The Canvas & Paint of Financial Planning
Introduction
Financial planning integrates your lifestyle with your long-term goals, equipping you and your family to best prepare for the future. Planning can feel tedious and overwhelming, but your future self will be grateful you did the work now. Like with most things in life, financial plans are not black and white, but flexible and designed for your unique circumstances.
What is a Financial Plan?
A financial plan is a comprehensive analysis of your financial situation, and the steps needed to take to reach your financial goals. Financial plans reveal where you need to adjust your lifestyle to get back on track. The time horizon of a financial plan depends on your goals and how far away you are from achieving them. Financial plans are flexible, providing cushion for medical emergencies, marriage, the birth of a child, and other life events.
Components of Financial Planning
- Budgeting is an important component of planning because it reveals your income sources and expenses, your assets and liabilities, and your financial strengths and weaknesses.
- Investing is another component, because it is important for building wealth and moving towards retirement if that is your goal.
- Retirement planning looks at your retirement and social security income and assesses the lifestyle you want to live during your retirement.
- Estate planning looks at inheritance tax estimates, any wills, and plans to give to philanthropic organizations.
- Tax planning deals with 401(k) and IRA contribution plans and returns on capital gains and income tax.
- Risk management has to do with LTC, disability, and life insurance. It also ensures beneficiaries and survivor benefit plans.
Determine Your Financial Goals
This step is vital to crafting your plan for what your needs are. Gather short-term and long-term goals but focus on looking at the whole picture of your financial future. These goals could include buying a home, retiring at 65, or paying off debt. Be honest with yourself about what you want out of life and how that translates financially.
Determine Financial Situation
It is important to know what you own verses what you owe. This will help in calculating your Net Worth, the value of everything you own. Knowing how much money you are bringing in and how much is going out is also important for budgeting and assessing where adjustments can be made.
Construct Plan
Next, piece together a plan outlining the actionable steps needed to stay on track. This typically involves saving money for retirement, building an emergency fund, and saving for traveling or desired purchases. Investing will also likely be part of your plan, because it is the optimal way to build wealth. You will need to discern your preferences and risk tolerance when building an investment portfolio. Paying off any debt is usually a piece of the plan, whether it’s car loans, student loans, or credit card debt. Building credit could also be a part of your plan if you are wanting to make big purchases, like a home or new car. Certified Financial Planners are educated and qualified to provide recommendations regarding your specific situation.
Implement Plan
Now, it is time to act. Once you have created your plan, you can now implement these adjustments to your everyday life. If your plan includes some extreme cutbacks to how much you are spending or increasing your savings, it is okay to start small and build up to your goal. Taking things incrementally will give you a better chance of sticking to the plan. Remember to stay flexible when things inevitably change.
Periodically Review & Revise
We are all faced with challenges and changes, making it important to reassess your plan and adjust accordingly. Adjustments like lengthening your timeline, saving more, or changing your goal altogether will help guide you back to the path.
Conclusion
A financial plan will help you manage your wealth wisely and keep you on a path towards the vision you have for your life. Seeking out a financial advisor is a great place to start when beginning this journey. Lets all take a leap towards a lifestyle that complements our finances.
Matt’s Corner
