What are the Key Components of a Financial Plan?

What are the Key Components of a Financial Plan?


Financial planning is the continuing process to help you make sagacious decisions. It is not only about investing, spending, moving your assets and income to achieve your long and short-term objectives, but to create a strategy for accomplishing them. A financial plan should be highly personalized to reflect your personal and family conditions, risk tolerance capacity, and future expectations.

But, first of all you must have your financial basics clear in your mind. And, then think of building an effective financial plan!

A good financial plan starts with the calculation of your current net worth and cash flow. Many other crucial things in life can impact our decisions like marriage, childbirth, divorce, home purchase, and retirement, etc. Further, any unpredictable event like a job loss, pay-cut, or divorce, can create new hindrances in your way. Each of them may have different answers for different individuals. So, here we try to put a little effort into helping to ensure a smooth ride on the particular path you are on.

Significance of a Financial Plan

You might have heard that financial planning is necessary for rainy days. Let us understand the significance of financial planning:

  • Increase your savings in the long run.
  • Gets you prepared for emergencies.
  • Help you to survive in turbulent times.
  • You can be pleased with the high standard of living.
  • It helps you devise an accurate plan to achieve a long-term goal.
  • It guarantees harmony between the outgoing and incoming assets.
  • A wise strategy generates enough wealth for your happy retirement.
  • It helps to manage money efficiently and enjoy peace of mind.

6 Key Components of a Financial Plan

Financial plans are different for everybody, but here we cover a few core components that a well-designed financial plan should cover.

1. Investment Planning

Your investing strategy should be the establishment of meeting your long-term, retirement goals, and education goals. Whenever done appropriately, your portfolio strategy should include an asset allocation mix such as bonds, stocks, and other alternatives that minimize risk.

However, investing is based on a lot of factors. Well-diversified assets and correlation factors individualize your needs and are instrumental to the success of your portfolio.

2. Tax Planning

For maximizing and protecting your investment returns, tax management is of utmost importance. There are various tax-reduction strategies for making tax-free income and wealth transfer options, which can be easily achieved by a good plan. Sound plans can model capital gain strategies, compounding benefits to tax deferral, plus tax-loss harvesting, which helps to counterbalance investment gains and conserve more of your principal.

The objective should be to remove unnecessary tax drag while protecting net income and investable assets to increase your long-term wealth.

3. Retirement Planning

Regardless of what your needs are, the financial plan should include a strategy for accumulating the income which you need after your retirement. Such a plan can eloquently describe how much you should keep in a savings bank account, for minimum investments, medical applications, social security, and other assets to meet your income objective.

Effective planning also helps you to understand when you want to retire. The other two most important things are your required retirement budget plan and lifestyle expectations you need to be taken into thought while doing retirement planning.

4.  Risk Management 

Life is uncertain and unpredictable, so young families need to understand the risks and some safe options to protect against a financial disaster for the family. A comprehensive risk management plan includes a review of life and disability insurance, catastrophic health insurance, property and casualty coverage, and personal liability insurance.

However, a sound risk management plan outlines all insurance that is available to balance risks that can provide income protection, survivor benefits, medical expenses, etc., for long-term care.

5. Cash Flow Planning

Understanding income/spending cash flow is one of the most critical aspects of financial planning and the relation between your debts and assets. Realistic goals are highly dependent on your ability to save.

If you spend more than you earn, it will not be possible to reach your set long-term goals. Cash flow statements should be timely updated to track progress and to recognize changes in your financial situation that require observation.

6. Estate Planning

Estate planning is also part of your financial planning that includes advance healthcare directive, durable power of attorney, trust, and will. It is an arrangement for the lifetime benefits and prevention of your hire.

Your financial planning should include a review of end of life assets transfer to reduce or eliminate your estate tax exposure and gifts. The final goal is to solve the liquidity required so that you can transfer the maximum wealth to your heirs.

Financial Planning: Key Takeaways

Financial planning is not about buying stocks for a short time or investing in the well performed mutual funds of the past year. It is not about taking any risks or any financial strategy and method that you are not knowledgeable about or comfortable with. If your financial advisor has you in investments which you don’t understand, then it is probably time to make some changes and acquire adequate knowledge and skills.

For a solid and successful financial plan, the easiest way to start is writing down your overall purpose in life with the fixed short and long-term goals which you would wish to achieve including your income, assets, and debts. With this, you can identify the sources of funds and how to invest these funds into appropriate policies, which ultimately help you in the achievement of your financial goals.

So, what is your financial plan? Have you decided or still thinking about it? Do share your views.

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