Creating a Comprehensive Financial Life Plan

Posted on by

A Financial Life Plan can help you get on the path to financial freedom.

A comprehensive life financial plan provides a picture of your current finances, financial goals and any strategies you’ve set to achieve those goals. The plan should include details of your cash flow, savings, debt, investments, and other elements of your financial life.

Creating a life financial plan can help bring things into focus—it’s like a roadmap to help you figure out how to reach your financial goals. a clear picture of what you want to accomplish, but the details of how to make it happen.

Financial planning involves identifying financial goals you want to achieve and making sure you have the “what-ifs” covered. This can help guide you through key decisions in life and make you less vulnerable to setbacks and financial hardships down the line. You can feel more confident about financial decision-making when you have a comprehensive plan to guide you. Your financial plan might cover a number of areas, from managing debt and saving for the future to building wealth and protecting your money.

Financial Life Planning connects our financial realities with our values and the lives we dream to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life’s financial, health and emotional goals.

It is a financial planning and investing approach which helps people align their investment portfolio with their values and with the things which are important to them. Think of it like a holistic roadmap for your financial well-being.

Financial life plan focuses on the emotional side of financial planning. It considers people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, behaviors, goals and resources.

“The right plan, executed faithfully, can be the difference between success and failure in any endeavor.” Brett N. Steenbarger, Ph.D., author of The Psychology of Trading

Whether you need to reduce spending and eliminate debt, increase your savings, or just refine the details, once you understand your financial mindset and associated behaviors; once you know where you are and where you need to go financially—a financial life plan can provide a more coherent sense of direction.

Market downturns and investment risk management

During periods of high market volatility and declines, financial life planning, when done correctly, assumes there will be these periods of volatility, panic selling and downturns like the equity markets are experiencing today as a result of COVID-19 pandemic. Any actions taken to significantly reduce or eliminate equity allocation could result in investors coming up short in retirement.

The risk of outliving their assets might be the biggest risk that retirees face today. With many of Americans living longer and the rising costs of healthcare in retirement, most retirees need a level of exposure to stocks in their portfolio for growth and to maintain their standard of living.

