Creating a Financial Plan
Henry Ford once said, "Obstacles are those frightful things you see when you take your eyes off your goals." When you create a financial plan, it's the equivalent of keeping your eye on the ball. You outline your assets, your needs, your goals, and match investments and financial vehicles to help you achieve those goals.
A financial plan is generally comprised of the following three
- A personal profile. The names and dates of birth of
everyone in your family, as well as anticipated dates for attending
college, retirement and life expectancies
- An overview of your financial scenario. This includes
your household income, debts, property and assets. You may also
include an overview of your risk profile-how much risk you're
willing to bear to achieve your financial goals.
- Financial objectives. These include buying a home,
vacations, saving for college, retirement, or a second home.
Elements of financial planning
Once you have a basic roadmap of where you are currently and where
you want to go, it's time to break down your financial plan into
a series of tactical strategies. All of these concepts are designed
to help you achieve financial security for the future, and ensure
that your dreams become a reality.
- Cut costs to create discretionary income. In order
to invest, you need to squeeze additional money from your income
each month. Sticking to your budget will help you do this.
- Create an emergency fund. Most experts recommend you
maintain between three to six months worth of income in an accessible
account should you unexpectedly lose your job or become incapacitated.
- Outpace inflation. You need to invest money aggressively
enough to beat the effects of inflation over the long term.
For example, if inflation is averaging 3% per year, your investments
need to return at least that much for your money to increase
- Minimize taxes. Like inflation, taxes decrease the
value of your income. That's why it's important to understand
which investment vehicles are appropriate for which goals. For
example, there are many tax deductible and tax-deferred plans
available for individuals saving for retirement. No matter what
the goal, always look to minimize taxes through tax-advantaged
- Diversify. A sound rule for all financial plans is
to diversify your invested holdings. Spreading your assets among
many different types of securities helps ensure you won't lose
your entire nest egg in one poor investment.
- Work with a professional. If you've never invested
on your own, you may want to start out working with a financial
planner. Check with friends, family, and co-workers for recommendations,
and find someone with whom you trust and are comfortable discussing
your financial matters.