How to Create a Financial Plan Like a Pro | family finances

A financial plan is the foundation of any good investor: a first step in creating a long-term strategy that sticks, whether your goal is to pay down debt or build wealth for generations to come.

Your financial plan is your compass when making decisions, big and small, that involve money. Major life goals, like owning a home or financing a child’s education, require careful planning. And research shows that those who get this plan in writing are more confident about reaching their goals and tend to maintain healthier financial habits, according to Schwab’s 2021 Modern Wealth Survey.

There is also no doubt among experts about the importance of a financial plan. Keith Beverly, managing partner and chief investment officer at Grid 202 Partners, says everyone needs a financial plan; what will vary is the complexity of the plan.

“When you’re fresh out of college and have your first job, your financial plan may be simple, but you still have one,” says Beverly. “There can be different levels of complexity and nuance depending on the individual, but when you think about financial planning — insurance, taxes, estate planning, and investments — those are the core areas.”

However, getting professional help with a comprehensive financial plan can be expensive and even impossible, as many advisors require a minimum net worth to participate in planning with a new client.

What is a financial plan?

A financial plan is a written document that outlines strategies, goals, and objectives for an individual’s or family’s money.

When created by a professional financial advisor, a comprehensive financial plan typically includes a list of recommendations that consider the client’s goals and values, as well as external economic factors. No two plans are exactly alike, and professional advisors generally don’t use a single, universal template for every client, but many advisors apply the same general financial planning concepts from the start.

Content of your financial plan

Your financial plan can be as simple as you want or as complex as your situation demands. While you don’t need to describe specific plans for each of these categories, the following list is a general guide to areas to review when creating a financial plan.

  • Risk management: review of your insurance needs.
  • Budget.
  • Management of emergency funds and debt.
  • Retirement planning.
  • Educational planning for a child or grandchild.
  • Planning of major expenses (lump sum purchases).
  • Estate planning.
  • Income tax planning.
  • Management of investment portfolios.

After reading this list, you should be able to pick a few areas you want to focus on and exclude areas that might not apply to your financial situation right now.

Step One: Gather Information

To plan a path forward, you must first figure out where you are today.

When a professional advisor first meets with a new client, the focus of this meeting is likely to be information gathering. Advisors must create financial statements and analyze that information before creating a financial plan.

To create a financial plan like a pro, you can’t skip this step. At a minimum, compile a list of the following: your current income streams, insurance policies, bank accounts, including retirement accounts, and debts owed.

Once you’ve listed the basics in one place, take a moment to assess where you stand on some qualitative money questions before moving on to the next step. Ask yourself: What is my risk tolerance right now? How important is work-life balance to me? How much time do I really have to spend managing my money?

Step Two: Set Financial Goals and Objectives

After taking some time to reflect on your financial situation, you may see obvious areas that need attention, or you may just want to make a plan to maintain the progress you’ve already made. Either way, it’s time to list specific, measurable goals.

“It is crucial to prioritize between competing targets. In general, people can have whatever they want, but not everything they want,” says Edward Moyzes, CEO and founder of Strategic View Advisors, a subsidiary of Northwestern Mutual Private Client Group. “At that point, you’re ready for an in-depth analysis that provides clarity on what priorities can be achieved, what trade-offs need to be considered, and how to align your existing wealth and future accumulation with your goals and values.”

Common financial goals often fall into one of these categories:

  • Objectives of education.
  • Retirement goals.
  • Career goals.
  • Savings goals.
  • charitable goals.

Step Three: Create Strategies

At this point, financial plans begin to differ greatly from person to person. At this stage in the process, it’s time to formulate a plan to reach the goals you just created for yourself and your family.

If debt management is a focus of your financial plan, for example, Moyzes says, “While debt is often a necessary part of a person’s financial life, it’s important to differentiate between debt that helps build wealth, such as a home mortgage, and debt. that can destroy it, like credit cards. A financial plan must determine if the structure (rate, terms, duration) of the existing debt is maximally efficient and if consumer debt requires changes in spending habits.

If estate planning is a priority, Moyzes says your financial plan “could be as simple as a will or as complicated as a series of trusts.”

Creating a financial plan also requires anticipating future conditions and understanding the economic environment in which you find yourself. Consider how your income may change in the coming months and how external factors, such as inflation, interest rates, and changes in tax laws, could affect your ability to reach your goals.

Beverly says her firm closely monitors such external factors on behalf of clients, analyzing how legislation in Congress and new market trends will affect them on an individual level. This analysis then feeds into customer conversations and ultimately customer plans.

“We have a framework for how we approach planning. We approach each of them with frameworks to understand their situations,” says Beverly. “We are being proactive, having that conversation with our customers. Backdoor Roth, this may be the last year that’s an option, so we’re answering those questions.”

Keeping abreast of the latest interest rates and legislation can be interesting to some and burdensome to others. People who don’t have the time or interest to create and adjust a financial plan, or just don’t want to take responsibility, can turn to a professional.

“It’s not that they’re not smart enough or that they can’t do it themselves, but one of the biggest advantages clients tell me about why they use an advisor is that they want to take the pressure off themselves,” says Kyle Moore, founder and financial planner for Quarry Hill Advisors. “Most people are going to decide if they can do it on their own at some point when the market takes a big hit; it’s about whether they can handle that. Along with research, mathematics and analysis, human behavior becomes an important factor”.

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