What is a financial plan?
Reading time: 7 minutes
February 10th, 2024
We all have goals and dreams we’re working towards, whether a new car, that first house, a dream round-the-world trip to mark a hard-earned retirement, or even just the financial security we want to give our loved ones after we're gone. But dreams can remain just that if we don’t have a strong plan in place.
When it comes to your finances, it pays to be intentional. And this is where financial plans come in to play.
What is a financial plan?
You can think about a financial plan as a financial roadmap through life. Made up of a set of financial strategies, a financial plan your current financial situation, goals for the future, strategies for achieving them, and any potential risks you need to plan for.
Common aspects of modern financial plans
Your financial plan should be tailored to your unique situation. As an example, yours could include:
- Long-and-short term financial goals. Your plan should include clearly defined short-term and long-term objectives, such as buying a home, caring for elderly relatives, saving for children’s education, or planning for early retirement.
- Budgets and spending. Budgeting and managing your expenses are not the same as a financial planning — although they do inform the process. A clear picture of your weekly and monthly expenditures and income can help you set more realistic goals in the near term as well as help you identify shortfalls that may impact your long term goals.
- Financial assessment: Think of this as a medical check-up, something you would do on a regular basis, but for your finances. An assessment could look at your current financial position, analyzing factors like income, expenses, overall cash flow, and liabilities (like loans) to determine your net worth. The assessment may also detail your credit score.
- Rainy day funds. If you have an emergency savings fund, you can include it in your financial plan. If you don’t, emergency savings may become one of your short-term or long-term goals. For example, a plan could set a realistic savings goal, where you automate recurring contributions, and prioritize building up six months of living expenses.
- Debt minimization. For example, your financial plan could include an analysis of both low-interest and high-interest debts. In turn, your plan could identify ways to tackle such debts. For example, it might suggest paying your smallest debts first for quick wins. Or your plan could include a goal to prioritize high-interest debts, to minimize overall interest payments.
- Retirement. Planning for retirement is one of the main spurs for creating a formal financial plan in the first place. Plans can motivate savings through vehicles like 401(k)s and IRAs, while guiding individuals on contributions, investment choices, and tax implications. You might include a calculation or forecast for retirement needs too — considering factors like lifestyle, life expectancy, and cost-of-living changes.
- Risks and protections. A main objective of a financial plan is to help you achieve your goals, but financial planning should also help you play some defense, too. By planning for contingencies through insurance plans, you can mitigate the impact unexpected events, such as a long-term illness, have on your overall financial future.
- Investing. Keeping risk in mind, your financial plan might also look at your current investments to understand how and if they are performing, in relation to your financial goals. If you have never invested before, your financial plan could map out your tolerance to risk and help you invest wisely, with target time spans for long-term goals.
- Estate planning. A less joyful side of financial planning is to make arrangements for your finances you have passed on. As financial plans are rarely ‘set and forget’, this is something you can add or expand upon as life changes. For example, your financial plan could include a deadline to create or update your will, or set out your wishes around inheritances, donations, or bequests.
Maintaining financial plans with professional advice
Our financial needs and goals at 35 are vastly different than they are at 65. That’s why financial planning is not a one-time exercise.
Life events — like moving in with a partner, having children, or providing care to relatives with health matters — can all mean it’s time refresh any dustier financial plans. If that task feels a little complex, consider working with a financial advisor. They can play an active role in guiding you through some of the long-term financial planning we’ve talked about here.
This material is provided for educational purposes only and is not intended to be relied upon as research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Bankoh Investment Services, Inc. does 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 or investment advice. You should consult your own tax or accounting advisors before engaging in any transaction.
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