Financial Plan
A financial plan refers to a tool that helps optimize the management of financial flows to achieve material goals and improve well–being. It includes analyzing expenses and revenues, setting goals and developing a strategy to achieve them. A comprehensive financial plan enables a person to link his needs with the opportunities.
It is often confused with the business plan that defines objectives of the company, while a financial plan is an overview of an individual's personal finances. A personal financial advisor is a professional who assists individuals with managing their finances and meeting financial goals.
Financial Plan explained
There are certain stages to develop a financial plan. A financial advisor is aware of them and can carry out a financial planning process. However, a person can study the steps stated below himself and build a personal financial plan. The first step in financial planning is data gathering. It is necessary to analyze expenses and income over a certain period of time, gather financial statements and personal documents to base a plan on accurate information about a person’s financial health.
Net worth calculation. To calculate the net worth, write down the following components:
- The assets. They include everything that a person owns and uses in his life: real estate, land, shares and other securities, as well as patent developments.
- The liabilities. They refer to mandatory payments, arrangements that may arise from financial contracts. The liabilities encompass auto loans, mortgage loans, monthly expenses, etc.
The net worth can be calculated according to the following formula:
total assets – total liabilities = net worth
Cash flow calculation. The cash flow plan is designed to calculate income, expenses and cash balances and it shows the deficit/surplus of funds, how much money a person has at his disposal and how much money is left over each month for investing or saving.
An individual can clarify all operations on the account, the balance at the beginning and end of the period in the monthly credit card statement. Besides, there is a document that can be issued by a bank, which contains details about the operations performed on the account. It is called a checking account statement. The statement reveals accurate information about the account status and cash flow: deposits, transfers, and withdrawals.
If some of the expenses change significantly depending on the season, then it will be more accurate to estimate the monthly expense by adding up all expenses for 12 months and dividing the total amount by 12. That’s how an individual can take control of the spending, plan for big purchases, understand how to save money, and also protect himself from financial risks.
A person can record monthly basic expenses, such as rent, utility bills. It’s easier to calculate how much an individual has spent over a year adding up all monthly expenses. It’s also important to calculate variable monthly expenses. Unlike fixed expenses, variable expenses depend on a person’s lifestyle and are based on daily spending decisions. Variable expenses include spending on clothing, recreation, etc.
In addition to this, a person can write down personal expenses - the amount of money a consumer spends on goods and services in order to meet material and spiritual needs.
Personal goal setting. An effective goal setting is a key to success. An individual should avoid such abstract goals as "I want more money" and set a clear one, for example, to get $1,000 per month in passive income in 10 years or to purchase a bigger house.
An individual decides himself which goals come first. Nevertheless, a financial professional can help with the financial decisions, navigate finances, and choose the right strategy for amassing money to reach financial goals.
Components of Financial Plan
Only plans of state-owned enterprises have an approved form. When drawing up a personal financial plan, an individual can include various aspects in the document.
However, there are some essential components that should be considered:
- Retirement planning. Financial planning should start not only with goal setting, but also with building a solid retirement plan.
- A risk management plan. A person should identify possible risks that he may face which may negatively affect financial situation and present challenges in achieving financial goals. After that, he should choose tools that will protect him against the potential risks, such as catastrophe insurance, life insurance, etc.
- Long-term investment strategy. To make a personal investment plan, it is necessary to determine the amount of funds that a person has available to invest, as well as set investment goals and develop the risk profile.
- Tax reduction strategy. A citizen can find ways to lower income taxes himself or consult a financial advisor.
- Estate planning. An individual has the right to make a plan in advance that will include details about the transfer of assets in anticipation of death.