Steps to creating a Comprehensive Financial Life Plan

  1. Develop a Positive Financial Mindset
    The most important step in developing and following a financial life plan is to examine your mindset about money.
    – Are you ready to accept responsibility for changing your financial situation?
    – Do you believe that you can and will change the way you make financial decisions?
    – Can you identify at least one benefit you hope to gain by changing your financial behavior?
    Financial mindset consists of a predetermined set of beliefs, thoughts, habits and behaviors an individual has about saving by paying yourself first, investing for the long-term and accumulating wealth for financial well-being.
    Every person has a set of financial beliefs, thoughts, habits and behaviors about money and personal finance. Even if they can’t express what their thoughts and mindset are, they still exist both consciously and subconsciously. Just by observing your own financial reality and outcomes, you can begin to better understand your financial mindset, behaviors and habits.
    Thus, it becomes important to develop and nurture a positive financial mindset. Since, it is difficult to develop the good financial habits and behaviors that will be necessary to lead to an improved financial outcome and overall financial well-being without a positive financial mindset.
  2. Write down your goals
    One of the first things you should ask yourself is what you want your money to accomplish. Financial goals will differ in the length of time needed to achieve them. Be sure every goal has a specific purpose, a dollar amount that it will cost, and a realistic target date. Make sure your goals are realistic and not set too high, or frustration may keep you from reaching them.
    – What are your short-term needs? Short-term goals are priorities that can be accomplished within two years.
    – Mid-term goals are priorities that can be accomplished within two to five years.
    – What are you saving for long term? What do you want to accomplish in the next 5 to 10 years? Long-term financial goals are priorities that may take more than five years to accomplish. Most long-term goals require investing.
    It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying, prioritizing and aligning your goals with your values, your goals will act as a motivator as you dig into your financial details.
  3. Create a net worth statement
    Achieving your goals requires understanding where you stand today. So start with what you have.
    – First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property.
    – Now make a list of all your debts: mortgage, credit cards, student loans—everything.
    – Next, subtract your liabilities from your assets and you have your net worth.
    If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  4. Know your cash flow
    Cash flow simply means money in (your income) and money out (your expenses). It will show you if you’re spending more or less than you earn.
    – How much money do you earn each month? Be sure to include all sources of income.
    – Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  5. Your budget and manage your expenses
    “A budget is telling your money where to go instead of wondering where it went.” John C. Maxwell
    For most people, financial success depend solely on how much they spend. This, it is important to find out where your money is going. Your budget will let you know how you’re spending.
    – Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes.
    – Then write down nonessentials—restaurants, entertainment, even clothes.
    Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on lines up with what is most important to you.
  6. Start (or build up) your emergency fund.
    Building a strong financial foundation starts with saving for emergencies. When you have a safety net for unexpected expenses, you don’t have to worry about throwing your budget out of whack. You can be confident that you’re ready for a car breakdown, home repairs, medical expenses or other emergencies that pop up. It’s OK to start small—saving $50 in an account you’ve designated for emergencies is a good starting point. You might work up to saving $1,000 and then eventually aim to save enough to cover three to six months’ worth of living expenses in an emergency fund. An emergency fund is essential because you need to absorb life’s surprises without making things worse. Without a stash of cash, you may have to take on debt for unexpected car troubles or surprise medical expenses. And, the fund can be kept in a savings account kept separate from your regular checking account. It’s not an account that should be dipped into often — unless there’s an emergency.
    If you already have an emergency fund, consider giving it a boost. An emergency fund should consist of three to six months’ worth of expenses, which is a different different amount for everyone. If you don’t think you’d survive financially if you missed a paycheck, then your an ideal candidate for needing an emergency fund.
  7. Focus on debt management
    Debt can derail you, but not all debt is bad. Yet, freedom from debt is an achievable goal for everyone.
    Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down. Do you know how much debt you currently have (credit cards, student loans, auto loans, mortgage, etc.) and how long it will take to pay off each debt at your current rate of payment? It’s important to make a long-term plan for debt repayment so you can focus your efforts on the most efficient ways to reduce your debt. This might include tackling high-interest rate debts first or loan consolidation. Create a running list of all your loan balances and interest rates so you can see where you stand today and identify ways to make a dent in your debt. For example, you might make extra payments on your loan with the highest interest rate. A financial advisor can help you review your debt and create a debt elimination plan. Use our Debt Roll-Down Calculator to find the best way to pay off your credit cards.
    If you’ve been struggling with old debt, such as credit cards, student loans or medical bills, now is the time to pay them off for good. If you’re not sure which debt to pay off first, consider the one with the highest interest. High-interest debt, like credit cards, can compound through hefty interest charges, late fees and other penalties. pay down the principal of your student loan. The sooner you pay it all off, the less burden you carry.
  8. Get your (retirement) savings and investing on track by paying yourself first
    Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference.
    Spending time today to plan your path to retirement can provide you peace of mind in the future. Getting started is the most important step you can take—it’s never too early or too late to save for retirement! The key is to continue saving consistently and make retirement savings a priority in your budget. Individual retirement accounts (IRAs) and employer-sponsored retirement plans, such as 401(k)s, offer tax benefits that can help your savings grow faster. As you near retirement, you’ll want to set a strategy for tapping retirement assets.
    Your financial plan should outline your retirement savings goals and ways to boost your savings (e.g., increasing your contributions every year or when you get a bonus or raise). Run the numbers using our Retirement Planner Calculator or review your retirement plans with a financial advisor.
    Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
    And, make the savings a priority by paying yourself first. This means that instead of saving what remains after paying your monthly expenses, individuals should pay themselves first by setting aside at least 10% to 15% of their monthly income as their first expense, and then pay the rest of their monthly expenses. Paying yourself means that your savings and other financial goals are taken care of before you allow yourself to spend money on less important items.
  9. College Savings.
    Parents and guardians face the challenge of balancing multiple financial demands, including your own retirement and future health care costs as well as education expenses for your dependents. Having a financial plan helps ensure you’re taking the right steps to address all areas of your financial life. Choosing the right college savings vehicle and planning ahead to take advantage of financial aid, loans and scholarships can help make college more affordable.
    Determine how much you want to save for college and the best way to grow your savings. Our College Savings Calculator can help you estimate how much you’ll need to save.
  10. Stay invested in the market for the long-term and check-in with your portfolio regularly.
    If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg.
    When was the last time you took a close look at your portfolio? There are no guarantees when it comes to investing, but it seems that fear and uncertainty tends to put investors on the sidelines when markets plunge and become highly volatile.
    Markets go up and go down down in the short-term which can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  11. Make sure you’re adequately insured
    Having adequate insurance is an important part of protecting your finances and family. Insurance is essential to protect your family and your financial future. Having health insurance, auto insurance and homeowners or renters insurance protects you when you need it. You may consider options for life and disability insurance, which can help protect your family’s finances if something happens to you. Review your insurance coverage and beneficiaries, especially if you’ve had any major changes in your family and life. A total risk assessment with an insurance professional can make sure you have the right level of coverage.
    We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage. You never know what the future may hold—but it helps to be prepared for anything. What if you or a loved one experienced major medical issues or needed assisted living or nursing home care? Making decisions about long-term care can be stressful and emotionally difficult, and the costs can drain your family’s finances.
    You may want to explore options for long-term care insurance to help pay for long-term care needs such as nursing home care. You may also decide to write an advance care directive regarding your wishes for medical care and name a power of attorney to make financial decisions on your behalf if you’re unable to do so.
  12. Know your income tax rate
    Taxes are one of the most insidious destroyers of wealth, along with debt. You should make sure you’re prepared for the annual tax season and review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information; take advantage of tax deferred accounts like IRAs and 401(k)s can help you save money on taxes and accumulate wealth more efficiently.
  13. Create or update your will and estate plan
    At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.
  14. Invest in yourself and continue to learn
    “An investment in knowledge pays the best interest.” Benjamin Franklin
    While college is a great self-investment, there are other ways you can invest in yourself. Consider taking courses in a field or industry you’re interested in pursuing.
    If you’ve been contemplating a career change, use your money to invest in that switch. If you need capital to start your own business, this could be your chance. Also consider using it to give yourself a much-needed break. Whether this is a vacation fund or simply money for a massage or spa day to recharge, reset and refocus. Focused on what would improve your well-being in the long-term, not a quick fix. Continuous learning and growth are the key.
  15. Three Pillars (financial wealth, physical health and emotional well-being)
    Financial assets like stocks, bonds and real estate are forms of personal wealth. However, Americans need to also focus their attention on staying emotionally and physically healthy. Self-care is paramount in all three facets of life which include financial wealth, physical health and emotional well-being. Eating a balanced diet, exercising, getting enough sleep and connecting regularly with family and friends, are essential to live a purposeful and fulfilling life.
  • Take control of your future with a financial plan for the next five, ten or more years.
  • Insurance Protection. Ensure you have adequate Medical insurance and consider purchasing Long-Term Care insurance.

References:

  1. https://www.brownleeglobal.com/financial-life-planning/?preview=true&frame-nonce=60592dd178
  2. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan?SM=uro#sf228155652
  3. https://www.cnet.com/personal-finance/how-to-invest-your-tax-refund/
  4. https://www.moneymanagement.org/credit-counseling/resources/financial-literacy-month
Advertisements