Definition of the financial plan

What is a financial plan?

A financial plan is a document that contains a person’s current financial situation and long-term monetary goals, along with strategies for achieving those goals. A financial plan begins with a thorough assessment of a person’s current financial situation and future expectations and can be created independently or with the help of a licensed financial planner.

Key points to remember

  • A financial plan documents a person’s long-term financial goals and creates a strategy for achieving them.
  • The plan should be comprehensive but also highly individualized, in order to reflect the individual’s personal and family circumstances, risk tolerance and future expectations.
  • The plan begins with a calculation of the person’s current net worth and cash flow and ends with a strategy.

The foundations of financial plans

Understanding the financial plan

Whether you do it on your own or with a financial planner, the first step in creating a financial plan is to put together lots of pieces of paper or, more likely these days, cut and paste numbers from various web accounts into one. document. or spreadsheet.

You can perform the following steps as an individual or as a couple:

Calculating net worth

To determine your current net worth, list all of the following:

  • Your assets: This can include a house and car, money in the bank, money invested in a 401 (k) plan, and anything else of value you own.
  • Your liabilities: This could be credit card debt, student debt, an outstanding mortgage, and a car loan. In some cases, you may have access to a grace period or a moratorium.

The formula for your current net worth is your total assets minus your total liabilities.

Determination of cash flow

You can’t create a financial plan without knowing where your money is going and when. Documenting transactions (the flow of money in and out) will help you determine how much you need each month for necessities, how much can be left for saving and investing, and even where you can cut back a little or a lot.

One way to do this is to go through your checking and credit card statements. Collectively, they should provide a fairly comprehensive history of your spending.

If your spending varies a lot with the seasons, it’s best to go through an entire year counting all the expenses in each category, then dividing by 12 to get an average monthly estimate of your spending. That way, you won’t underestimate or overestimate what you spend on utilities, and you also won’t forget to factor in holiday giveaways or vacations.

Don’t overlook cash withdrawals that can be used for sundries, from shampoo to soda.

Document how much you paid in a year in basic housing expenses like rent or mortgage payments, utilities, credit card interest, and even household furnishings. Add categories for food, clothing, transportation, medical insurance, and uncovered medical expenses, then separately document your actual expenses for entertainment, dining, and vacation travel.

By going through your own financial records, your personal expense categories will stand out. You can have an expensive hobby or a pampered pet. Document the costs.

After you add up all of those numbers over a year and then divide by 12, you’ll know exactly what your cash flow has been.

Consider your priorities

A person’s clearly defined goals are at the heart of a financial plan. These can include funding a college education for the kids, buying a bigger house, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals. However, a professional financial planner may be able to help you choose a detailed savings plan and specific investments that will help you tick them off one by one.

The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy and an estate plan.

Special considerations of a financial plan

Financial plans do not have a defined template. A certified financial planner will be able to create one that meets you and your expectations. When completed, it can inspire you to make short-term changes that will help ensure a smooth transition through financial phases of life.

The following should be addressed and revised as necessary:

  • Retirement strategy: Whatever your priorities, the plan should include a strategy for building the retirement income you need.
  • Comprehensive risk management plan: This includes a review of life and disability insurance, personal liability coverage, damage coverage, and disaster coverage.
  • Long term investment plan: A personalized plan based on precise investment objectives and a personal risk tolerance profile.
  • Tax reduction strategy: A strategy to minimize personal income taxes to the extent permitted by the tax code.
  • Estate plan: Provisions for the benefit and protection of your heirs.


What is the purpose of a financial plan?

A financial plan is designed to help you make the best use of your money and meet your long-term financial goals, whether that’s sending your kids to college, buying a bigger house, or leaving an inheritance or enjoy a comfortable retirement.

How to write a financial plan?

You can write a financial plan yourself or enlist the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you should consider longer term goals and find ways to achieve them.

What are the key elements of a financial plan?

Financial plans don’t have a set format, although good ones tend to focus more or less on the same things. After calculating your net worth and spending habits, you’ll explore your financial goals and discover ways to make them achievable. Usually this involves some form of budgeting and creating a way to put money aside each month. To ensure you live comfortably for the rest of your life, it’s generally a good idea to develop a long-term retirement, risk management, and investment strategy, and keep tax expenditures to a minimum.