What Is a Financial Plan and How Do I Create One?

Picture this: you’re about to embark on a cross-country car trip all the way across the continental United States but you don’t have a map, a GPS or Siri to guide you. Does that sound enjoyable? How will you know if you’re going in the right direction? What if you get a flat tire? Are you stressed out yet?

Practically speaking, you simply wouldn’t drive from Boston to LA without a GPS or a map. Even a short holiday suffers without a plan.

So what about the much longer journey of life – what’s your financial roadmap from the working world into retirement and beyond? Do you have an itinerary all planned out or are you driving without directions, fingers crossed that you’re on the right road?

Your financial path through life doesn’t have to include confusion, wrong turns, delays, and setbacks. A financial plan makes all the difference in guiding you forward on a productive and efficient path to achieve your goals.

So what is a financial plan, and what goes into it?

At its core, a financial plan is a living document. It takes a comprehensive look at where you are today and describes where you want to go, as specifically as possible. One size does not fit all. After all, the goals and situation of a young family with school-age children looks markedly different from a seasoned professional who is contemplating retirement in the next few years.

Step one: Define your goals

The first step in a financial plan is defining goals and objectives as precisely as possible. Some goals are easy to measure, such as buying a new home, while others less so, such instilling strong values in our children. Both are very important. Without a clear destination in mind, you can’t create a roadmap to get there.

Step two: Gather data for analysis

The second step in a financial plan is detailed data gathering and robust analysis. All assets and liabilities are summarized. All income and expenses are measured. Reasonable projections for the future are made based on a number of variables, including retirement age, length of retirement/life expectancy, investment rates of return, inflation, income taxes and others.

Step three: Determine specific recommendations

The third step in creating a financial plan is developing specific recommendations based on the data to achieve your goals. A financial plan produces a set of steps to take in order to make achieving the goals a reality. It may include making changes to investments, insurance or estate planning documents. It may include recommendations to pay off debt or sell an asset. Frequently, there are trade-offs involved.

Step four: Implement the recommendations

The fourth step in financial planning is implementing the recommendations. A plan is only valuable if it is followed and executed. Otherwise, it is just a stack of paper. Implementation often takes a village. It is a coordinated effort between the client, the financial planner, and the client’s other advisors, including accountants, attorneys, investment managers, insurance agents and others.

Step five: Monitor and revise

The last step in financial planning is frequent monitoring and revising the plan as needed. Once the initial recommendations are put into action, periodic checkups are needed to ensure the client is still on the right track. Since a family’s goals, needs and situation evolve over time, so should the financial plan. Expect follow-up steps.

Are you ready to create your own, customized financial plan to get on the clearer path to achieving your financial goals? Contact a Wealth Advisor at Bankers Trust today!