Having a financial plan is a great way to prepare yourself for future success with your finances. But what is it and how does it start? Find out now.
Chances are you've heard the term financial plan in a news story or conversation with colleagues or family members. Having a financial plan sounds smart, but not everyone knows what's in a correct document and why they need it.
Thankfully, these plans aren't difficult to put together. If you wish, you can create a simple financial plan yourself. Those who prefer a more in-depth document can hire a financial planner to put one together for them.
So what exactly is a financial plan and how is it created? Here's what you need to know.
What does a financial plan include?
A financial plan is a document put together by you or a professional who guides your personal finances. The plan can be as detailed or as minimal as you wish. It should inspire you to make progress in both the short and long term.
While many people end up having a written financial plan, your plan isn't set in stone. You can adapt it as your life and goals change over time. This is why it is essential to regularly review and revise your financial plan.
If you are financially savvy, you may be able to create a financial plan on your own. After all, it's just a document outlining your current financial situation, where you want it to be and how to get there. You can easily use Google Docs, Google Sheets, and free investment calculators to put together a document you might call your financial plan.
That said, a well thought out financial plan should include the following sections.
Current situation
To understand where to go, you first need to know where you are starting from. A financial plan can gather valuable information about your current finances, including income, expenses, cash flow, debt, savings, and investments.
If you keep track of your finances, processing this data is much easier than starting from scratch. In any case, it is important to know which tools you need to work with.
Review your banking, debt and investment statements to find relevant information on each financial item. Once you have a list of your current financial positions, you can find out how much money you can invest towards your goals. You can also use this starting point to find realistic short and long-term goals.
Future financial goals and how to achieve them
A financial plan is a road map for the future of your finances. You should set short, medium and long term goals for your money within your plan. Goals can include getting out of consumer debt, building an emergency fund, reaching a specific dollar amount of investment before retirement, and more.
A financial advisor can help you think about goals you might miss. Since they create financial plans for a wide variety of clients, they can fill in the spots you might not think are still extremely important.
Retirement planning
One of the biggest goals is to be able to withdraw. Your plan should be about how you intend to finance your retirement and how you will build the financial means to do so.
Retirement planning is more than just choosing a retirement number. You have to decide how much to invest each year, which account types to invest in and which investments to choose. Once you reach retirement age, you need to have a withdrawal strategy that preserves your funds so that you have money until you die.
Tax planning
Tax planning is another important concept that you should include in your financial plan. It allows you to keep more money for your goals. It does this by making smart decisions about your money to reduce the total amount of taxes you will have to pay for life.
Some tax planning strategies are as simple as putting the right types of investments into the right tax-advantaged accounts. Other strategies are more complex. For example, you need to keep track of your investment base so that you can do tax loss collection. Financial advisors can help you expose yourself to strategies you may not be familiar with. By learning more strategies, you may be able to keep more of your hard-earned cash.
How are you protecting your finances
It is also vital to manage how you protect your family and finances. Insurance is often a vital tool that people use to do this. We recommend that you consider car insurance needs, homeowners insurance, renters insurance, life insurance, disability insurance, long term care insurance, and umbrella insurance, among many other types.
In addition to insurance, you will need to make sure that you take care of any estate planning to do. You may want to create a will, trust, advance medical directive, or other estate planning documents to make sure your wishes are honored when you die. Your plan can use specifily to make sure there are as few tax impacts as possible when you die.
What is purpose of a financial plan?
The purpose of a financial plan is to develop a thoughtful representation of how to achieve your financial goals while protecting your family and finances. It should give you a roadmap on how to achieve your goals and ensure you have a bright financial future.
Creating a financial plan makes you think critically about what you want your future life to be like. This can be a great way to set bigger goals or make changes if you're not happy with your current life or lifestyle.
You may think that only people with large sums of money need a financial plan. It couldn't be more wrong. Honestly, anyone can benefit from having one.
Financial plans can help you understand what you need to do to have a successful financial future. It gives you a snapshot of where you are starting and what you need to do to get where you want to go. Much of what a financial planner helps you in developing your document is not common knowledge to someone who doesn't know much about finances.
Once you know what goals you need to achieve and when you need to achieve them, you can be more motivated to move forward faster. Often times, having a financial plan that you review and update regularly can be a big motivating factor. It can help you keep your finances in good shape for your future and retirement.
How is a financial plan made?
If you are financially savvy, you may be able to create a financial plan on your own. After all, it's just a document outlining your current financial situation, where you want it to be and how to get there.
You can easily use Google Docs, Google Sheets, and free investment calculators to put together a document you might call your financial plan.
Take an inventory of your current situation
The first thing you should do is see where you are starting from. First, work on tracking your expenses and income. You can do this manually or using free software such as Mint or Personal Capital. Then, calculate your net worth. This involves collecting information about your assets (like cash and investments) and debts (like car loans and mortgages). It can be done with a simple spreadsheet or by using a service like Personal Capital.
