What Are The Components of a Financial Plan?

A financial plan can be an essential element of financial stability and helping you reach your financial goals.

There can be many benefits to having a financial plan. Surveys show that two-third of people who have a financial plan in place feel more financially stable, and they also have funds stashed away in case of emergencies. Investors who adhere to a financial plan, meanwhile, are much more aware of the impacts of risk tolerance, the fees and costs associated with their investments, and the need to regularly rebalance their portfolios than investors who just wing it.¹

So what is a financial plan? There are many different ways to arrive at the end goal, from hiring a financial planner to using robo-advisors or creating one yourself. Here are some hallmarks of a financial plan, but keep in mind that some of the best components of a financial plan are those that help you reach your financial objectives.

5 Components of a Financial Plan

Think of your financial plan as a blueprint for pursuing financial success. Financial planning assesses your current financial situation and shows you a path to follow and make the necessary adjustments in an attempt to meet your short-, medium- and long-term financial goals.

Your financial plan can be all-encompassing and include every aspect of your life, such as budgeting, retirement/estate planning, shedding debt, increasing net worth, tax consequences, insurance, and other aspects of your current and future financial situation. Or it can be segmented into bite-sized pieces that feel the most important to you. If your primary financial goal is to pay down credit card debt, for example, your financial plan will be centered around ways to save or make additional money for debt reduction as you work toward shedding high-interest debt. If your financial goals include estate planning, saving for a house or ensuring you have enough money for retirement, consider engaging a financial professional such as a Certified Financial Planner or Certified Private Wealth Advisor for high-net-worth individuals. These financial professionals may be able to help you maximize your efforts over the long haul.

Regardless of scope, these are some common hallmarks of a financial plan:

• Outlining your financial goals. A plan is nothing without an end game. Your financial objectives will largely determine the depth of your financial plan. Listing all your short- and long-term financial goals helps define your plan’s strategies, target dates and priorities.
• Determine your current net worth. Your personal balance sheet provides a basis from which to launch your financial plan. Compile a list of all assets and debts to determine where you truly stand – and don’t sweat it if the numbers are skewed toward the debt side. If you have a mortgage you likely have far more debt than liquidity. But that’s one of the reasons why you are creating a financial plan.
• Budgeting. Now that you’ve outlined your financial objectives and taken a hard look at where you stand, it’s time to figure out where your spending and budgeting fits into your financial plan. You may find you need to make major adjustments to your lifestyle to meet your financial goals, such as downsizing your home for a more affordable mortgage, or trimming frivolous spending such as eating out, gym memberships, streaming services or traveling.
• Wealth accumulation. Most financial plans will include targeted goals as you attempt to preserve and grow your net worth. Take a look at how much you’re currently saving, the net worth of current investments and brokerage accounts and any other assets you have to determine if you have the potential to create enough wealth to meet your financial objectives. You may need to rebalance your investment portfolio, or meet with a financial planner to hash out new strategies to potentially grow your net worth.
• Retirement planning. Financial plans are often centered around this important end goal. You’ll need to calculate how much you might bring in from Social Security, as well as determine how long you might have income from other sources. Other factors to consider include taxes, inflation, medical bills, insurance, and post-retirement spending.

The Bottom Line

A comprehensive financial plan can help you make better decisions about your finances and spending habits. Financial plans aren’t one-size-fits-all; rather, they should be tailored to your current and long-term financial goals.

Once you’ve created a financial plan, the next step is implementing it. You don’t have to make radical changes, especially if you have a very long horizon. The sooner you can bring the full weight of your financial plan to bear, the quicker you’ll be on track to pursue your financial milestones. Lastly, you may have to revisit your financial plan from time to time to help ensure your goals are viable and you are on track to achieve them.

Source:

Modern Wealth Survey, Charles Schwab, https://www.aboutschwab.com/modern-wealth-survey-2021