What Is a Financial Plan?

Financial goals come in all shapes and sizes. Some individuals only aspire to save for a rainy day and build their nest egg. Others want to save for their children’s education, pay off their mortgage in 15 years, start a business, or retire by 45. Whatever your goals are, one thing’s for certain. A solid financial plan will provide the direction you need to make them a reality in perfect timing.

What Is a Financial Plan?

In a nutshell, a financial plan is a document that serves as a roadmap to accomplish all that you desire for your finances. It also allows you to visualize the exact steps necessary to reach the finish line since it breaks each goal down into benchmarks to ensure you stay on track.

Key Benefits of Financial Plans

There are a few key benefits to financial plans you should be mindful of.

Financial Plans Assess Your Current Financial Situation

It’s impossible to devise a plan of action for your financial future without knowing where you stand. But a financial plan forces you to take a step back and assess your current financial situation to determine the actions to get from where you are now to where you intend to be long term.

Financial Plans Help You Narrow Down Key Objectives

When mapping out your financial future, it’s easy to get inundated with ideas for your future. The reality is you can only do so much, and that’s why it’s essential to narrow down all your visions into a few financial objectives. And a solid financial plan will help you do just that, as it’s a prerequisite to having any success.

Otherwise, you’ll spend too much time spinning your wheels moving in several directions. Or even worse, you’ll never get the clarity you need to take that first step.

Financial Plans Dissect Your Goals into Actionable Steps

Have you ever made plans to accomplish a goal but never quite made it to the finish line? This could be for several reasons, but more than likely resulted from not having a plan of action. Fortunately, financial plans dissect those key objectives discussed earlier into actionable steps to keep you on track and help you reach the finish line.

Financial Plans Contain Benchmarks

The key objectives listed in your financial plan should be realistic and attainable. And by implementing particular benchmarks, you’ll build momentum as you progress and check action steps off your list.

Financial Plans Foster Accountability

Need a dose of motivation to stay on course? While you may not have a financial planner whispering words of encouragement in your ear, you’ll have a clear and concise financial plan that outlines what you need to do every step of the way along with deadlines to ensure you meet your goals in time.

What’s In a Financial Plan?

The format of financial plans differs across the board, but most contain the following components:

Financial Health

What’s the current state of your finances? Do you have more assets than liabilities or vice versa? Are you carrying an excessive debt load? Is your budget balanced? Do you have an adequate amount of cash on hand for a rainy day? In this section, you’ll find the answers to these questions along with a breakdown of the inputs used to calculate your net worth, a detailed budget, and any other applicable information.

Tax Planning

By now, you know that Uncle Sam wants his cut each time you earn money. And you are probably accustomed to the deductions from your paycheck or quarterly tax payments if you’re self-employed. But what if there was a way to reduce this amount so you could enjoy more of your hard-earned money? This section of your financial plan will address strategies to help you save on taxes.

What about tax implications as you approach the golden years? Your financial planner will explore ways to structure your nest egg so you’ll take the most minimal tax hit in retirement. This could be in the form of opening a Roth IRA so the distributions are tax-free if you expect to earn more in retirement. Or maybe a traditional IRA that is funded with pre-tax distributions may be more sensible if you’d prefer to lower your tax liability now and pay later when you’re in a lower tax bracket.

Investment Plan

The investment section in your financial plan takes a deep dive into your portfolio. What types of investments do you own? What’s your current rate of return? Is your portfolio properly balanced? Is your asset diversification strategy ideal for your investment goals? What actions would you need to take with your portfolio to meet your financial goals? Do you intend to use a robo-advisor? In this section, you’ll find the answer to these questions and much more regarding your investments.

Costs of Continuing Education

Is saving for your children’s college expenses at the top of your list of priorities? Or maybe you’re looking to fund your own education? This section addresses ways to make it happen without burying yourself in student loan debt.

Retirement Plan

How much should you save for retirement? Financial planners hear that question much more often than they’d like to admit. So, this section is dedicated to retirement goals and exactly what it’ll take to get there. The financial planner will take the deficit between what you currently have and your end goal to calculate how much you need to save on a monthly basis. This amount will then be adjusted for inflation to reach a figure that works.

This section also includes specific strategies for your nest egg that may be worth considering to reach your retirement goals in a timely manner while reducing your tax liability to the IRS. And you’ll find suggestions on how to optimize the current mediums (i.e. 401(k) employer matches) you’re using for retirement.

