Manage Money

Key Elements of a Financial Plan

Are you making a financial plan? Maybe for the first time ever or maybe for the umpteenth number of times? Either way, congratulations truly! Yes, we really mean it.

Creating a financial plan is something basic, right? But you’ll be surprised to know how many people still don’t have any type of plans at all for their financial future. They just live from month to month without saving and investing for the future. They don’t save for a possible situation such as job loss, medical emergencies, and etc. So if you do plan for the future, you are way ahead of those that do not. 

If this is your first time making a financial plan, you need to know its components, or what it comprises.

  1. Goals and objectives: The very first thing which you need to pen down is the goals and objectives. These can be multiple, or you can have a single goal and objective. This is up to you, but you need to follow through. This section is going to be your guideline for the rest of the process, so really think hard about your goals and objectives. By the way, you can also make these for the long term, the short term, or both. It is better to have a mix of both so that you know you are making progress. Goals can be saving x amount within 30 years, investing x amount and earning over the years, saving up to buy a home, and etc.

  2. Income Tax planning: Here is where you examine whether you are maximizing all possibilities of saving taxes according to the planning objectives.

  3. Balance sheet: A balance sheet, or as it is also called the Statement of Financial Position, is now to be made. It shows your net worth, assets and liabilities. You should update the sheet from time to time as you progress towards your goals and objectives.

  4. Issues and problems: There shall invariably be problems and even the occasional setback. In this step, you try to determine what the issues are and problems are of your current financial situation. Record the risks as well.
    One unexpected event can derail even a well-thought out financial plan.

  5. Risk management and insurance: It takes just one unexpected event to derail even the well-thought out financial plan. Think about it: last year so many people lost their jobs, faced unemployment, faced health issues, and more. When they faced these, their plans were derailed. They just were not ready for this, and faced a lot of problems.

  6. Retirement, education and special needs: These are things for which you need to plan. Your financial projections should be geared towards meeting these needs.

  7. Cash flow statement: This is where all of your income streams are shown, as is shown how much money comes in from all of them. Here is also where you should recurring stream income and regular income.

  8. Investment planning: In this section, you do an analysis of your investments for determining if your portfolio’s growth, income and diversification are consistent as per your Objectives. 

  9. Estate planning: This is where you put a review of your lifetime gifts and the final transfer of assets for the reduction or elimination of gifts and income tax exposure.

  10. Assumptions: This is where you add your assumptions about future inflation rates, tax brackets, return on investments, years of work remaining, and your life expectancy. 

  11. Implementation plan: In this section, you put a final implementation plan.

Lastly, to finish the process you need to ask yourself,

  1. What rate of return risk do I need to take in order to enjoy the same standard of living in retirement that I enjoy today?

  2. How long will I need to work before I can afford to retire?

  3. How much can I afford to spend and not run out of money?

  4. Am I saving enough to reach my retirement income goals?


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