By Ryan Graves on Nov 18, 2019

What is a Financial Plan?

Many of us have heard of a financial plan before, but few of us have a clear definition of what it is or why it’s essential to have one. When many of us are asked to define what a financial plan is, few of us can describe it as much more than a budget.  Financial planning, when done correctly, offers so much more to consumers than a budget. Financial plans are created independently or with the help of a professional.  

At its core, a financial plan provides a map that connects your current place to your ultimate goals, along with a few stops along the way.  

Goals: Setting and planning for your various destinations in life. It is highly unlikely that you only have one financial goal, so it is vital to prioritize and set them according to your vision and values. Having clearly defined and measurable goals are central to a financial plan. Your goals may include saving for a home, retirement, college education, or travel.  

Creating a written financial plan increases confidence.  According to the 2019 Modern Wealth Survey from Schwab, 63% of people with a written financial plan feel confident compared to only 28% of those without a plan. Only 17% of non-planners felt “very confident” that they would reach their goals compares to 56% of those with a plan. Having a plan creates demonstrable value.

Net Worth

To get to where you want to go, you need to know where you are first.  One of the most critical steps of financial planning is simply getting all your information together in one place to get a clearer view of where you are and what your current needs may be.  

Knowing your net worth it crucial to understanding where you are.  To calculate your net worth, you will need:

Assets: savings and checking accounts, 401k, IRA, car, house, and anything else of significant value
Liabilities:  mortgage, student loans, car loans, and credit card debt

As you may have guessed:  Assets - Liabilities = Net worth.

Cash Flow

Determining where your money is going every month can be a very revealing and humbling experience.  It will help you understand where your necessities are and show if you are saving enough towards your goals. Having a plan that lists your goals and tracks your cash flows will help you make more conscious choices around your spending and savings, which dramatically increases your chances of success.  

Just like any trip, stops and detours occur along the way, so it is vital to make adjustments to the plan as necessary.  A financial plan is a highly customized document, as everyone has different resources, goals, and priorities that constantly change through life phases.  It is important to consistently review the plan and make the necessary changes as they come up to ensure your shifting priorities match your changing resources.  

Other Important Elements

The following should be included with your plan and adjusted as life happens:  

Retirement:  You’re not going to be able to work forever, so the plan should consist of a plan for accumulating assets during your productive years.  Retirement is not a goal, but a stop along your journey.

Risk Management:  It is essential to understand and protect yourself from any unforeseen incidents that can prevent you from reaching your destination. Insurance is a great tool to mitigate many risks 

Investment Plan:  A well thought out investment strategy should entail your objectives and match your ability and willingness to take investment risk.

Taxes:  Taxes are the fees we pay along the way to reaching our goals.  Ultimately, taxes cannot be avoided entirely, but they can be minimized, helping to ensure positive planning outcomes.

Estate Plan: what happens to your assets when you’re gone?  Having an estate plan in place will protect your heirs.

Using a professional to help you create a financial plan can greatly increase the likelihood of your success. Click here to contact Bemiston Asset Management.



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