What Is a Financial Plan?
Financial planning is critical with how important money is in our lives. A reason you may feel stressed financially is largely because you do not have a plan. A Financial Plan forces you to review each aspect of your life and money so you can maximize your impact and reduce your stress. Creating your own plan can give you the clarity needed to connect the money you and your business receive to the life you want to live. So how do you create your own Financial Plan?
Step 1: Get Organized
The first step is to get organized. Understanding what accounts and assets you have, as well as what debt or obligations you have, is the first part. Write down everything in your life that has a dollar value to it. This could be bank accounts, retirement accounts, real estate, businesses, cars, equipment, etc. Split your list into two, your personal and business “balance sheet”. So, when you are done, you should have a one-page snapshot of every dollar in your life and where it is.
Now you also need to know how your money is moving between these assets. You can call this a budget, income statement, cash flow statement, it doesn’t matter. What is important is that you know how much money you receive (either from your employer or from your customers), where that money went, and how it got there. The last thing you want is to pay taxes on the same dollar twice, because you didn’t realize what account it was going into. This is why budgets and P&L statements will never go away. Look back at the last month and write down where each dollar went to. Add up all of the savings, expenses, giving, etc. until you reach the amount of income you received last month. You can also do this on an annual level as well for the items that are not monthly recurrences.
Step 2: Allocate Towards Your Goals
Now that you know where everything is and how it gets there, focus on where it should be and should go. A Financial Plan by definition is built to help you reach your financial goals, since the whole reason to create a plan is to achieve some future target. This could be as simple as increasing your savings account, or as complex as reinvesting into your business. The idea is to focus on what you want, and then allocate your money to make that a reality.
You need to give each dollar a destination. This is when the different parts of financial planning come into play. For example, you should set aside, preferably in a separate bank account, money designated to pay your taxes. You should have another significant portion pushed to savings or retirement accounts. Maybe you want to put your kids through college or build an annual travel fund. You should be able to point to your balance sheet and budget and say, “there’s my travel fund and this is how much I put into it”.
The better you allocate your money, the more tax planning comes into the picture. No one wants to pay more taxes than they are required. As you generate more income, you will want to reach your financial goals in more tax efficient ways. A simple example of this is investing for retirement. Contributing to a retirement account not only reduces your tax bill this year, but helps you save for a major life event in the future. Make sure you allocate money first towards what you want in life, and then ask yourself if there is a more tax-efficient way to do it.
Step 3: Make Sure You are Protected
No plan you create will work perfectly. As your Financial Plan develops over the years, you want to make sure you protect yourself from future troubles. This is when emergency funds, insurance, and estate planning come into picture. Having savings of at least 3-6 months of expenses (at least personally, and 6-12 months for the business), is strongly recommended by many advisors.
Then look into your insurance policies. Am I sufficiently covered if something happens to me? Will life insurance protect my family and my business? What happens if something dramatically affects the business, how exposed am I and my family? It’s never fun to play the “what if” game, but the whole purpose of financial security is to be secure when something happens. Start with focusing on having enough coverage in each of the main categories of personal insurance (health, life, disability, and property & casualty) so you feel confident you are protected.
Estate planning is one of the most ignored and important parts of your financial plan. Protection also means having a plan for when you are no longer here. Having a will, a predetermined power of attorney, a living will and possibly a trust is a good starting point. These documents will help those around you understand what to do if you are not here, or if you are in a situation where you cannot act on your own. This could also apply to key people in your life. What happens if your business partner or an important employee dies unexpectedly? It’s important to have both protection (possibly insurance) and a written process so you don’t make a bad situation worse.
Just Get Started
Your financial life can increase in complexity as your personal and business wealth grows. A financial plan means focusing on staying aware of your money, allocating your dollars to what you want in life, and protecting yourself from what you don’t want to happen. Your Financial Plan will evolve as you go, but these are the basics. If you want more complex tax planning strategies for example, this foundation can make it much easier. A professional can help you better develop your plan, but the goal is to get started, not to craft the perfect plan. Planning is much more important than the plan.
Feel free to reach out if you need help building your own plan!
TC Falkner 