Essential Elements in Your Financial Plan

T. Patrick Reidy IV

September 16, 2022

FINANCIAL PLANNING • READ TIME: 5 MIN

"Someone's sitting in the shade today because someone planted a tree a long time ago."

Warren Buffett

The CFP® Board defines financial planning as a process that “involves looking at a client's entire financial picture and advising them on how to achieve their short- and long-term financial goals.” There is, however, a bit more nuance involved in the financial planning process than may be gleaned from this definition.

Although there are a number of ways to approach the financial planning process, the outline below details some of the essential elements to incorporate in to a holistic financial plan. Ultimately, the plan document should outline an individual's present financial situation, as well as put forth strategies to achieve the established (financial) goals.

Identify, Select, and Refine (Life) Goals

Without appropriate goals, a financial plan is little more than an amalgamation of statements and analyses or investment strategies and accounts. In addition to pinpointing a variety of goals on “different timelines” (short, medium, long), the goal-setting process should use realistic targets, assumptions, and timelines.

Goals may be broken down into short-term (within the next 2-3 years), medium-term (3-10 years), and/or long-term (10+ years). For example, paying down high-interest debt (short-term), purchasing a home (medium-term), and retiring at a particular age (long-term) are all financial goals. In addition to general timeframes, each goal should also specify a dollar figure and target date - this allows for goals to be tracked, progress to be monitored, and for adjustments to be made based on levels of priority or changes in one’s financial situation.

Cash Flow

Understand Your Current Finances

Although net worth and cash flow statements are two distinct elements, they both provide a “baseline” for a financial plan. Net worth statements and cash flow statements have been outlined previously:

The purpose of these two items is to (1) characterize assets and liabilities and (2) determine sources of funds and where those funds go in order to prioritize account/goal funding, high-interest debt reduction or elimination, etc.

Ultimately, reworking or refining your balance sheet and spending/saving patterns is defined by your goals (and their respective timelines and funding needs.) This step of the process, in turn, leads to the development of another item: a personal budget.

The (Personal Finance) Basics

Apart from developing an understanding of assets and liabilities, net worth and cash flow statements allow for planning to begin to take shape related to budgeting, debt management, financing future purchases anything from vacations to homes to college tuition), and establishing an emergency fund. Ultimately, the priority level assigned to specific goals will dictate the way in which funds are invested, debts are reduced, etc.

One of the most essential elements in a financial plan is the creation and maintenance of an emergency fund. Much like conducting a “needs analysis” for insurance purposes, an emergency fund needs analysis is comprised (primarily) of identifying non-discretionary expenses as compared to income streams and other variables.

At this point in the planning process, a majority of the “basics” and “essentials” have been addressed - what are we working toward (goals), what means are available to reorganize and fund these goals (assets, liabilities, income), and have the bare minimums (debt, emergency fund) been addressed?

Plan for the Unexpected

Few things can be more detrimental to your plans (of any kind) than unforeseen challenges or emergencies. While “planning for the unplanned” sounds a bit cryptic, there are ways to lessen the severity of unexpected expenses and/or prevent catastrophic loss. To this end, appropriate insurance needs analysis and related elements of planning are imperative. As is the case with other financial assets and investments, insurance is a form of total risk management.

Ultimately, the goal of life, health, home, auto, etc. insurance is to insulate the insured from (catastrophic) loss and financial uncertainty regarding accidental loss. Building appropriate insurance coverage into a financial plan involves careful analysis related to a number of different factors including age, health, business ownership, home value, estate planning needs, etc.

Putting Available Funds to Work

Although there are countless ways to "invest," the process can be as simple as contributing to a retirement account or setting up automatic contributions from a checking account to a brokerage account. Typically, as the size of accounts/portfolios grow, more nuance is incorporated into the portfolio - such detailed tax-planning or the incorporation of additional strategies, managers, and/or asset classes.

The care and attention given to a portfolio, however, does not depend on its size. Selecting the appropriate balance of assets, utilizing different types of accounts (qualified, non-qualified), and aligning investments with clients' risk tolerance, investment horizon, and liquidity needs are always significant considerations.

Again, the guiding force in determining types of accounts, contributions or distribution schedules, or assets, is the goal(s) within the financial plan. The timeline or dollar amount required for a particular goal often dictate, among other factors, the risk profile and types of assets incorporated into the account/portfolio.

Plans Within a Plan: Tax, Retirement, and Estate Planning

A financial plan is primarily a composite of different goals, plans, and strategies. The holistic "financial plan" may also specifically detail steps, benchmarks, or timelines related to tax planning, retirement/income planning, and estate planning. These elements are unique to each client's financial situation and "stage of life."

Additionally, as time passes goals may change and/or their importance may shift. Retirement planning - including retirement income and Social Security estimates or a post-retirement lifestyle plan - for example, will likely be of greater significance as a client approaches retirement age. Appropriate planning and preparation for retirement may occur at any stage of life, but will take on greater significance with age. This also highlights the fluidity of planning and the importance of appropriate monitoring and/or updating of the plan to ensure it remains relevant.

Beneficial at Any Stage in Life

Regardless of when you begin planning - financially - in your life, the items outlined above provide a solid framework for identifying strengths and deficiencies, as well as trackable “benchmarks” for your personal finances. As with any type of plan, financial planning seeks to assess a current situation, and (perhaps more importantly) identify the means for arriving at where you want to be or what you want to accomplish next.

Finally, coordinating with a qualified financial professional on your financial plan can provide you with needed support and guidance. A financial professional - such as an advisor or planner - can monitor your financial plan, discuss updates and changes, and provide other forms of support (coaching, etc.) Furthermore, working with a qualified professional to develop and maintain a unique financial plan allows you to focus more on the things you enjoy doing (such as any number of the goals you used to develop your plan.)

If you would like to discuss your financial plan, develop one, or discuss these topics in more detail, reach out to our team to learn more.

The content is developed from sources believed to be providing accurate information. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy referenced here will be successful. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by RP Wealth Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Diversification and asset allocation are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.