What Are the Essentials of Crafting a Solid Financial Plan?

Many of us know that having a financial plan is a sensible place to start when it comes to achieving essential life goals. But what exactly is a financial plan, and more importantly, what makes for a solid plan? A financial plan is a strategy that lays out a set of actions that you need to take today to achieve your future life goals.  

 

To be sure, a plan identifies a path that aligns available financial resources with your intended life destination. Therefore, the essentials of a solid financial plan should include clearly defined objectives, outcomes relevant to your current life situation and should also thoroughly reflect your entire financial position. Not considering these factors may lead your plans off course and to an unintended destination.

Crystallize Your Goals

If a financial plan lays out how you can bring about your life ambitions, then being sure about your aim is central to hitting your intended mark. For this reason, the basis of a solid plan often begins with clearly defined financial objectives that align your financial plan with your goals. So, what are financial objectives?

 

Well, the table below illustrates how clearly defined objectives bring precision to your overall plan. To be sure, financial objectives get at the heart of why your financial plan exists. What’s more, they can also be used as a reference point later on down the road to gauge whether your plan recommendations are moving you toward (or away) from your intended target.  

Getting Help with Defining Objectives

What can you do if you have a general sense of your goals but are uncertain about articulating your specific objectives? That’s where a conversation with a financial advisor can help. For example, let’s say that you’re a few years away from retiring but don’t know how to start planning for retirement.  

During a discussion with your trusted advisor, you may discover that your retirement ambitions may include nuanced intentions like relocating closer to family, traveling the world, or wishing to be more charitable. In this situation, while your overall goal is retirement planning, the objectives that set the course for your plan may include buying a new house, creating a post-retirement travel budget, or evaluating means for engaging in philanthropic endeavors. Either way, financial objectives give direction to and are a crucial first step in creating your financial plan.

Planning Outcomes Should Be Relevant to Your Life Situation

Another essential aspect of creating a solid financial plan is ensuring that your planning objectives are relevant to your current life situation. This is important because irrelevant outcomes in your plan may take you down a path you never intended, leading to wasted time and souring your overall planning experience. When this happens, your perceived value of the planning process may decline along with your desire to put in the work necessary to achieve the other goals contained within your plan.

For example, pursuing a distribution strategy as part of a planning process might not make sense if your retirement date is over a decade away. Similarly, adding a professional asset management objective to your plan when all you want to do is consolidate a few small retirement accounts, might be beyond the scope of your planning engagement.  

Comprehensive Shouldn’t Mean Complicated

Along these same lines is the use of a comprehensive financial plan. You might have heard of the term before and asked yourself: what is it, and why do I need one? From a broad perspective, a comprehensive financial plan may include:

  • Cash flow planning
  • Investment management services and
  • Estate planning

Some individuals may find value in looking over all of their money matters in one sitting, particularly ahead of crucial life transitions. For example, let’s say that you’ve amassed substantial savings and are a few years away from retirement. In this case, it might make sense to consider objectives that address investment distributions, ensuring the longevity of savings during your golden years and having an estate plan aimed at leaving behind a legacy.  

For many people, however, sitting down with an advisor to talk about investment management or estate and tax planning objectives might not make sense at their given station in life. Even so, a comprehensive financial plan may still be an incredibly useful solution to address your most pressing planning needs. In fact, a comprehensive plan does not need to be complicated to be relevant for your life situation when there’s a focus on the basics.

Take another example of a young couple planning to start a family. How might they benefit from a comprehensive financial plan? At this phase in their lives, the family might need to consider 1) adjustments to their current and future expenses, 2) establishing a savings program to pay for their child’s education, and 3) reviewing life insurance coverage and preparing a simple will to address unexpected life events. 

The point here is that comprehensive shouldn’t mean complicated. What’s of more vital concern, however, is whether planning objectives are relevant to your current station in life. In either case, irrelevant planning objectives might prompt buyer’s remorse, and derail your entire financial plan. Therefore, be sure to ask yourself early in the planning process, whether your objectives align with what you’re ultimately trying to accomplish in your life today.

