The development of a personal financial plan for yourself or family provides the framework for a flexible, dynamic plan of action offering the following benefits:
1. Keeps the focus on immediate, intermediate, and long-term financial goals.
2. Potentially cuts income taxes, improves cash flow, and reduces the cost of debt service.
3. Establishes a suitable investment policy consistent with goals to balance risk and return.
4. Minimizes or eliminates the risk of unanticipated financial disaster.
5. Helps minimize the risk of prematurely depleting assets during the golden years.
A sound financial plan can have a significant impact on long-term financial well-being. The sections typically addressed in a personal financial plan are:
1. Financial Summary
2. Tax/Cash Flow/Debt Management
3. Investment Portfolio Review
4. Retirement Planning
5. Estate Planning
6. Risk Management – Insurance
7. Education Funding Analysis
It is quite common for a financial plan to contain as many as 10-20 or more specific recommendations or action items. A single page implementation checklist serves as the first page of the plan providing a bullet-point summary of the key recommendations. A “thumbprint” example of our Financial Planning Checklist is illustrated due to publication space constraints.
It is important to prioritize the action items and begin to implement the plan promptly. A plan that sits on the shelf and is not acted upon is worthless. After the initial plan has been completed, it is not necessary to go through a thorough financial planning exercise annually.
A particular section or module of the plan can be updated as major changes occur. For instance, the addition of a new family member requires an estate plan, education plan, and risk management review. Other typical life events that call for an update to a plan are a change in marital status, an employment change, a death in the family, or a special needs analysis such as when a family member becomes terminally ill.
Some people prefer to develop a financial plan one module at a time in an ad-hoc manner. This is better than not planning at all, but has the following disadvantages:
1. Some sections of the plan may be overlooked and never addressed.
2. The sections of a financial plan are integrated.
This means that decisions made in some areas can have a significant impact on other areas. It is for these reasons that a more comprehensive personal financial plan is recommended for those who have never been through the process.