Everything you need to know about Financial Planning and it’s Elements
What is Financial Plan?
A financial plan is the comprehensive evaluation of an investor’s current and future financial state.
Financial plans are made by using the currently known variables to predict the future cash flows, asset values and withdrawal plans.
Most individuals generally work on their financial plans using their current net worth, tax liabilities, asset allocation and future retirement and estate plans.
These metrics are used with the estimates of the asset growth to determine whether the individual’s financial goal can be met in the future or what are the steps that the individual should take to ensure that they meet their financial goals.
Financial planning is basically the process of meeting an individual’s life goals through proper management of their finances.
It also involves gathering relevant financial information, examining ones current financial status and coming up with a strategy or a plan on how one can meet one’s goal with ones current situation and future plans.
Also, a good financial plan will help the investor in realizing what should be the changes they will have to make to reach their financial goals. Financial goals should be quantified and there should be milestones set for tracking.
Through financial planning the investor will get a direction and understanding of their financial decisions and will help them in cutting back on expenses which are not required. Financial planning also help the investor understand how their financial decisions affects other areas of their finances.
When the investor views each of their financial decisions as a part of the whole, they can consider the short and long-term effects it will have on the investor’s life goals. Through financial planning, the investor can easily adapt to the life changes and they will feel more secure which will put their financial goals back on track.
Who is a Financial Planner?
A financial planner is a professional who prepares financial plan for people thereby helping them figure out and meet their life goals. The planner can understand the financial situation and make recommendations which are best suitable for them. A financial planner will look at all the needs including budgeting and saving, taxes, investments, insurance and retirement planning.
Elements of Financial Plan
According to Investopedia, below are the elements of financial plan;
- Financial Goals: A financial plan is based on an individual’s or a family’s clearly defined financial goals, including funding a college education for the children, buying a larger home, starting a business, retiring on time or leaving a legacy.
- Cash flow analysis: The income and spending plan is used to determine how much should be set aside for debt repayment, savings and investing each month.
- Retirement strategy: The financial plan will include a strategy for achieving retirement independent of other financial priorities. The plan should include a strategy for gathering the amount of capital that is required and the lifetime distribution should be planned.
- Estate plan: The financial plan should include arrangements for the preservation and the distribution of assets with attention to minimizing the settlement costs. All the estate planning instruments should be reviewed and updated.
- Comprehensive risk management plan: Identify all risk exposures and provide the necessary coverage to protect the family and its assets against financial loss. The risk management plan includes a full review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
- Personal net worth statement: A snapshot of assets and liabilities serves as a benchmark for measuring progress towards financial goals.
- Long-term investment plan: Include a customized asset allocation strategy based on specific investment objectives and a risk profile. This investment plan sets guidelines for selecting, buying and selling investments and establishing benchmarks for performance review.
- Tax reduction strategy: Identify ways to minimize taxes on personal income to the extent permissible by the tax code. The strategy should include identification of tax-favored investment vehicles that can reduce taxation of investment income.
How to make Financial Planning Work
The results of financial planning do not only depend on the financial planner, it is the responsibility of the business owner as well to ensure they get good results. To achieve best result, the customer should follow some basic steps and avoid some common mistakes.
- Set goals:
The business owner should set targets of what they want to achieve and when do they wish to achieve these results. Setting a goal will help you in making the right decisions and will provide a better and clear picture for the financial planner who will then be able to better assist the customer.
- Understanding effect of financial decisions:
Each of the financial decisions the customer makes may affect all the other areas of their life. An investment decision may have consequences that may affect the customer’s estate plans or a decision about buying a car may affect how the customer wants to meet their retirement goals. The customer should understand that all of their financial decisions are interrelated.
- Re-evaluating financial situation between intervals:
The financial goals a customer has at 20 may change when he’s 40 years of age. As time passes, the financial goals may change over the years which can be because of change in lifestyle or change in job status. Revisit your financial plan as time goes by.
- Begin financial planning as early as possible:
Financial process is a process which will provide better results when the planning has been started at an early age. Early financial planning will inculcate good habits such as investing, saving, budgeting which will help the customer meet the changes in life and handle emergencies easily.
- Realistic approach:
Financial planning will not change the customers situation overnight, it is a long process which requires a lot of work and a disciplined approach for managing the finances. Thus, the customers should have a realistic approach.
Rakesh Seth is an finance blogger and he love to write about business ideas, finance tips and planning. He runs Karvy Wealth, a wealth management company.