Financial Plan

A comprehensive picture of the current economic situation and financial goals

Author: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:September 28, 2023

What Is A Financial Plan?

A financial plan is a detailed evaluation or document that details an individual's present pay and future financial situation by predicting future income, asset values, and withdrawal plans based on known variables.

It also involves a budget, which organizes a person's finances and may include actions or precise goals for future spending and saving. This budget distributes future earnings to various expenses, such as rent or utilities.

While also setting aside some funds for both short- and long-term savings. A financial plan is sometimes confused with an investment plan; however, in personal finance, it can focus on other areas such as risk management, estate planning, college planning, or retirement planning.

In addition, financial planning is considered more than that; a lot more goes into business and regular life planning. It includes many achieving future goals and things such as making money, retirement planning, a child's education, saving tax, and creating a business.

In this article, we will understand its fundamentals, components, the purpose of financial plans in personal and business life, and its unique considerations.

Understanding a Financial Plan

The financial plan is considered a comprehensive picture of the current economic situation, financial goals, and any strategies to accomplish them. Cash, savings, debt, investments, insurance, and other elements of financial life can be included in financial planning.

In addition, it is a continuous process that will lower any financial stress about money; it helps to save for long-term goals such as retirement. Financial planning is essential because it allows you to maximize your assets while achieving your plans.

'Financial planning is not only for the wealthy; anyone can benefit from creating a future financial roadmap.'

Whether you are doing it on your own or with the help of a financial planner, the first step in making a financial plan is collecting a lot of needed documents and clipping and pasting numbers from multiple web-based accounts into a document or spreadsheet.

It is impossible to overestimate the value of financial planning. It is not simply about increasing money away and cutting costs because Financial planning is more than that; a lot more goes into financial planning. This includes achieving future goals and things like:

1. Making money

Once the cost of standard products increases, you will need to save up enough money if you want to maintain or improve your current lifestyle in the future. 

Also, we can not forget that all this requires money to grow your wealth. Therefore, effectively investing your money in the right areas can achieve your goals.

Also, for long-term goals, equity mutual funds can be a good choice. In the long run, these funds can help the investor build wealth.

2. Retirement planning

Your retirement can be between 25-30 years in the future. However, this does not mean you should plan for it when you retire. However, it will help if you begin planning your safety net to live a happy and comfortable retirement.|

Early planning can help secure your financial future in the face of economic uncertainty. Furthermore, if you start early, you can benefit from the force of compounding, which can help you develop a large enough corpus over a 25-30-year period.

3. Child's Education

As we know, education has become very expensive, and it will keep increasing in the future. This is why it is necessary to begin planning as soon as your child is born. Knowing how much money you want to earn and starting investing can help you reach your objective.

4. Saving Tax

Everyone is most likely to pay a substantial amount of tax each year. But you can now be able to reduce your tax bill legally. The income tax act contains various provisions that allow people to lower their tax outgo.

You may determine the best ways to invest your money and lower your taxable income by preparing your taxes ahead of time. Also, mutual funds are considered tax-efficient for investing in your long-term goals.


Benefits Of a Financial Plan

Financial planning has various practical advantages. It helps many things, like boosting your savings.

Without a financial plan, it may be possible to save money. But, it may not be the most efficient method. Gain a lot of insight into your income and expenses when you make a financial plan. In the long run, it increases your savings and tracks and consciously cuts down your costs.

Another benefit is a better, higher standard of living. Unfortunately, most people believe that they will have to reduce their living level to make their monthly bills and EMI repayments. However, you would not have to compromise your lifestyle if you had a solid financial strategy.

It is possible to achieve your objectives while living comfortably. In addition, be ready for any situation that may arise.

Establishing an emergency fund is an essential part of financial planning, which is considered one of the benefits. The person must ensure to have at least six months of monthly salary because you can not know when precisely the emergency might happen.

So, in this case, you will not have to stress about procuring funds in case of a family emergency or a job loss. The emergency fund can assist you in making timely payments for various expenses.

Another reason is to set up a reserve fund. As we know, the future is unpredictable, and anything could happen at any time. The following situation is an example that can illustrate this reason.

Imagine a father who has taken out an education loan to help his daughter pay for college. He is also saving money for his upcoming retirement, which is a few years away. But, a medical emergency occurs in the family. 

Unfortunately, he will have to pay for medical expenses out of his pocket because he does not have medical insurance. This depletes his retirement fund and adds to his financial obligations.


How do financial plans save real-life situations?

Many people find themselves in similar situations. I am hoping for the best, But also necessary to prepare for the worst. A sudden job loss or a medical emergency might completely destabilize your finances; this is why an emergency fund is needed to deal with such situations.

Financial experts urge investors to set aside a contingency fund equal to six month's salary. Furthermore, this can be invested into a liquid fund to get your money immediately in an emergency.

It is also possible to cover monthly costs, invest in your future objectives, and spend a bit for yourself and your family without stress if you have enough money. Financial planning allows you to manage your money effectively while also providing you with peace of mind. 

Financial planning contributes to tackling Inflation, meaning that Inflation is the term of prices rising over time and refers to the steady increase in the price of products and services over time. If you are not aware, it can quickly deplete your money.

Here is a short example to show how its affects:

Imagine you have 100$, and a chocolate bar costs 10$. You can buy 10 chocolate bars with this amount. Consider keeping 100$ in a bank for the next year at a 5% yearly interest rate. You have 105$ left at the end of the year.

However, say that the price of the chocolate bar rises to 11$ in a year. This implies you will have to pay 110$ next year to get the same 10 chocolate bars. But, you are short of 5$ because you only have 105 $ this is how Inflation eats at one's savings.

