adjust your financial plan
Review your plan at least once a year (alone or with a financial professional) and more often if a change in circ*mstances affects your financial situation. Keep it running efficiently by adjusting it as necessary.
What is the purpose of a financial plan?
A financial plan should help you get the most out of your money and achieve long-term financial goals, such as sending your children to college, buying a bigger home, leaving an inheritance, or enjoying a comfortable retirement.
How do I write a financial plan?
You can write a financial plan yourself or get help from a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this is documented, consider the long-term goals and decide how to achieve them.
What are the most important parts of a financial plan?
Financial plans are not uniform, although good plans often focus on the same things. Once you've calculated your net worth and spending habits, examine your financial goals and ways to achieve them. This usually involvesa form of budgeting, savings and investments per month. To ensure that you can live comfortably and financially stress-free for the rest of your life, the areas to focus on are an emergency savings plan, a retirement plan, risk management, a long-term investment strategy, and a tax minimization plan.
In short
A financial plan is an essential planning tool for your financial well-being, now and in the future. It involves determining the current state of your finances, your various financial goals and methods that can help you achieve them.
It's never too early or too late to make a financial plan. And no matter how much money you have, a financial plan can help you determine the best way to make it work so you can meet your financial needs at all stages of your life.
