What exactly is a “Financial Plan”? In plain English a Financial Plan is a written document that maps out literally everything to do with your money and any action that impacts your money now and in the future.
To make an analogy, would you ever build a full-time home without a written blueprint drawn up by a licensed Architect? If you have any sense whatsoever, you would not. While theoretically possible to build a home yourself without an Architect, it could be quite dangerous. Most contractors would not agree to work with you. Local inspectors would likely not approve the plan. If you built it yourself, the final dwelling would be nowhere near the professional look and utility versus what an architect would design. Home value and resale value would be lower, among the other negative impacts of not having an Architect.
A Financial Plan and a blueprint for a new home have many similarities. But do you NEED a Financial Plan? The answer is no. Will you be much better off with a Financial Plan? The answer is a resounding yes. Is there a downside to getting a Financial Plan? Not really, only spending a relatively small amount of money and some of your time.
So, what specifically is in a Financial Plan? It is a document that tells you how much money you should spend on savings, on insurance, on investments. It tells you what types of insurance you should be buying. It gives guidance on how to reduce taxes, it gives advice on if you are spending on the wrong items, or spending on frivolities. It tells you how to budget for basically all your essentials. The plan will advise on retirement funding, college funding and if you have enough of an emergency fund.
Depending on your specifics, the plan can include all of these topics, or just some of them. For example, a big misnomer is that you need to be invested in the stock market to have a Financial Plan. Not true at all. In fact, someone with no money in stocks often gets the greatest benefit of a financial plan, by learning how to save and leverage your earnings so you can invest in the future.
A good financial plan is created once you, the client, provide information to your financial planner or financial advisor. Information such as your annual earnings, family status, tax information, health information and of course your goals and desires are quite vital to creating a solid plan as that is one of the fundamental reasons for creating a Financial Plan in the first place.
During the planning process you will likely be asked to consider things you have never thought about before and almost certainly learn entirely new concepts. Sometimes the process can be uncomfortable. For example, your planner may bear the bad news that you cannot retire when you want, unless either expectations change or your current situation changes. Knowing the truth about your financial life is far better than ignoring it, regardless of the temporary discomfort.
Having a financial plan in place, and having that plan reviewed and updated at least annually can give you an enormous sense of peace. For some, this document becomes a life plan given the impact it can have on you and your family.
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