Take Control of Your Money and Reap the Benefits Of Financial Planning
In my experience in Financial Services, there is nothing more important for financial success than a Financial Plan.
My career was focused on developing programs and tools to help people reach their financial goals. I also managed teams focused on Investment Risk.
One thing is clear. Every one of us does at least one of these four things every day: Spend money, make money, save money, or invests money.
I strongly believe that the best way to manage your money is to create a personalized financial plan tailored to your individual life and goals. Then, stick to it or make changes as life changes.
That is where a financial plan comes into play.
Table of Contents
What is a Financial Plan?
A financial plan is a roadmap for making wise decisions regarding money. It involves analyzing your current financial situation and setting long-term goals.
A financial plan considers your budget, expenses, investments, savings, and other factors to identify growth opportunities and provide strategies for staying on track.
It is designed to help you reach your financial goals and provides guidance that can help protect you from unnecessary risks.
What is Financial Planning?
Financial planning is an ongoing process of identifying, monitoring, and adjusting your finances to meet your financial goals.
As life changes due to career, family, health, and lifestyle conditions, it is essential to continually review and update the financial plan to accommodate these shifts.
This will allow you to be prepared for the future and maintain progress toward achieving your goals.
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What Should Be In a Financial Plan?
Financial planning is important in managing your finances and achieving your long-term goals. A financial plan should include the following components:
- Goal Identification
- Net Worth Statement
- Cash Flow and Expense Monitoring
- Risk Management and Insurance Planning
- Tax Planning
- Investment Planning
- Retirement Savings Plan
- Profit and Loss Statement
Who Can Help Create a Financial Plan?
There are a variety of professionals who can help you create and manage a financial plan, including:
- Chartered Financial Analyst (CFA)
- Financial advisors
- Certified public accountants (CPAs)
- Financial planners
- Investment advisors
- Estate attorneys
A Certified Financial Planner (aka CFP) is an excellent option for individuals looking for a financial advisor with a record of accomplishment in providing financial planning advice and services to their customers.
In addition, many CFPs can also provide their clients with investment management strategies and financial planning support.
In my 22+ year career in Financial Services, I do not believe Financial Advisors are the best choice for financial planning.
In my experience at two of the largest Financial Services firms, the home office (which I was part of) does not truly equip Financial Advisors with the tools or tax guidance to give sound financial planning advice.
For more thoughts as a Financial Services industry insider, see Financial Tips From A Chartered Financial Analyst or Should I Max Out My 401k? a 42-Year Old Retired CFA answers!
Financial Planning Fundamentals
At first glance, financial planning may seem simple. A solid understanding of an individual or couple’s current financial situation and future aspirations is paramount to constructing a tailored financial plan.
Examining the nuances makes all the difference in successful long-term planning.
A thorough financial plan should be organized according to potential life events, including techniques and strategies that can be applied at each step.
This enables you to acquire a doable timeline that outlines what actions must be taken immediately and in the future.
It’s a means of understanding and managing your money and time.
Let’s look at some of the important components to include in a complete financial plan. When working with a professional planner, they could typically review these areas of financial planning and more.
A Budget
One of the most critical components of financial planning is a budget. Individuals and couples can ensure they live within their means by preparing and following a budget.
A budget is simply identifying where your money comes from and where it goes.
Having a financial planner ensures that you follow an appropriate budget relative to your income. It also gives you the support needed to ensure that debt does not begin to accumulate over time.
How to Budget for Unexpected Expenses
Emergency Savings
Based on a January 2022 survey conducted to determine consumers’ financial health, 56% of Americans would be unable to pay an unexpected $1,000 bill from their savings, instead opting to charge a credit card or find other sources to cover the payment.
A good financial plan should include an emergency fund to cover 3 to 6 months of expenses.
For example, if you lose your job without severance and expect you can return to work within six months, your emergency fund combined with your unemployment income should help you bridge the gap between jobs.
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Debt Payoff Plan
Having a high balance on your credit cards costs you more than just the interest you pay. It can also damage your credit rating and make it harder to acquire a home or car, launch a business, rent an apartment, or secure employment.
And student loan debt is something that almost every college graduate in the U.S. has to deal with, generally more than $30,000 on average.
