You may have already created a financial plan, or maybe you decided now is an excellent time to start. Either way, having this type of roadmap can help support money management and confident financial decision making. While creating a plan can look different for each person, several financial planning basics can help guide you toward achieving your goals.
A financial plan is a comprehensive strategy designed to manage finances in a way that helps an individual achieve their short and long-term goals. A well-structured plan can be as general or as detailed as a person chooses and commonly includes budgeting, savings goals, debt management, investment strategies, and retirement planning.
A well-structured financial plan can help an individual make informed financial decisions, stay on track with their goals, and adapt to changes in their financial situation. Since this document is fluid and can change as you age and personal needs or circumstances evolve, it’s important to regularly review it to check progress, decide if adjustments are needed, and determine if current money habits align with financial goals.
When it comes to financial planning, the earlier a person starts, the sooner they can adopt healthy habits, build savings, and understand how to manage money more effectively. This can help minimize financial stress and create a more secure foundation for the future. Financial planning helps:
Just like a bicycle has several parts working together in tandem, a comprehensive financial plan has multiple parts that support each other to accomplish set goals. A person’s income feeds into a budget; a budget breaks down this income into money for expenses and financial goals, and those goals all tie together to make up an overall plan. Here are some of the key elements that are often part of building a financial plan.
Short and long-term financial goals: A person’s goals are the core component of a financial plan and create the foundation for building a strategy. It’s important to have short-term (within the next five years) and long-term goals (after ten or more years) and organize them in order of priority and timeline.
Current net worth: Take inventory of current assets, such as bank accounts, investments, and property owned, and compare them to outstanding debts, like student loans, a mortgage, and credit cards. As you get started, do not be alarmed if debts outweigh assets. Having a financial plan can help identify ways to reduce those debts and grow assets over time.
Budget: Establishing a budget lets you track income and expenses, then determine which areas to cut back on spending and where income can make the most impact.
Debt management: Not all debt is created equal. If you have a mortgage, for example, this can help build equity. However, credit cards are a type of high-interest debt, and without a proper payment plan, a balance can grow quickly and can affect a person’s credit score. Every financial plan should include a debt management strategy, goals for saving, investing, asset protection, and building wealth over multiple generations. You can also develop a clear plan for transferring wealth and assets while considering factors such as estate taxes, inheritance laws, and family dynamics. This may be a good time to establish a trust, create a will, and explore other estate planning tools that help ensure a smooth transition of wealth.
Emergency fund: Building an emergency fund can help an individual be financially prepared for the unexpected, like the loss of a job, costly car or house repairs, or a medical event. With money set aside, there’s less need to tap into savings or increase credit card debt.
Retirement goals: It’s never too early to start saving for retirement. There are many tools to help build assets for the future, including investments, 401(k)s, IRAs, and annuities. If an employer offers a retirement savings plan, consider taking advantage of this benefit to create more retirement income for the future.
Insurance coverage: Having insurance coverage in place can help protect different aspects of a financial life, as well as the lives of loved ones. Coverage options can include health, home, car, and life insurance.
Factoring life insurance into a financial plan can help add security and predictability by protecting assets in the event of an emergency or unexpected event. Typically, there is a predetermined death benefit amount, so you’ll know exactly how much money to count on if something happens. When purchasing life insurance, the insured helps safeguard their family’s future and can help them pay off debt, cover final expenses, keep up with day-today bills, or save for certain milestones.
When digging into the financial planning process, it’s helpful to evaluate where you are and where you plan on going. Then outline the financial moves that will be required to accomplish each goal in the coming days, weeks, months, and years. Steps often include:
A good first step in the planning process is gaining a big-picture view of personal finances by taking stock of all financial accounts. Take note of monthly income, regular bills, outstanding debt, and how much is in savings. As you enter the process, you may decide you would prefer assistance in creating your financial plan. Finding a financial professional can offer helpful guidance and advice to set you up for success.
Whether working independently or with a financial professional, it’s important to identify the short and longterm goals that support where you want to be financially in the future. Do you wish to pay off a car? Save to buy a house? Or put aside money for retirement? Once goals are outlined, a plan can be built around those objectives, including how much money is needed for each goal and the tools and solutions that could be useful.
With goals laid out, now it’s time to look at a monthly budget and determine how to break down expenses, cut unnecessary spending, and allocate income toward savings goals. If one of your to-do's is paying off credit card debt in the next six months, take the total amount due, break it into six payments, and set up an automatic payment. Using auto pay and automatic deposits can make staying on top of finances easier and help you work toward goals more efficiently.
Once a plan is in action, it’s good to check back in periodically to review progress. The dates that were set for certain goals act as guideposts and can measure if the timeline still makes sense if there is income to put toward this goal, and if the priority of this goal still makes sense in your current situation. If working with a financial professional, take successes or struggles into account to refine the plan to be more manageable. Remember, a financial plan changes as life changes, so regularly revisiting goals and setting aside time for an annual financial checkup can help keep a financial plan in line with your vision for the future.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.
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