What a financial plan is, and how to make one.
A financial plan is a document that helps to plan, direct, and manage how you handle or spend money, it is like a map that reduces stress whilst enhancing success, it helps in setting goals, targets, and objectives, which whence strictly followed, allows you to get to your desired level in life. It is basically a document that outlines your goals and how to achieve them.
What does a financial plan contain?
A document must contain some basic essentials for it to be termed as a financial plan, if not, it may not be logical to term such a document as one, some of these things includes, financial health, investments, taxes, risks, estate planning, education planning, and retirement, it may contain other things, but the ones mentioned above are very much important.
- Financial health
This part of the financial plan document should contain an overview of your financial standings, it should include your net worth (subtract your total debt from your total assets), budget and expenditures, and your cash flow.
This part of the financial plan document should include risks and dangers which you feel might not be able to make you achieve your goals, they may include bad health, accidents, disability etc, and then outline what you think may be the likely solutions, e.g insurance.
This particular part of the financial plan document would contain portfolio performance and topics such as taxation issues, stress test, reward, risk and its tolerance, correlation, investment options, portfolio risk score, etc.
This part takes an holistic look into the plans that you have for retirement, salient questions would be asked, questions like, are you saving enough for your retirement? How much do you need to earn before retiring? What do you plan to engage yourself with after retiring? Do you know the best accounts to save in order to minimize tax bill?
This section of the financial plan would seek for ways to cut down on taxes, so that you can have more money in order to reach your goals. This is highly necessary because a large bulk of people’s income goes towards the payment of tax bills.
- Estate planning
This part of the financial plan document is very important and should be drawn up by legal professionals, this section of the financial plan seeks to look into the future and tries to imagine what happens to your assets when you die, proffering a solution now saves a lot of things in the future.
- Education planning
This section has to do with education and human capital development, it may be either you are planning to return to school for adult education or seeking to proceed in your studies, it may also be that you want to send your kids to school, the section comes in handy a lot.
Benefits of a financial plan
Financial plan is a document, and its implementation largely depends on the personality involved, how serious they are, and how willing they are to follow it through. It’s major advantage is that it provides actionable steps towards achieving what you seek to achieve, if also allows you to examine how well you’ve fared, it’s quite easy to notice where you’re lagging behind in the financial plan, and how best to fix the situation.
These are some of the steps to take in making a financial plan:
- Set your goals
You need to set your goals, what you want to be and where you want to be in the next ten (10) years, the educational qualification you must have attained within the next five (5) years, the type of car you want to use by the end of the year, the category of house you would like, the number of kids you want to have, and many more goals can be set, your financial plan must start with a goal, as that is exactly what would guide to through the other steps.
- Gather your information
After setting your goals, the next thing to do is to gather your information, these information would be those that are highly necessary in achieving your set goals. They may include your current monthly income and expenditures, your current retirement plans and savings, monthly contributions, allocations, and any other plans available to you, insurance and premium facilities, account beneficiaries, and all other relevant documents. They are very important as that’s the information you would work with.
- Evaluate your financial situation
After setting your goals and having the necessary information at hand, the next step is to evaluate your financial situation or standing, this is very important as you already have where you’re going, the next question should be if what you’ve done so far and your financial situation is okay enough, and if it’s not, you should start racking your brain on how to improve on your lot. You should make a true and sincere financial breakdown of the type of life you want to live after retirement, the dollars and cents is very important here, at this stage, younger should be able to know whether you’re in my right direction or not.
- Stick to the plan, adjust only when totally necessary
This is where the bulk of the work is, this relies a lot on personal commitments of the person, since you have goals and know exactly where you’re headed, and you know how to go round and about it, this is when you’re needed to put the plan into place, make sure you follow the plan thoroughly, make adjustments only when it is totally necessary to.
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