In a nutshell, Financial Planning is a method of achieving the type of life that you plan for. Unfortunately many people do not plan and they end up not getting what they wanted.
Everyone’s financial plan is based on his or her own unique situation. But most plans address the following elements:
Current Financial Situation – Both you and the planner need to know where you are at financially which includes a net worth statement ( list of assets and liabilities) as well as a cash flow determination (income and outgo). This is important to identify areas of potential savings and have an ability of judging progress over time.
Investment Risk Tolerance and Capacity – It is crucial to understand these areas before attempting to determine whether your current investments are appropriate for your situation.
Investment Analysis and Recommendations– It’s important to know what investments you have currently prior to determining whether they are appropriate for your situation (based on risk tolerance, risk capacity and goals). Only than can alternative recommendations be appropriate.
Investment Policy Statement – Many people get off track in their investments because they don’t have a clear game plan. An Investment Policy Statement clearly outlines the objectives of your investments, expected returns, possible gains and losses based on historical data, and provides guidance for managing your investments going forward.
Retirement Planning – This element identifies the goals that you have now and in the future, takes into account current and future income and assets and then determines the likelihood that you do not run out of money before the end of the line.
Estate Planning – This is about having the proper documentation so that you are cared for the way you want should you become incapacitated as well as passing on your assets when you are gone in the best possible way.
Risk Mitigation -Bad or unexpected things can occur if life and there should be a plan to deal with them as they occur. How would you; handle a 3 million dollar health problem, are sued for 2 million due to a car accident, die prematurely, need long term care. Risk mitigation planning is avoiding some risks, transferring some risk with insurance and retaining the risk in some areas. If insurance is part of the plan you want to make such you have the right type in the right amount and at a good price.
Debt Management – While this does not apply to everyone, some people need help in recognizing good and bad debt and having a plan to decrease both in the best manner.
Tax Planning – The less you pay in taxes, the more that’s left in your pocket. Identifying ways of decreasing taxes can be to your benefit. This planning often involves your accountant, CPA or enrolled agent.
Regardless of your age, financial planning can help you live the life you want through the proper management of your finances and risks.
Based on their education, experience and ethics, those advisors who are Certified Financial Planners ® would be a good choice to analysis your situation and craft a written financial plan to address the above topics
This article is for informational purposes and should not be taken as legal, tax or investment advises.
Photo by: Giovanni Giusti