create a financial plan

How to Create a Financial Plan

Financial plans are as unique as the person creating it. Though there is no wrong way to construct a plan, there are elements that define a good one. These elements include a budget, investment strategy, risk management and estate planning considerations. First, you should sit down with your family, business style, and discuss your life objectives and financial goals. At this time, start listing your goals and objectives for use in future conversations. Examples of goals and objectives include: saving $250 a month, retiring at age 55, start going on one awesome vacation a year and purchasing a new house in the next 5 years. Ensure that you are able to measure the goals that you list.

Determine Goals & Objectives

After you have listed all of your goals and objectives it’s time to start constructing your financial plan. Your goals and objectives will serve as the blueprint for your budget. Use your objectives to drive your savings and expenses. In addition financial plans need to be constructed with the most accurate data available.

When gathering financial data be sure not to overlook any income or expenses. When you must estimate some figures, lean towards conservative estimates. A good rule to plan by is overestimate costs and underestimate income. This will ensure that your financial planning estimates are conservative.

Create Your Financial Map

Next you will need to take the raw data that you collected and organize in a manner that provides relevant information. Some great formats for financial analysis include the statement of cash flow and the balance sheet or the statement of net worth. It's advised that you use a computer program to collect the raw financial data and crunch the numbers for you. It makes the process a lot simpler, if not you can always use an excel spreadsheet.

After you have calculated your current situation you should begin to create a budget that reflects your future goals and aspirations as we discussed earlier. This budget should articulate your projected income and expense data in consideration of your expectations and potential constraints.

Protect Your Assets

The most overlooked and under-appreciated element of personal financial plans is insurance. Having comprehensive coverage can protect the assets you have from a variety of contingencies. Nobody likes to pay insurance premiums. Most even think they do not need insurance, until they ever need it.

There is no better asset protection than insurance. A trip to the hospital or a car accident can ruin your financial future. So make sure you measure you current assets and potential risks. Then ensure that you have enough coverage in case an accident occurs.

Invest Wisely

Depending on your current situation you should next devise an investment strategy. It’s prudent to invest capital in excess of your safety fund. Investing can be tricky so ensure that you know the rules before you put money to work. The younger you are the more risk you can take. This means you can choose investment vehicles that are more volatile, like small and medium cap stocks. As you grow older you want to begin to reduce your risk exposure by limiting your holdings to large company stocks and bonds. This will reduce the volatility in your portfolio.

Implement, Revisit and Revise

Finally, on a regular basis revisit you plan. Were there any differences between what you expected and what actually occurred? Did you exceed or lag expectations? Make sure you make the personal or financial changes needed to get back on track.

I hope this quick yet comprehensive illustration of how to create a financial plan helps you move towards living the life that you want. The best time to create a financial plan is right now. If you have any suggestions or additional ideas feel free to leave them in the comments below.