Estate Plan

No one wants to think about their death. It’s a bit creepy and for some, downright scary. And while it’s true that you longer have to worry about your finances when you die, your loved ones that are left behind do. So, the question is: do you want to them to handle business with the least amount of stress possible or be left to sort out the mess and pick up the tattered pieces?

This section provides direction designed to minimize tax burdens and final expenses associated with settlements when your life comes to an end. You’ll need to solicit the assistance of an attorney to draft up documents related to estate planning, but a financial planner will lay the framework and point you in the right direction.

Risk Management

Regardless of your current financial health, there’s always room for improvement. But why work so hard to establish a solid financial foundation only to subject yourself to unnecessary risk? That’s where insurance comes in, and this section will identify current gaps in coverage gaps along with those that may arise as you progress in your financial journey. You’ll also find recommendations to hedge against the risks presented.

How to Create a Financial Plan

Step 1: Find a Certified Financial Planner (CFP)

When researching your options, ask around for recommendations and read reviews from third-parties. Those you consider should have the CFP designation and follow a fee-based model. (If their fee structure is commission-based, there’s a possibility they will attempt to peddle products that you don’t need in an attempt to boost their bottom line).

Step 2: Gather your Information

Before your meeting with a financial planner, reach out to request a checklist of the documents they’ll need. Doing so will greatly facilitate the process of creating a financial plan.

Step 3: Establish Your Top Goals

This is hands-down the most exciting part of the process. It’s where you’re allowed to dream big and envision the life you want. If you haven’t quite thought about what you want your financial future to look like, start by jotting down goals you want to accomplish such as buying a home or buying a car. Then, narrow down the list to determine which are most important.

When setting goals, you want them to be enticing enough to stick to for the long haul. So, paying off debt sounds good, but paying off high-interest debt so you can stop living check-to-check and take annual vacations is even more attractive.

And saving money for a rainy day is another solid financial goal, but saving money to avoid your budget blowing up in your face each time something comes up is more solid.

Another enticing goal: building credit to minimize what you pay on debt products, like a mortgage or auto loan, when you need them versus simply boosting credit to have an 800 credit score that looks good on paper.

Step 4: Create a Spending Plan

Do you have a budget or are you flying by the seat of your pants each month? If it’s the latter, you’ll want to create a spending plan right away. Doing so will get you spending in check and free up funds to allocate towards the financial goals you set in the last step. A spending plan also minimizes the chances of burying yourself into an even deeper debt hole because you won’t be allowed to spend more than you earn.

Step 5: Draft Up the Financial Plan

At this point, the financial planner should have everything they need to draft up the financial plan. But it’s important that you review the contents to ensure it includes all your key financial objectives and ask questions regarding the strategies if you aren’t clear on an approach or suggestion.

Step 6: Execute the Plan

It’s time to get moving. First things first: understanding the dedication it’s going to take to check goals off your list. Next, you’ll need to stick to your spending plan to ensure you have enough disposable income to allocate towards your goals. Most importantly, schedule regular follow-ups with your financial planner to stay on track. And it also doesn’t hurt to get an accountability partner to encourage you when it’s more tempting to make a financial decision that deviates from the plan.

Step 7: Preserve Your Financial Health

Are you properly insured against the risk of loss from natural disasters, a debilitating health issue, or sudden death? Is your emergency fund substantial enough to get you through a route patch? Do you carry a big enough life insurance policy to take care of your final expenses and care for loved ones who depend on you in the event of your death? These are just a few ways to preserve your financial health in the long-run.

The DIY Approach

Maybe you desperately want to draft up a financial plan but don’t have the funds to make it happen? You can do your research and draft up a financial plan, but it’s best to shop around for a financial planner that you can afford.

How Often Should You Update Your Financial Plan?

There’s no hard and fast rule on when you should update your financial plan. While you’ll want to review it periodically, there are some instances that may warrant a check-in to make adjustments. These include:

  • The birth of a child, especially the birth of your first child
  • Career changes or promotions that result in a change in income
  • New objectives for college planning
  • An illness that impacts your bottom line
  • An inheritance or large financial windfall

Do You Need a Financial Plan?

If you’re serious about attaining your financial goals, you need a financial plan. Why so? Well, it’s one thing to sit around and discuss all that you’d like to accomplish. It’s another to sit down with a professional and come up with a strategy to knock those goals out of the park.

It’s not the end of the world if you don’t create a financial plan, and you may still meet your goals. However, a financial plan provides you with the framework to reach the finish line in the most efficient and rapid manner possible without pulling your hair out.