5 Essential Elements of a Comprehensive Financial Plan

Many people equate a financial plan to a budget. The truth is a real financial plan is a lot more than that. A financial plan serves as a roadmap for achieving your financial goals and securing a stable future—whatever life brings. It's a comprehensive strategy that outlines your current financial situation, identifies your objectives, and provides a step-by-step plan to reach them. In addition, a financial plan should help you mitigate the effects of unexpected events on your overall financial future—such as a long-term illness that requires on-going care.

In this blog, we explore the five key components of a financial plan and how they work together.

1. Investments

Investments are a vital part of a well-rounded financial plan. Having a liquid savings account is important, but investments offer the potential for higher returns. By allocating a portion of your resources into various investment options like mutual funds, stocks, bonds, or even real estate, you can potentially generate passive income and grow your wealth over time, helping you build a nest egg for retirement and meet long-term financial goals.

Investments of different types can also help diversify your portfolio, which spreads the risk more evenly and reduces the impact of market fluctuations. However, it is crucial to consider your risk tolerance, time horizon, and financial objectives when selecting suitable investments to ensure they align with your overall financial plan.

During the financial planning process, you can you decide on both long-term and short-term investment strategies that are appropriate for your income, expenses, risk tolerance, and personal timeline for reaching your goals.

2. Insurance

Protecting your assets—including yourself—is as important as growing your finances. There are various forms of insurance available to help mitigate the impact unforeseen events can have on your financial future. In addition to health insurance, there are many supplemental insurances for different life events and concerns. For example, life insurance can ensure your family is supported after you're gone or bridge the gap to maintain their lifestyle as the estate is distributed. Similarly, disability insurance can protect you from depleting your savings in the event a long-term illness requires you to stop working, and long-term care insurance can help if you need on-going care from professional resources such as an in-home nurse or hospice care.

As part of building your financial plan, make sure to consider unideal scenarios—because while life happens, insurance can help.

3. Retirement Strategy

Your financial plan should also take into account the amount of income you'll need to ensure you can live comfortably after you stop working. How much money you’ll need in retirement may be determined by certain factors, such as your health (Medicare may not cover all your healthcare expenses), whether or not you will have paid off your mortgage or repairs your home may need during your retirement, if your children are financially independent, other debt you may have, and taxes.

It’s also important to keep in mind that your level of discretionary spending—for example, on travel, dining out, or gifts—may increase during retirement because of the additional time you'll have to travel, explore and socialize.

As you build your financial plan, it's important to discuss what you want your retirement to look like, so you can make adjustments to your current saving and spending habits, like increasing your 401(k) contributions, or making extra payments on your mortgage to minimize ongoing housing expenses.

4. Trust and Estate Planning

Trusts and estate planning is the process of setting up legal structures to transfer your assets to beneficiaries in the event of your incapacitation or death. While trusts involve the ongoing transfer of assets, estates usually establish a one-time transfer of assets after death; both types of plan are typically best accomplished with guidance from an attorney. This process often includes the creation of a will, estimating estate and inheritance taxes, and planning philanthropic gifts according to your wishes. It may also include advance directives for end-of-life care and selecting someone to help manage your affairs, if necessary.

By strategizing with a financial professional on this part of your financial plan, you can better ensure that your heirs actually receive what you plan to leave them as well as while manage or minimize potential estate and gift taxes they may incur.

5. Taxes

A comprehensive financial plan should integrate efficient tax planning to protect you from unnecessary tax burdens. As tax laws change, it can be difficult for taxpayers to stay up-to-date on the latest tax strategies and available tax credits. Common tax deductions include traditional IRA contributions, mortgage interest, charitable contributions, health savings account contributions, and some medical expenses. By working with a tax professional, you can better optimize your portfolio to retain a greater portion of your money, which can be channeled towards your short-term and long-term financial goals.

There is no one-size-fits-all when it comes to financial planning. What makes sense for you may not work for someone else, and an expert can help you understand why. Working with a professional, such as a Bankoh Investment Services advisor will help you develop a specifically tailored financial plan that can help grow your wealth, achieve your goals, and protect your financial assets.

This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Bank of Hawaii and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, accounting or financial professional before engaging in any transaction. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bank of Hawaii or its affiliates to buy or sell any securities, investments, or insurance products. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. Past performance is not a guarantee of future results.