Why You Need A Financial Plan, Part 1

Many people think that a financial plan is only for people with money. Studies show, however, that a comprehensive financial plan benefits everyone, regardless of income, age and net worth. In fact, having a financial plan is one of the sure ways to get into a higher income bracket!

Unfortunately, only 31 percent of American families have a financial plan, just 35 percent have a plan in place in case of a financial emergency, and only 18 percent are confident they can retire.

Those with a financial plan are 70 percent more likely to feel “very confident” about managing money, savings and investments. Planners also are more likely to describe themselves as “living comfortably” compared to non-planners.

In this series, I cover the top reasons you need to get a financial plan today, and what you should look for in a financial plan.

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What is a financial plan? According to Certified Financial Planner Board of Standards, a comprehensive financial plan covers savings and investments, planning for retirement, education, emergencies, major purchases, insurance needs, estate analysis and other financial goals.

Why is it so important?

We all want to be financially free, to be able to pursue our passion and goals in life without having to worry about money. If you look at people who are financially free, they have made SMART money decisions all their life. A financial plan helps you make SMART decisions.

The sooner you start making smarter decisions, the more likely you are to achieve financial freedom. You always can get more money, but you can’t get more time. The best time to get a financial plan may have been in the past, but the second best time is today.

Even if the financial decisions are small and may seem insignificant, over time they add up. Just like investing and the magic of compound interest, the more time you have for investments to grow, the less money you need to save in order to achieve the same returns as someone who has less time.

A comprehensive financial plan also helps you determine when you can retire, when you should take Social Security, how much you need to save every year, how to maximize your hard-earned money, limit your risk, and help you grow, protect, enjoy and give away your wealth!

Your financial plan is your roadmap. It answers the three most important questions in regard to your finances and life: Where are you now? Where do you want to go? How will you get there?

When people think of a financial plan, many assume it is setting up a budget, saving for retirement and looking for good investment products. But a financial plan goes much deeper than that. If properly done and updated regularly, it could make the difference between financial independence and financial dependence. Here are key things a good financial plan has. Please visit artofthinkingsmart.com for sample plans.

Your Goals. The purpose of the financial plan is to meet your financial goals. Goals are not just expenses, but your hopes and dreams. Proper goal-setting will focus you on how your money can be used to fulfill your needs, wants and wishes. But if the goals do not adequately reflect what you truly need, meeting your goals may not give you the financial independence you want. A million dollars today will be worth only $540,000 20 years from now if annual inflation is 3 percent. A good financial plan will reflect your true lifestyle goals and values you want to live by.

Capital Needs Analysis. This is a detailed analysis of your cash flow. In other words, how much money comes in and how much money goes out every year until the plan ends. A small change can make a big impact 30 years from now, so it is important to update the financial plan to reflect any changes, no matter how small. A good plan will have a Monte Carlo simulation or something similar, where you can see all the potential outcomes of your plan based on different variables. This will help in determining the chances of certain outcomes, probability of success in meeting your goals and establish the appropriate safety net to safeguard against financial uncertainty.

Risk Tolerance. This means how much risk you are willing to take for a higher return. Many people overlook this step and do not have a plan that adequately reflects their risk tolerance. This is crucial in order to determine the right type of investments and asset allocation of your investments. Many people adapt their risk tolerance to investment products rather than have the correct mix of investment products to fit their risk tolerance.

Investment Portfolio. Money you save has to be invested to grow! There will be ups and downs, but a good plan will help you stay disciplined. It will take into account average returns, bad timing and the probability of success in reaching your targeted return, and how that will affect your plan.

Adapts To You. This is your personal financial roadmap. There is a significant number of assumptions in a plan, such as interest rates, market performance, income and inflation. A good plan will help you understand which assumption and variables have the biggest impact on your plan. It also will address your insurance, tax and estate-planning needs, and they will cater to your goals.

Easy To Understand. A plan is not effective unless you can understand it! You want the plan to give a clear presentation of the results and easy-to-follow action steps. If it is confusing, people may be less likely to take the steps needed to implement the plan.

In today’s uncertain economy, financial planning has become increasingly important. With an overwhelming number of options for saving and investing, managing your finances can be difficult.

Creating a financial plan helps you see the big picture and set longand short-term life goals, a crucial step in mapping out your financial future. Working with a CFP professional can secure your financial well-being, give you peace of mind and help you reach financial-planning success.