What is in a financial plan?
In general usage, a financial plan
is a comprehensive evaluation of an individual’s current pay and future
financial state by using current known variables to predict future income,
asset values and withdrawal plans.This often includes a budget
which organizes an individual’s finances and sometimes includes a series of
steps or specific goals for spending and saving in the future. This plan
allocates future income to various types of expenses, such as rent or
utilities, and also reserves some income for short-term and long-term savings.
A financial planner is sometimes
referred to as an investment planner,
but in a personal finance a financial planner can focus on other specific areas
such as risk management, estates, college or retirement
In business, a financial plan can refer to
the three primary financial statements (balance sheet, income statement and cash
flow statement) created within a business plan. Financial forecast or
financial plan can also refer to an annual projection of income and expenses
for a company, division or department. A financial plan can also be an
estimation of cash needs and a decision on how to raise the cash, such as
through borrowing or issuing additional shares in a company.
What is a personal financial
of ‘Personal Finance’ All financial decisions and activities of
an individual, this could include budgeting, insurance, savings, investing,
debt servicing, mortgages and more. Financial planning generally
involves analyzing your current financial position and predicting
short-term and long-term needs.
BREAKING DOWN ‘Personal Finance’
individual financial activities fall under the purview of personal finance;
personal financial planning
generally involves analyzing your current financial position, predicting
short-term and long-term needs and executing a plan to fulfill those need within
individual financial constraints. Personal finance is a very individual
activity that depends largely on one’s earnings, living requirements and
individual goals and desires.
most important aspects of
personal finance are:
- Assessing your current financial position – looking at expected cash flow, current savings, etc.
- Buying insurance to protect yourself from risk and making sure your material standing is secure
- Calculating and filing taxes
- Savings and investment
- Retirement planning
Matters of personal finance include, but are not
limited to, the purchasing of financial products for personal reasons, like
credit cards, life and home insurance, mortgages
and retirement products. Personal banking is also considered a part of personal
finance, including checking and savings accounts and new banking products.
What is the purpose of Financial Planning?
The major purpose and reason for financial planning is to
line up our financial and lifestyle ducks. Most people have a lot going on
financially and with life in general, life insurance, pension plans, education
funds, taxes, employee benefits, wills, power of attorney’s, cash flow to
mention a few . It’s very important that we have informed reasons to base our
financial and lifestyle decisions on. A personal plan becomes like a rudder for
your financial ship. Most importantly it gives you control financially which in
turn reduces stress and will give you an improved quality of life. Plus
it just makes sense; we plan everything else in our life so why wouldn’t we plan
for the best use of the money we work hard for and create some financial
Where do we start?
Before you start a plan you must first identify what
your personal objectives, goals and dreams are. This is the first step in
personalizing your plan. Then you need to inventory your assets, liability
and expenses so we can clearly identify a starting position. All of this
information will be recorded on a data form and may take some time to
accumulate. Many people find that this process is very valuable and rewarding
because it requires: accounting for expenses, evaluating debt, reviewing
investments portfolio weightings and getting an up to date wills and power of
attorney, all things they have been planning to do but haven’t got around to it
because it’s a daunting job.
The second step is to transfer this information to
financial planning software program. The amounts of input items are vast.
So without a computer program it would be impossible to organize and evaluate
all of this information.
The third step is for a financial planner to
interpret all of this information. A professional Financial Planner will have a
clear understanding of risk management requirements, wealth accumulation
products and purpose, taxes, retirement rules and regulation, government benefits,
estate planning etc. Without this professional knowledge and understanding it
would be impossible to complete a comprehensive personal financial plan.
How do I start
implementing my plan?
You will now have all of the information to make informed
decisions. Once more you need to clarify your objectives and then
take action that will allow you to accomplish each of your identifiable
goals. Your financial planner with give you a step by step process
based on your priority of importance. Some goals you will change immediately
with perhaps a slight adjustment to what you are currently doing. Other goals
may need to be re designed to accomplish your intended result. But remember
that financial planning is like a rocket ship going to the moon, it is off course
90% of the time and corrections must be made. As long as you clearly know what
your objectives and goals are you will always have a clear target to aim for
and can make the required adjustments.
What can I expect from
You will have a clear and concise alignment of your assets,
liabilities and expenses to your personal objectives, goals and dreams. You
will then proceed with confidence knowing exactly what needs to be done to
accomplish your objectives. Words that I have heard other people say are:
relief knowing it can happen, feelings of confidence, excited about the future,
clear direction to mention a few. The whole process takes a non tangible
position and makes it tangible by attaching actual numbers and time
frames to your plan which will taking the guess work out of future financial
I have been asked before -when is the best time to
start a financial plan? My answer is always the same “the best time
was twenty years ago and the second best time is today”. It’s one of those
things where the sooner you start the better it is but it’s never too late to
Financial planning has value at all stages and ages of life
because your priorities will change:
- First stage (Starting out years) –When starting out most of our income goes to providing for the
lifestyle expense. At this stage there are normally few assets but there
could be liabilities with debt (mortgage etc.) and perhaps a new family
members having a life insurance planning is important. If there is no
house or family as yet then most of your surplus income will go to saving
for a down payment for a house purchase, paying off school debt or
planning a family. Little money for retirement savings. This is the best
time to purchase life insurance because of the young age and most often
there is no health issues so it’s easier to get and the cost are very low.
- Second stage (Growing years) – Goals change
as your needs change. Children’s
education may be important, starting retirement plans and reducing debt
may also be the major priorities.
- Third stage (High income years) – This is
the time that you must save most of your retirement assets. It is often
your highest earning years and cash flow is commonly more plentiful.
Income tax, deferral plans will be your focus.
- Forth stage (retirement) – Your lifestyle
expenses are paid for from your retirement assets, pension plans and
government benefits and you are enjoying life and managing your health.
Managing your taxable income will be key for maximizing income efficiency.
- Fifth stage
(estate planning) – You have accumulated several assets and you need to
plan the distribution of these assets upon your passing. You may want to
leave a legacy to your family and contribute to a charity or church of
your choice. Taxes will be an issue and proper planning will be necessary
for a tax effective distribution of assets. Wills, trusts and power of
attorneys need to be up to date.
Why is it important to have a
The Importance of Having a Financial Plan. Creating a financial plan helps you see the big
picture and set long and short-term life goals, a crucial step in mapping out
your financial future. When you
have a financial plan, it’s
easier to make financial
decisions and stay on track to meet your goals.
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