A Solid Financial Plan Should Be Thorough

How much house can you afford, or how much should you save for retirement? Many resources exist today that can help you calculate answers to these and other important money related matters. In fact, many websites and financial institutions offer free tools that can help you create a savings plan, establish a budget, and track your spending in real-time. But are these simple calculations and means enough to help you create a solid financial plan?

Often what’s crucial to the success of your financial plan is not the tool you use, but rather how thoroughly these computations fit into the mosaic that is your life. Therefore, solutions to your financial objectives should reflect your spending and saving decisions as well as your asset and debt circumstances. This is important because some tools only consider one frame of your financial picture and may produce recommendations that fall short of your ideal outcome. And when you make decisions based on incomplete information, it could cost you valuable time and money.

For example, let’s assume that your goal is to buy a house. An online calculator may tell you how much you can afford based on your income and living expenses and estimate a purchase price that’s consistent with your mortgage. The tool does its job and produces a useful output when you give it some simple inputs. Even so, the estimate may represent a static result and likely not reflect all of the possible outcomes given your dynamic life situation.

Let’s take our example a step further. Upon thoroughly reviewing your entire financial situation –spending, savings, assets, and debt – you discover that consolidating credit card debt could free up an extra $500 per month. When you take this information and feed it back into your home buying calculator, what you’re likely to find is that 1) you can now afford to buy a more expensive home or 2) shorten the time it takes to save for a down payment.  

The point here is that a solid plan should include calculations and estimates that thoroughly consider your entire financial perspective. Even if you intend to address just one objective, broadly understanding the interrelationships across your financial situation can help you craft a solution that fits your unique needs.  

Increase Your Chances of Achieving Success

Finally, an essential point to consider is deciding when to create a financial plan on your own and when to bring in a professional. As we mentioned earlier, there are a host of tools available that can help you create your very own plan. From simple calculators to sophisticated smartphone apps and websites, these tools can lay out actions that you need to take today.

What’s more, many personalities have authored books and created programs that have helped thousands of people reach their goals. So, when it comes to doing-it-yourself, there are plenty of cost-effective resources that you can utilize today to help you develop a solid financial plan that will move you closer to what’s essential in life.  

Knowing When It’s Time to Work With an Advisor

Sometimes, working with an advisor might make more sense than going it alone. Think of a financial advisor as a personal trainer. A personal trainer can help you achieve weight loss goals by creating nutrition and work out plans, showing you how to use equipment at the gym, and holding you accountable to your desired outcome. In a similar way, a financial advisor can use the planning process to help you achieve your important financial goals.

When might it make sense to bring an advisor into your planning process? Well, maybe you understand the various planning tools and approaches but have neither the time nor inclination to carry out the analytical and preparation work yourself. Another point where it may make more sense to work with an advisor is when you have a goal but are not quite sure about how to articulate your financial objectives or identify the tasks necessary to pursue that goal. Or maybe you’ve even tried a canned one-size-fits-all method to managing your finances but find that the approach does not suit your unique situation. If any of these illustrations resonate with you, then it might be time to bring in outside help.

Whether you work with an advisor or decide to go it alone, crystallizing your goals, identifying relevant financial objectives, and utilizing thorough solutions that fit into your life mosaic are essential components to crafting a solid financial plan. Not considering these factors may lead your plans off course and to an unintended destination. Indeed, a financial plan may be just what you need if you’re looking for a way to create structure in your life and spend less time worrying about achieving your life’s passions and purpose.

About the Author

Peter Donisanu
Peter Donisanu is Chief Financial Strategist and President at Franklin Madison Advisors, Inc. Franklin Madison Advisors is a fee-only fiduciary financial planning and investment management firm based out of Pittsburgh, Pennsylvania and serving clients nationally. We exist to serve a generation that has been underwhelmed by traditional paths to financial security and independence.