How To Create A Financial Plan

By David S. Chang

set and reach goal concept

When people think of a financial plan, many assume it involves setting up a budget, saving for retirement and looking for good investment products. But a financial plan goes much deeper than that. If properly done and updated regularly, it could mean the difference between financial independence and financial dependence. Here are key steps on how to create a financial plan. Please click here for free sample plans.

  • Your Goals. The purpose of the financial plan is to meet your financial goals. Goals are not just expenses, but your hopes and dreams. Proper goal setting will focus you on how your money can be used to fulfill your needs, wants and wishes. However, if the goals don’t adequately reflect what you truly need, meeting your goals may not give you the financial independence you want. Consider that $1 million today will be worth only $540,000 twenty years from now if annual inflation is 3 percent. A good financial plan will reflect your true lifestyle goals and values you want to live by. 
  • Budget and Net Worth. This is a detailed analysis of your cash flow – how much money comes in and how much money goes out every year until the plan ends. A small change can make a big impact 30 years from now, so it is important to update the financial plan to reflect any changes, no matter how small. A good plan will have a Monte Carlo simulation or something similar, where you can see all the potential outcomes of your plan based on different variables. This will help in determining the chances of certain outcomes, probability of success in meeting your goals, and establish the appropriate safety net to safeguard against financial uncertainty.
  • Risk Tolerance. This means how much risk you are willing to take for a higher return. Many people overlook this step and do not have a plan that adequately reflects their risk tolerance. This is crucial in order to determine the right type of investments and asset allocation of your investments. Many people adapt their risk tolerance to investment products rather than have the correct mix of investment products to fit their risk tolerance.
  • Investment Portfolio. Money you save has to be invested to grow! There will be ups and downs, but a good plan will help you stay disciplined. A good plan will take into account average returns, bad timing and the probability of success in reaching your targeted return and how that will affect your plan.
  • Adapts To You. This is your personal financial roadmap. There are a significant number of assumptions in a plan such as interest rates, market performance, income and inflation. A good plan will help you understand which assumption and variables have the biggest impact on your plan. It also will address your insurance, tax and estate-planning needs, and they will cater to your goals.
  • Easy To Understand. A plan is not effective unless you can understand it! You want the plan to give a clear presentation of the results and easy-to-follow action steps. If it is confusing, people may be less likely to take the steps needed to implement the plan.

David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant ArtofThinkingSmart.com | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!

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