The Key Components of a Financial Plan

Time to read: 6 Minutes

Your comprehensive financial plan is like a roadmap. It identifies where you are and where you want to go, and aims to lay out the most efficient and effective path to get you from point A to point B.

Of course, with financial planning, there isn’t just one destination you’re heading towards. There are a variety of goals, such as purchasing a home, funding a child’s future education, and planning for retirement, that you’re working towards. Additionally, you want to make sure the path you take protects and preserves your wealth and lifestyle in case something unexpected does occur.

There are a variety of tools that will help you achieve your goals. Exactly how these tools are used and how your finances are structured depends on:

• Your goals and their time horizons
• Your individual financial circumstances
• Current life stage and financial picture

An experienced financial advisor can help you determine the best way to structure your money to reach your goals. That being said, there are six key components that all goal-based financial plans should include. Keep reading to learn more.

Cash Flow and Budgeting.

In order to start determining how much money can be saved or invested to achieve your goals, you need to have a clear picture of how much money you have available.

The first step is determining your monthly take home-pay after taxes, insurance costs, and any other deductions have taken place.

Next, subtract any regular fixed expenses, like mortgage, rent, and car payments, as well as any regular expenses that may vary slightly, like utilities, groceries, and other necessities.

The amount left over is what you have available to put towards your goals and any discretionary spending.

This exercise is an important first step, largely because it tells you how much money you have available to put toward goals each month. It also may help to highlight areas where you’re spending more than you’d like or help you realize that certain goals may be achievable within your current budget.

Emergency Fund.

Building an emergency fund is an important part of any financial plan, and creating one should be one of your top priorities.

Your emergency fund should contain a minimum of 3 months of expenses in a savings account so that it’s protected against market fluctuations and can be withdrawn from at any time without any penalties.

After the account has been funded, regularly checking and adding money to account for inflation or increased expenses helps to ensure the emergency fund continues to cover your needs.

Paying Down High-Interest Debts.

This component likely won’t apply to everybody looking to make a strategic financial plan, as not everybody has high-interest debt. However, for those who do have credit card debt, personal or payday loans, or have taken cash advances, paying off the debt ahead of schedule and as quickly as reasonably possible should be part of your financial plan.

Unlike a mortgage or a car payment, which would be considered line items in your budget, high-interest debts can become a huge drain on your finances and make it more difficult to achieve both short- and long-term goals. In addition to the high rates, this can be due to compounding interest and unfavorable terms where early payments cover fees before reducing the balance.

Investment Planning.

Investments are an important component of your financial plan. When used correctly, investing is a tool that helps to accumulate wealth and reach goals.

Of course, investing does carry risk. That’s why it’s important to approach investing with a long-term perspective and focus on informed planning rather than assumptions about future market performance.

An experienced financial advisor can help you build an investment portfolio based on your unique circumstances, goals, and risk tolerance.

Tax Planning.

Often confused with tax preparation, many people don’t realize tax planning is a key component of a comprehensive financial plan. More often than not, it’s because they don’t realize quite how impactful strategic tax planning can be.

While tax preparation is the preparing of annual taxes with the goal of reducing the amount of taxes you pay that year, tax planning aims to reduce your overall lifetime tax burden as much as possible.

This is done in a variety of ways, from deferred compensation to tax-loss harvesting, strategic structuring of assets, and more.

The impact of effective tax planning can be tens, if not hundreds, of thousands of dollars saved throughout the course of your lifetime. However, which strategies to implement (or are even available) is highly specific to your individual circumstances. An experienced financial planner can help guide you towards strategies that best fit your needs and goals.

Retirement Planning.

As arguably the most anticipated financial milestone, retirement is something most people plan for their entire lives. As you approach retirement age, the focus naturally shifts from diligently saving to determining the best way to utilize the nest egg you’ve spent your entire adult life building.

This includes determining what your ideal lifestyle in retirement looks like, how much money you need to save to retire comfortably, strategies for effectively structuring your retirement savings, optimizing your withdrawal strategy, and creating a plan in the event of expected expenses and challenges.

Because retirement is something you should begin saving for as early as possible, it’s an important component of your financial plan, regardless of what stage of life you’re currently in.

Legacy Planning.

Many would consider legacy and estate planning to fall under the “retirement” umbrella. While estate planning is a large consideration during retirement, coming up with an initial estate plan and determining how you’d like your assets to be distributed is important long before retirement.

It’s important to think about what legacy you’d like to leave and create a will that outlines these wishes. This will should, at a minimum, include how your assets should be distributed, who should administer your estate, and plans for any dependents, should you have any.

Your plans will likely change during different stages of life and as your finances evolve, so keeping your estate plan updated will help give you peace of mind.

Is your financial plan comprehensive? Our team is here to help ensure your plan contains all the necessary components to help you reach your goals and approach milestones with confidence. To learn more about our approach to goal-based, comprehensive financial planning, contact our team!