Once you have this information, be sure to keep it up to date. Keep tracking your expenses on a monthly basis. Consider updating your net worth once a month, quarter, or year based on your goals.
Set the goals you want to achieve on a timeline
Once you know where you are starting from, you can figure out where you want to go. There are several financial goals you can set depending on your current situation and where you want to end up. One key is to set a timeline for achieving your goals. This helps you calculate whether it is realistic to achieve your goals in the timeline you want
For example, if you want to save $ 20,000 over three years, you should save $ 556 per month. If that isn't realistic, you need to find a way to make more money, cut spending, or find a more suitable goal.
Goals could include:
Build an emergency fund.
Pay off debts.
Be properly insured with life insurance, homeowner, umbrella, car and other types of insurance.
Setting up estate planning documents.
Contribute a certain amount to investment accounts each year.
Achievement of a certain investment balance.
Make sure you include realistic deadlines so you don't get discouraged and throw your financial plan away.
Determine what actions are needed to achieve your goals and take action
Once you've established your goals and timing, it's time to start the strategy. Goals are only useful if you are actively trying to achieve them.
Based on your history and available financial resources, find out how to allocate your money to your goals. For some goals, such as preparing for retirement, you need to understand which investments to invest in. For other goals, such as aggressive debt payment, you may need to find ways to increase income to achieve them faster.
Based on these results, act and set up systems to make the achievement of these goals a reality.
Track your progress
A financial plan works best when you track your progress. If you create one and never look at it again, it doesn't do much good. Set up monthly, quarterly, or annual checks to review your financial plan so you can see how you're making progress.
Nobody's perfect. You may not reach your goals in the timeline you were hoping for or a favorable market could help you reach your goals earlier than expected. The key is to know where you are relative to your plan.
Make changes and update your plan as needed
If things aren't going as planned, it's time to take action again. If you are falling behind your goals, find a way to catch up and change your plan to reflect that. However, catching up may not always be possible. In these cases, the goal deadlines may need to be changed.
Keeping your financial plan and goals up to date doesn't mean you've failed. It means that you are taking control of your finances. People who have information and measure their progress often make far more progress than those who financially fluctuate in life without these tools.
It might be a good idea to hire a professional
However, you may not be aware of any blind spots or better strategies that financial experts could help you implement. That's why most people prefer to hire a financial planner or financial advisor to draft the document for you. They do it for a living. Good financial advisors know the ins and outs of what you need in your plan. But more on this below!
Do you need a financial planner or consultant?
There are several types of financial advisors you can hire to create a financial plan. Some financial advisors try to fit you into their ecosystem by earning commissions on transactions or by selling you insurance products. Ideally, you want to avoid these types of consultants. There are exceptions, such as when you are sure they have your best interests in mind.
Instead, you'll want to hire a paid fiduciary financial advisor who is legally obligated to make decisions in your best interest. These consultants do not receive a commission for the sale of the products. Instead, you have to pay them.
If you need a financial planner, you might want to consider using a service like Facet Wealth. Facet Wealth uses Certified Financial Planner (CFP) technology and fiduciary professionals to help you build a financial plan and manage your investments.
Facet Wealth is virtual only, but you will work with a dedicated CFP that doesn't change from meeting to meeting. This allows the financial planner to know you and your situation well. They can help you by adapting your financial plan as your situation evolves.
Their consultants have no incentive to sell. You are only charged a flat annual fee based on the services you need. You don't even have to pay an asset under management (AUM) fee. They offer different types of planning including retirement, education, life, income tax, insurance, probate, inheritance, retirement income, and wealth management planning.
If you'd rather work with a financial advisor in person, you can find one using the Paladin Registry. The Paladin Registry is a free service that connects you to a financial trustee who can address your financial planning concerns and needs.
The service requires you to fill in some basic information about your situation. Then, Paladin Registry searches its database to connect with one to three suitable financial fiduciary matches to compare. They also review and document the qualifications of consultants recommended for you.
Once you have the list of potential consultants, you can interview the candidates and select the best one. Paladin Registry also offers a free guide to help you understand the best way to interview your candidate financial advisors. Once you have chosen a consultant, they can create a financial plan for you.
My final thoughts
Putting together a financial plan can be a great exercise. It allows you to understand where your finances are today. It also makes you think about where you want your finances to be in the future and how to get there. You can put together a financial plan by yourself. That said, you may be missing out on things you aren't aware you need to include or strategies that could help you reach your goals faster.
Many people choose to hire a financial advisor to put together a financial plan. You can hire a service, like Facet Wealth, or find a consultant to meet you in person using a service like Paladin Registry. No matter how you decide to create your financial plan, make sure you have one. This way, you know what goals you are pursuing in order to have a successful financial future.