A financial plan will determine which debt you should pay off first and how quickly to repay it. Suppose the interest rate is fixed and relatively low.
In that case, a financial planner may suggest not paying off certain debts more quickly, especially if this frees up your dollars for savings or investments, which may offer higher returns.
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Investment Planning
A financial plan should provide the foundation for establishing your investment strategy.
While it may not discuss the specific investments (you will hold your portfolio management particulars), financial planning should provide a vision of how much you should invest.
It should include the types of investments recommended to build an appropriate asset allocation.
Education Funding
A priority for many families includes saving for higher education and identifying financial aid and scholarships that can minimize their children’s student loan burden after graduation.
A financial plan should provide a blueprint for using 529 college savings plans and other tax-deferred savings accounts to optimize a family’s education funding strategy.
Insurance
A financial plan should include a discussion of insurance policies important for every individual and couple to consider.
Insurance plays a vital role in financial planning, from policies designed to protect your assets like your home or car to policies that offer a guaranteed income stream in retirement or upon the death of a family member.
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Retirement Plan
One of the primary benefits of financial planning is knowing when you can afford to retire comfortably.
Your financial plan should provide a range of likely ages when you can quit your job and live off your savings and sources of income like Social Security or 401k.
Estate Planning and Charitable Giving
While financial planning regularly incorporates details concerning your estate, many individuals will have a particular estate plan besides their financial plan.
Estate planning involves setting up and maintaining a strategy describing who will receive your assets upon death.
Various essential documents are involved, some of which are legal (e.g., a last will and testament), while others exist simply for the benefit of those you love.
At this emotional time, having a well-constructed plan can help make matters less challenging for family members.
A component of estate planning may also include discussing your charitable giving aspirations. Financial planners are knowledgeable about using tools like a Charitable Remainder Trust to reduce your tax liability.
An estate plan also helps when an individual is incapacitated, too. Estate planning includes your financial assets, other items, and last wishes.
Due to the financial complexities and legal implications, many people choose to work with financial advisors and attorneys who offer estate planning services.
The Importance of Financial Planning
Many people mistakenly believe that financial planning is only for wealthy individuals. This is not the case. As previously mentioned, we all make money, spend money, save money, and invest money.
A financial plan can bring great benefits for all. The points below highlight how this is achievable.
Coping with Tough Times is Easier with Financial Planning
Nobody can predict the future. Financial planning helps people fold risk into their planning strategies to ensure a better chance of being prepared if catastrophes occur.
Even smaller, more private family struggles– like the death of an extended family member– can throw unprepared households into financial disarray.
Everyone encounters difficult times eventually– and people should plan for them.
Families Benefit from Financial Planning
Effective financial planning helps individuals and couples secure their family’s future. Whether they already have children or plan to have some soon, a financial plan can provide the people closest to them with peace of mind.
Financial planning, ideally, helps people generate higher income and savings. These can be lifesavers during emergencies or unforeseen events.
Financial planning can create a safety net for parents who have children to provide for.
Many families also use their savings to help get their children started on the right foot. Financial planning should allow parents to help their children attend college, purchase a home, or buy their first car.
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Financial Planning Makes Navigating Deaths in the Family Easier
While nobody likes to talk about it, financial planning also helps people prepare for the inevitable. Upon death, the finances of the departed will require handling by a family member or an authorized professional.
Individuals and couples can help ease the impact of their passing on those they love most with a sound financial plan. Countless families struggle to pay their bills or fund funerals when a loved one passes away.
Financial planning can help people avoid this situation and support their families long after they’re gone.
The Bottom Line: Financial Planning is Important
Financial planning gives individuals and couples the assurance they need to enjoy their life with less financial stress. Some opt to participate in financial planning independently.
While this is a viable and cost-effective alternative, it necessitates a lot of self-discipline and time investment over the course of a lifetime.
Others prefer to consult a financial specialist, often enlisting the help of a Certified Financial Planner.
Through collaboration with an adequately certified and experienced advisor, individuals and couples can benefit from having someone there to hold them accountable to do what’s in their best interests.
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Originally published at chachingqueen.com.
Greg Wilson, CFA
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