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Financial Plan

A financial plan is a comprehensive overview of your financial goals and the steps you need to take to achieve them. Financial plans are usually physical documents to ensure that your plan is concrete and final. Many people will combine a financial plan with an investment plan, as investing is often part of what will help you save for the future. If you have more questions about your finances, consider working with a financial advisor in your area.

What Is a Financial Plan?

A financial plan identifies, organizes and prioritizes your financial goals, then outlines the steps you need to take to achieve them. They can also lend some insight as to if you’re on track to meet your financial goals or if you need to make adjustments to your spending. These plans may revolve around consolidating debt, opening bank or brokerage accounts, establishing a savings regime or building an investment plan.

Financial plans can stretch over years, months or decades, depending on the time horizon of your goals. But through seemingly small steps, like having a monthly savings goal or investing a small portion of your paycheck, your financial plan can lead to much better preparation for the future.

Financial plans are typically flexible too, allowing for any possible life changes or unforeseen events. This could encompass an extended hospital stay, a marriage, the birth of a child, a move, a new job and more.

Most people have a wide range of short- and long-term financial goals, from paying down debt to planning for retirement to building a college fund. But since everyone’s personal situation is unique, each financial plan will look a bit different. In general, though, there are five main steps to the formulation of any in-depth financial plan:

  1. Figure out your financial goals.
  2. Get together documents and statements that paint a picture of your current financial situation.
  3. Create your long- and short-term financial plan.
  4. Begin putting your financial plan into practice.
  5. Adjust your financial plan as your life changes.

Step #1: Outlining Your Financial Goals

The first thing you need to do when putting together a financial plan is determine exactly what you want to accomplish. Start by reviewing possible short- and long-term goals and objectives. These might include placing a down payment on a house, paying off your student loans or buying a brand new car. These goals will become the driving force of your financial plan.

Look at your financial future as a whole when outlining these goals. All of your finances are connected, so don’t just focus on one aspect. For example, when it comes to family planning, you may want to think about not only starting a college savings fund, but also putting a down payment on a house.

Step #2: Collect Your Personal Financial Information

Financial Plan

Once you’ve established goals and you’ve gotten help if you want it, you can begin an overview of what your financial situation looks like. Include any assets and liabilities, such as properties, investments, retirement accounts and loans. Analyzing all of this information provides a more accurate understanding of your current financial standing.

When you’re collecting information, start with consistent items like your rent or mortgage, utility bills and other fixed expenses. Then look at your spending history to get an idea of what you normally spend on things like groceries, entertainment, travel, clothes, etc. And of course, you’ll want to have a clear sense of your income, including your paycheck and any investment or rental income.

Knowing where you stand now will help determine the next steps you need to take to achieve your goals. You can tweak your goals or timeline based off your starting point, determining their practicality and feasibility.

Step #3: Create Your Financial Plan

With your financial standing and goals defined, you can start developing the actionable steps of your financial plan. Most likely, this will include saving money for retirement, an emergency fund or a big purchase (or all three!). Investing will also likely play a prominent role in your financial plan – over the long term, investing in the market is the best way to grow your wealth.

How exactly you invest will be up to your individual preferences and risk tolerance. If you work with a financial advisor, she can help you determine the best asset allocation between large and small-cap stocks, bonds, cash, and alternative investments for your preferences.

If one of your goals is a big purchase like a house or a new car, then you’ll also want to include in your plan steps to build up your credit. You won’t need to do much if you already have an excellent credit rating. If your rating isn’t where it should be though, part of your plan should be to focus on paying credit card bills and student loans on time and other methods for building up credit.

Finally, if you have significant debt, part of your plan will be to pay it down. How exactly you go about it — if you get a consolidation loan or not, if you increase your monthly payment or leave it unchanged, etc. — will be dependent on your situation.

Your financial advisor can help with this process, offering planning recommendations based on your financial overview. Whether it’s suggesting a savings minimum or proposing a debt repayment timeline, they are there to help. Take into account any risks or alternatives they point out. If your financial plan ever needs to be changed, these steps can prevent you from getting stuck.

Step #4: Implement Your Financial Plan

Once you’ve created your plan, it’s time to put it in action. It may be easier to start off small, rather than immediately jumping into the deep end. For example, instead of saving half your paycheck at once, start saving in small increments.

The timeline of your financial plan can stretch for years, so there may not be any immediate results. But stick to the steps outlined in your plan and you will reach those milestones in no time.

It’s important to follow the steps you set in your financial plan. However, it’s just as important to recognize that unexpected things do happen, from starting a new job to having a medical emergency. Any situation that arises that you didn’t expect can impact your finances, so you should make changes to your plan accordingly. That way, it can better reflect your financial standing.

Step #5: Consistently Revise Your Financial Plan

Of course, financial changes may impact your ability to reach your financial goals. You’ll want to check on your plan to see if you can still meet those goals after those unexpected hurdles. If not, you can easily change the plan. You can alter your timeline, set a higher savings minimum or change the goal altogether.

Meeting with your financial advisor every few months can be helpful. If necessary, they can help make changes to your plan to steer you back on track. Be adaptable and open with your advisor when it comes to revising your plan according to new objectives or setbacks.

Financial Planning With a Financial Advisor

Financial Plan

While it’s certainly possible to craft a financial plan on your own, it’s an exceptionally difficult process. This is where are a financial advisor that specializes in financial planning can come in handy.

Financial advisors differ from specialized professionals like estate planning attorneys, as they focus on a more holistic overview of financial planning. They provide not only an overarching gauge of your overall situation, but also extensive advice to help you meet your goals. They can also help you create a tax-friendly plan.

When choosing a financial advisor to build a financial plan with, look for those with designations like certified financial planner (CFP) or chartered financial consultant (ChFC). These certifications ensure that the advisor has garnered the proper education and experience in the financial planning field. However, just because an advisor might not have these certifications doesn’t mean they’re not qualified to help you.

Though financial advisors often have an overall understanding of financial planning, most work within specific financial fields. For example, an advisor may specialize in services for those close to retirement, while others work more with younger people clients. Therefore, pick an advisor that closely aligns with where you are in life.

Bottom Line

A financial plan helps you responsibly manage your money and plan for the future. Though making a plan may take some time and dedication, it will likely pay off in the long run. In turn, you’ll have a clearer path for reaching major milestones and will be better prepared for you and your family’s future. Don’t be afraid to seek out the services of a financial advisor if you’re unsure of where to begin with your financial plan.

Tips for Creating a Financial Plan

  • If you don’t know where to start with your financial plan, try working with a local financial advisor. Luckily, finding a suitable financial advisor that fits your needs doesn’t have to be difficult. SmartAsset’s free tool matches you with financial advisors in your area in just 5 minutes. Get started now.
  • While most financial advisors offer investment management services, you may like the idea investing on your own. Start by opening a brokerage account and selecting an asset allocation for your personal risk tolerance. A robo-advisor service can further simplify your investments, as they invest your money based on proprietary algorithms.

Photo credit: ©iStock.com/sturti, ©iStock.com/bowdenimages, ©iStock.com/AndreyPopov

Emily Zhu Emily Zhu writes on a variety of personal finance topics for SmartAsset. Her expertise includes retirement, credit cards, taxes and banking. She grew up in Brooklyn, but now splits her time between Brooklyn and Rochester. Emily is currently studying at the University of Rochester.
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