Financial planning is organizing your finances so that you can accomplish a goal around money. A comprehensive financial plan organizes your finances so that you can live the life you want to live. Below are the 7 steps to a Comprehensive Financial Plan.
1. Goal Setting
Money is a difficult topic. Many of us need a little push to change our habits around money. Desiring a goal can be the fuel needed to get you over the edge. I recommend using various goal setting techniques to find the motivation to change your money culture and to start you on your journey of a comprehensive financial plan.
2. Cash Flow Analysis
In order to fund your goals, you’ll need to direct your money towards them. A cash flow analysis brings awareness to where you’re spending money now so that you can direct them to where you want to. The first step is to create a budget.
3. Goal Analysis
A goal analysis says this is where I am now. This is where I want to be. And this is how I get there. It’s literally crunching the numbers so that you can have a plan to get to where you want to be.
4. Investment Analysis
The underlying fuel to your plan is money. How you invest your money can give you a better chance of reaching your goals sooner. A good investment analysis will show what you’re getting (returns) how much risk you’re taking (standard deviation), and what you’re paying for it (advisor fees and fund expenses). From there you can decide to adjust risk accordingly and if your returns are a good reflection of the costs.
5. Risk Analysis/Management
Most financial plans only include insurance analysis if the advisor makes money selling you a policy. A comprehensive financial plan does a risk analysis to look at all your risk exposures. From home and auto insurance to healthcare, life, and long term care, you should know exactly what risks you’re taking and what could derail your plan.
6. Estate Review
On the surface, an estate review looks at the ownership of your assets, what estate planning documents you have and who the key players are, and who your beneficiaries are. It’s best to review these every few years to make sure your wishes haven’t changed.
7. Rinse & Repeat
After you’ve created a comprehensive financial plan, it’s important to review it periodically to make sure it’s working. Updating your goal analysis and reviewing your investments to make sure they’re working for your plan should be done annually. Insurance/risk analysis can be done every couple years and your estate plan should be updated as things change, or every 5 years.
Being organized with your money can afford you to live a more meaningful life because you don’t have to worry about money. While it can a rather large undertaking, if you think about it, you have your whole life to do it. And once it’s done, you can focus on more meaningful things, like travel, golf, and reading books on the beach.