What is a financial plan?
A financial plan is a document that includes an individual’s current money situation and long-term monetary goals, as well as strategies to achieve those goals. A financial plan begins with a thorough assessment of the individual’s current financial situation and future expectations and can be made independently or with the help of a certified financial planner.
- A financial plan documents a person’s long-term financial goals and formulates a strategy to achieve them.
- The plan should be comprehensive but also highly individualized to reflect the individual’s personal and family situation, risk tolerance and future expectations.
- The plan starts with the calculation of the present net worth and cash flow of the individual and ends with a strategy.
basics of financial planning
understanding financial planning
Whether you’re going it alone or with a financial planner, the first step in creating a financial plan is gathering lots of pieces of paper, or more likely cutting numbers from various web-based accounts these days into a single document. Pasting or spreadsheet.
You can complete the following steps as an individual or a couple.
net worth calculation
To find your current net worth, list all of the following:
- your property: This can include a house and a car, some cash in the bank, money invested in a 401(k) plan, and anything else you own.
- your liabilities: These can include credit card debt, student loans, an outstanding mortgage and car loans. In some cases, you may have access to a grace period or a moratorium.
Your net worth, minus your total liabilities, is equal to your current net worth.
cash flow determination
You can’t make a financial plan without knowing where your money is going—and when. Documenting the transaction — the flow of cash in and out — will help you determine how much you need each month for needs, how much is left for savings and investments, and even where you are. Can cut down a bit.
One way to do this is to look at your checking account and credit card statements. Collectively, they should provide a fairly complete history of your spending.
If your expenses vary a lot seasonally, it’s best to go through the entire year — counting all the expenses in each category and then dividing by 12 to get an average monthly estimate of your spending. That way, you won’t underestimate or overestimate what you spend on utilities, or forget to account for holiday gifts or a holiday.
Don’t overlook cash withdrawals that can be used on all kinds of things from shampoo to soda.
Document how much you paid in a year in basic housing expenses such as rent or mortgage payments, utilities, credit card interest and even home furnishings. Add categories for food, clothing, transportation, medical insurance and non-covered medical expenses, and then separately document your actual spending on entertainment, eating out and vacation travel.
As you look at your own financial records, your personal spending categories will stand out. You may have an expensive hobby or a pampered pet. Document the cost.
Once you add up all of these numbers for one year and then divide by 12, you’ll know what your cash flow has actually been.
keeping your priorities in mind
The core of a financial plan is clearly defined goals of an individual. These may include funding a college education for children, buying a bigger 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 can help you choose a detailed savings plan and specific investments that will help you correct them one by one.
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax deduction strategy and an estate plan.
Special considerations of a financial plan
There is no set blueprint of financial plans. A licensed financial planner will be able to create a financial planner that suits you and your expectations. Once completed, it can prompt you to make changes in the short term that will help ensure a smooth transition through the financial phases of life.
The following elements should be addressed and modified as needed:
- retirement strategyNo matter what your priorities are, the plan should include a strategy for accumulating the retirement income you need.
- comprehensive risk management plan: This includes a review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
- long term investment plan: A customized plan based on specific investment objectives and individual risk tolerance profile.
- tax reduction strategyStrategies for reducing taxes on personal income to the extent permitted by the Tax Code.
- estate planning: Provision for the benefits and security of your heirs.
What is the purpose of financial planning?
A financial plan is designed to help you make the best use of your money and achieve long-term financial goals, whether it’s sending your kids to college, buying a bigger house, leaving an inheritance, or a comfortable Enjoy retirement.
How do I Write a Financial Plan?
You can write a financial plan yourself or take the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this is documented, you need to consider the long-term objectives and come up with ways to achieve them.
What are the major components of a financial plan?
Financial plans don’t have a set format, although the good ones focus on more or less the same things. After calculating your net worth and spending habits, you will figure out your financial goals and find ways to make them achievable. Typically, this involves some form of budgeting and creating a means to withdraw money each month. To ensure that you live comfortably for the rest of your life, it is generally advisable to devise a retirement, risk management and long-term investment strategy and keep tax expenses to a minimum.