It reduces purchasing power over time, and you have to pay more to buy the same goods. You can fight Inflation by putting your money into things that will give you better returns over time. However, financial planning is essential.

You may spend more time with your family, pursue your passions, and travel the world. However, you must consider one important question: how will I be able to cover all of these costs? To fully enjoy your retired life, you must have enough money.

This is doable if you have financial planning that ensures regular income post-retirement.

Steps to create a financial plan

There are seven steps to create a financial plan. They are:

1. Begin by establishing financial goals

Your financial goals guide an excellent financial plan. It is possible to feel more intentional about saving if you approach financial planning from the perspective of what your money can do for you, whether buying a house or helping you retire early.

Make your financial goals inspiring. Begin with plans because they will motivate you to take the following steps and serve as a guiding light as you work to achieve your objectives.

2. Please keep track of your money and redirect it toward your goals.

Get a sense of monthly financial flow - how much money comes in and leaves. An accurate image is vital for making a financial plan, as it can identify opportunities to increase savings or debt repayment.

Knowing where your money goes can assist you in making short-, medium-, and long-term plans.

3. Get your employer match.

If you go to a financial advisor, he or she will inquire if you have an employer-sponsored retirement plan, such as a 401(k), and if so, does your employer matches any of your contributions.

Note that 401(k) contributions reduce your take-home pay today, but it's worth it to contribute enough to obtain the total match amount because that match is free money.

4. Make sure emergencies do not turn into disasters.

Putting money aside for unexpected needs is the cornerstone of every financial plan. Starting with a small amount like $500 will be plenty to cover minor emergencies and repairs, preventing credit card debt from accumulating.

Another way to protect your budget is to build credit. When you have good credit, you have more options, such as the potential to secure a reasonable vehicle loan rate. In addition, it can boost your budget by lowering your insurance rates and allowing you to skip utility deposits.

5. Tackle high-interest debt

Paying down "toxic" high-interest debt, such as credit card balances, payday loans, title loans, and rent-to-own payments, is an integral part of any financial strategy. Some of these have such interest rates that you will have to return two or three times what you borrowed. 

If you are struggling with revolving debt, a debt consolidation loan or debt management plan may assist you in consolidating multiple bills into a single monthly payment with a lower interest rate.

6. Invest in building your savings

Investing appears to be a privilege reserved for the wealthy or those with established careers and families. However, contributing to a 401(k) plan or opening a brokerage account might also be ways to invest.

7. Build a moat to protect and grow your financial well-being

Building a moat to protect yourself and your family from financial failures with previous steps is possible. Also, you can continue to improve your economic moat as your career grows by:

  • Increasing your retirement account contributions.
  • Increasing the size of your emergency fund until you have three to six months' worth of living expenses.
  • Using insurance helps protect your financial stability in the event of a car accident or illness. Life insurance protects care those who rely on your income. Most people's needs are met by term life insurance, which covers 10- to 30-year intervals.

Why is a financial plan important for your business?

The financial plan, as previously said, is a snapshot of your company's current situation. The projections will inform your short- and long-term financial goals, which will be a starting point for developing a strategy.

It assists you in setting realistic expectations for your company's performance as a business owner. In addition, since you know your financials inside and out, you are less likely to be shocked by your current financial situation and are better prepared to deal with a crisis or explosive growth.

A comprehensive financial plan also makes you more appealing to investors, aside from helping you better manage your business. It lowers your risk and demonstrates that you have a solid strategy and track record for expanding your company or business.

Whether you are beginning a new firm or expanding an existing one, all business plans should include the following elements:

These financial statements can be helpful even if you are just getting started.

In addition, having a firm financial strategy allows you to break down what is required in your short-term finances. For example, many firms experience monthly or seasonal revenue fluctuations, resulting in times when cash is plentiful and cash shortages occur.

Poor cash management can lead to problems such as not being able to pay your employees. On the other hand, a well-structured financial plan that includes a cash cushion allows the business owner to sleep better at night. 

The financial cushion enables the company to take advantage of opportunities that arise, such as buying inventory from a supplier at a discounted price for a limited time.

It is easy in business to focus on daily crises or challenges. However, the cost of being too short-term is that the owner may not devote enough time to preparing what has to be done to grow the company over time.

With its forward-looking focus, the financial plan allows the business owner to determine better what expenditures are required to keep the company on track for growth and to stay ahead of competitors.

A business owner makes so many decisions that it can be impossible to discern which judgments were successful and which ideas or methods failed. Therefore, setting quantifiable targets that can be compared to actual results throughout the year is part of the financial planning process. 

The owner can examine whether an increase in advertising costs resulted in the expected increase in sales. Also, the owner can judge how to distribute marketing resources based on trends in particular product sales.

A small business's ability to conserve financial resources and allocate capital wisely is vital to its success. The advantages of business financial planning include recognizing the most significant expenditures.

It results in immediate productivity, efficiency, or market penetration increases versus those that can be postponed until cash is more abundant. Most companies go through this prioritization process, weighing the costs and advantages of each planned spending.

Small business owners used to work long hours and face numerous challenges, especially in the early stages of their businesses. As a result, it can be tough to identify whether the company is making progress or if it is stuck in mediocrity. 

Actual outcomes are better than expected, which provides much-needed encouragement to the small business owner. For example, a graph demonstrating consistent month-over-month revenue growth or a rising cash balance is a powerful motivator. 

The importance of a financial plan in the company is similar to the extent of financial planning for students: it allows the owner to understand, with the clarity of complex data, whether or not the business is on track to succeed.

Free Resources

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