What is a Financial Plan? Do I need one? Where do I start?
When you set aside time to calculate your receipts from recent purchases; when you check your bank statement after each paycheck and decide how much cash to put into your savings account; when you purchase your home or lease your first car; and when you go grocery shopping with a digit in your mind that you refuse to exceed, you’ve participated in financial planning.
Creating a financial plan is making a personal step-by-step guide to help you achieve your money goals and other aspirations involving money. Whether that is going on a beautiful vacation or paying for college, the goal is the same: to ease your stress about being financially stable and independent so you can enjoy the quality of life you desire.
How do you make a financial plan?
Is there a standard outline, or is it attuned to the individual’s money mindset and motivations? It’s a little of both! Each person’s financial plan will look different based on their own financial goals, but the road to success has tried-and-true check-ins along the way to ensure that your financial plan helps you reach your destination.
What are the essential steps to a financial plan?
The most common, and effective, financial plans are structured to identify your present money situation and skills, and refine and nourish your money mindset, which allows you to manage money the best you possibly can.
A standard financial plan with Fyvie Financial usually looks like this:
● Your financial situation.
● Establish your financial goals.
● Creation of the plan to reach the goals.
● Setting up actions to take forward via SMART goals, and annual evaluation periods to review your plan and strategies going forward.
These steps are indeed crucial to the creation of a successful financial plan, yet there are other considerations that will help flesh out the best course of action for you.
1. Know your money mindset.
We’ve discussed this phrase on our blog as we believe understanding your money mindset is the root to any lucrative financial plan. Your money mindset is your relationship with money, and why you view it the way you do. Our money mindsets are often formed early in our lives, and we usually carry it with us as we grow older.
Think about how you were first introduced to money, how you saw it being handled, what you were taught about earning and using money. These may seem like minute memories, but they play a huge factor in how you see money and what you do with it.
For example, if you were a child who was granted an allowance, yet your parents had control over how you spent your money, this could shed light on how you spend money today. Perhaps their authority over your funds showed you the value of a dollar, and motivated you to be responsible with money. Or it could have had the opposite effect, and led you to spend money frivolously—even if it put you in a financial bind—because it’s your money and you can essentially do what you wish with it.
The key word in the phrase “money mindset” is certainly “mindset” as we each have our own way of viewing and meeting challenges, as well as solving problems. When you know why you have the relationship with money that you do, and how it has put you in the financial situation you are currently in, you can then understand what steps are best to help you grow your wealth by reshaping how money can serve you versus haunt you.
2. Why would a Financial Planner be of great service?
While most people are capable of managing their own finances, it never hurts to get a second opinion, especially from licensed financial professionals. If you find yourself trying to create a financial plan, achieving minimal success or, worse, ditching the plan if it’s not working, a Financial Planner may be the right fit for you.
Financial Planners are trained to get to know you and your financial goals, and assist you by building the perfect financial portfolio. Following creation of the plan, if you rather your professional take the reins and manage your investments for you, some types of planners are more than capable of meeting and exceeding your expectations.
Working with a Financial Planner could make the difference in if your financial plan is sound and ready to work for you or if it fails at a hurdle straight out of the gate or a year or so down the line.
So how do I create a financial plan if I want to try myself?
1. Know your financial situation.
As we mentioned earlier, creating a financial plan starts with understanding your current financial circumstances before you draft out your financial goals to tackle.
Some questions to include in setting up your financial plan are as follows:
● What’s my money mindset and money motivations?
● What’s my monthly income versus my monthly expenses ?
● Do I have spending and saving plans, if any? Is it working?
● Do I have any debts or assets I need to include?
2. Set up your financial goals.
Ask yourself what money goals will serve you and allow you to become financially free. How will this plan help you to never worry about money again? Common financial goals are investing thousands of dollars in a savings account such as an IRA or 401(k), or purchasing a home that you can pass down to your children and their children.
3. Make your financial plan.
What avenues will best help you achieve your financial goals? How long do you estimate it will take to reach them?
Your plan could consist of devising spending and saving plans that challenge you to underspend, and save as much money as possible. It could be setting up an emergency fund or breaking down your debts. It could also be working with a Financial Planner to hit each milestone through calculated investments and financial training.
Your financial action plan should reflect your short and long-term goals, interests, and serve to grow your wealth through discipline and organization.
4. Review your financial plan periodically.
While the standard review of your financial plan is annually, we encourage you to regularly keep up with your expenses and progress on your goals if you are doing this yourself. This could be checking in twice a week, once a month or each quarter to assess if your plan is moving along as scheduled, or if you need to make changes to help improve the process and keep you on track. If you have a Financial Planner helping you with this, then they will complete the check-ins, rebalancing etc for you, and you should be having annual meetings with them to review!
