A Guide To Financial Planning

What is a Financial Plan?

A financial plan is a comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. Most individuals work in conjunction with a financial planner and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans. These metrics are used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what steps need to be taken to ensure that they are.

Elements of a Financial Plan

• Financial goals: A financial plan is based on an individual's or a family's clearly defined financial goals, including funding a college education for the children, buying a larger home, starting a business, retiring on time or leaving a legacy. Financial goals should be quantified and set to milestones for tracking.

• Personal net worth statement: A snapshot of assets and liabilities serves as a benchmark for measuring progress towards financial goals.

• Cash flow analysis: An income and spending plan determines how much can be set aside for debt repayment, savings and investing each month.

• Retirement strategy: The plan should include a strategy for achieving retirement independent of other financial priorities. The plan should include a strategy for accumulating the required retirement capital and its planned lifetime distribution.

• Comprehensive risk management plan: Identify all risk exposures and provide the necessary coverage to protect the family and its assets against financial loss. The risk management plan includes a full review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.

• Long-term investment plan: Include a customized asset allocation strategy based on specific investment objectives and a risk profile. This investment plan sets guidelines for selecting, buying and selling investments and establishing benchmarks for performance review.

• Tax reduction strategy: Identify ways to minimize taxes on personal income to the extent permissible by the tax code. The strategy should include identification of tax-favored investment vehicles that can reduce taxation of investment income.

• Estate plan: Create arrangements for the preservation and distribution of assets with attention to minimizing settlement costs and taxes. Review and update estate panning instruments, such as wills, trusts, power of attorney, medical directives, and marital trusts.

Ten reasons why financial planning is important

Financial planning helps you determine your short and long-term financial goals and create a balanced plan to meet those goals.

Here are ten powerful reasons why financial planning – with the help of an expert financial advisor – will get you where you want to be.

Income: It's possible to manage income more effectively through planning. Managing income helps you understand how much money you'll need for tax payments, other monthly expenditures and savings.

Cash Flow: Increase cash flows by carefully monitoring you’re spending patterns and expenses. Tax planning, prudent spending and careful budgeting will help you keep more of your hard earned cash.

Capital: An increase in cash flow, can lead to an increase in capital. Allowing you to consider investments to improve your overall financial well-being.

Family Security: Providing for your family's financial security is an important part of the financial planning process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.

Investment: A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.

Standard of Living: The savings created from good planning can prove beneficial in difficult times. For example, you can make sure there is enough insurance coverage to replace any lost income should a family bread winner become unable to work.

Financial Understanding: Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.

Assets: A nice 'cushion' in the form of assets is desirable. But many assets come with liabilities attached. So, it becomes important to determine the real value of an asset. The knowledge of settling or canceling the liabilities comes with the understanding of your finances. The overall process helps build assets that don't become a burden in the future.

Savings: It used to be called saving for a rainy day. But sudden financial changes can still throw you off track. It is good to have some investments with high liquidity. These investments can be utilized in times of emergency or for educational purposes.

Ongoing Advice: Establishing a relationship with a financial advisor you can trust is critical to achieving your goals. Your financial advisor will meet with you to assess your current financial circumstances and develop a comprehensive plan customized for you.

How to create a financial plan

Creating a personal financial plan will help you achieve any goal you’ve set for yourself.

Financial plans help you determine where you’re going with your money. Partly inspirational, these plans can help you create a strategy for paying off all of your debt while saving for a new house at the same time. When building your financial plan, follow these three steps:

Step 1: Determine where you’re going.

These goals will become the driving force behind your overall plan. Your list should include your short-term, mid-term, and long-term goals, and it should be realistic and specific. Short term goals are within one year, while mid-term goals are between two to five years and long-term goals are greater than five years from today. For example, if your medium-term goal is to buy a new car within the next three years, research the car you’re interested in and how much it costs. Your goal could be based on how much you’ll need for a down payment or perhaps to pay for the car in full with cash. Then, determine your target purchase date.

“Once you know how much you need to save and how long you have to save it, you can set a monthly savings goal. “

Step 2: Build in milestones.

Create 'small wins' along the way that motivate you to stick with your financial plan and reinforce the progress you are making. These small wins become the key milestones of your financial plan. For example, if one of your goals is to pay off the debt you’ve accumulated on two credit cards within the next five years, one of your milestones might be to pay off the credit card with the highest interest rate within two years and the one with the lower interest rate by the end of that five-year period. With this plan in place, you would have a goal around which credit card to pay down first. With the pay down of that first credit card, this can serve as a small win that can then empower and keep you motivated to pay down the second card.

Step 3: Set your monthly goal.

Once you know how much you need to save and how long you have to save it, you can set a monthly savings goal. Then you can see where that goal fits in your budget. If you find that you can’t save as much as your goal requires, take a look at your spending and see if there are places you could make adjustments. If that doesn’t seem feasible, you may need to add more time to your goal completion date, change your prioritization, or look for ways to increase money coming into the household.

“Creating your financial plan takes a significant time investment at first, but documenting your goals can help you save time and money in the long run. With a plan in place, you can set milestones and celebrate the achievements that will keep your finances healthy today – and for years to come.”