April 15, 2018
You may hear the term “financial plan” and imagine thousands of dollars spent and hours in a stuffy broker office discussing the benefits of a diversified portfolio. Or maybe you think financial plans are only for those who, well, have finances. Not so and not so. Every adult needs a financial plan, no matter how much money you have (or don’t have) and how old you are. But I get it; a financial plan can seem overwhelming.
According to Wikipedia, a financial plan is a “comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans”. I’m a financial planner, and even I am a little intimidated by that statement. It’s no wonder that the perception is a financial plan is needed only for the wealthy and sophisticated.
A financial plan at it’s simplest is a map to reach your goals. Notice I didn’t say “financial goals”. Everyone wants to make and have more money, but money is not the goal. You need a financial plan to reach your life goals; money is just the tool. Do you want to retire early so you can travel? Are you consumed with credit cards and want to live debt free? These are life goals that require a financial plan to reach them. All you need to know is where you are today, and where you want to be tomorrow (or in 20 years). The financial plan just connects the two.
Where are you today? This is your current financial overview. It’s basically made up of two documents: net worth and budget. If you don’t have these already, you can easily create them.
- Net worth: Make a list of all your assets with their worth (cash, savings, house, car, etc). If you have multiple savings and retirement accounts, this is a good time to dig up the statements and get an updated amount for each. Then list all debts (credit cards, school loans, mortgage, etc). Subtract your debts from your assets and you have your net worth.
- Budget: How much you bring in and spend each month. The goal is to gain a realistic idea of what you spend, where you spend it and what you have left at the end of the month. This allows you to identify areas to save and where you may overspend.
Where do you want to be tomorrow? Where do you want to be in one year? What about 5 or 20 years? Create your own life goal bucket list. Don’t worry about whether it seems financial or not; remember that money is a tool to reach your goals. Now separate them into long term (5+ years from now) and short term goals (within the next 5 years). Finally, prioritize them by importance.
How do you get there? This is the financial plan. How can you use money to reach these goals? For some goals, this is simple enough. Want to travel to Europe next year? Estimate the cost and create a monthly savings plan. However, most of us have multiple goals. We want to travel, get out of debt, save for our childs’ education, buy a home, protect our family, retire someday and more. A financial plan takes into account all of your goals. It creates a detailed map based on your prioritized goals, showing you exactly where to spend your money, where to save, and for how long. If you are a math and money type, you may be able to create this on your own. Or you can hire a financial planner to create one for you. Since financial plans often include complex subjects such as life insurance and wills, a financial planner may be necessary to help you navigate.
So you see, a financial plan is not just some aloof statement with pie charts and annoying buzz words. Whether you are a single 20 something who wants to start a consulting firm but is saddled with $50K in student debt, or you are a married 50 something who wants to be sure she has enough to retire, a financial plan simply provides the map to get you there.