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Guide to Financial Planning

When you think of financial planning, you may think of the financial services used by high-net-worth individuals. But not only is financial planning accessible to everyone, it’s also necessary for everyone.

Financial planning is the single most important step in helping you reach your financial goals. It can give you a clear view of where your finances are today, as well as help you build a concrete strategy to get them where you want to be.

And the good news is that financial planning doesn’t have to be difficult. In just a handful of steps, anyone can make their own financial plan that will help them reach their biggest goals.

What is Financial Planning?

Financial planning is the process of looking at your entire financial situation, creating short-term and long-term financial goals, and putting strategies in place to reach those goals.

Financial planning can look at every area of your financial life, including cash flow, insurance, taxes, investments, estate planning, and more. What exactly is included in your financial planning process will depend on your personal situation and the financial goals you hope to reach.

What Is Included In a Financial Plan?

A financial plan is a document that summarizes your financial situation, lists your short-term and long-term goals, and outlines the strategies you’ll use to reach them. You can refer back to this financial plan at any time for guidance when making financial decisions. While each person’s financial plan will look a bit different, there are a few components you can expect to find in each one.

Net Worth

Your net worth, simply put, is the difference between your assets and your liabilities. In a formal financial plan, your net worth would be calculated using a balance sheet. Calculating your net worth is a simple calculation that you can do in just three steps:

  1. Add up all of your assets. These might include money in your checking and savings accounts, funds in your investment and retirement accounts, and tangible assets of value, such as a home, art, or antiques.
  2. Add up all of your debt, also known as your liabilities. Your debt could include credit card debt, student loans, mortgages, auto loans, and other money owed.
  3. Subtract your liabilities from your assets, and the result is your net worth. Keep in mind that if you’re early in your career and have student loans, your net worth might even be negative. Less important than the current number is working to improve that number over time. The larger your net worth, the better.

If you don’t want to calculate your own net worth, we can help. Visit our net worth calculator, and after you enter a few figures, you can quickly determine your net worth.

Your Cash Flow

Cash flow is just a fancy way of referring to the money going in and out of your bank account. Your cash flow is made up of two different components: income and spending.

Each financial plan includes a cash flow statement, also known as a budget. First, you’ll list all of your income for the year, no matter how big or small. Income could include your salary, interest from savings accounts, and any capital gains or dividends from your investments. It could also include large financial gifts, tax returns, bonuses, and other windfalls.

The second important component of your cash flow statement is your spending. Unlike a monthly budget, a cash flow statement in a financial plan usually looks at all of your spending for the year.

First, your cash flow will include fixed expenses such as your rent or mortgage, insurance, loan payments, and other bills. It will also include variable expenses that may include groceries, entertainment, gas, dining out, travel, and any other discretionary spending.

The purpose of the cash flow statement is to find the difference between your income and expenses. The difference between these numbers is what’s left over to spend on financial goals. The more money you have leftover, the faster you’ll be able to achieve those goals.

Unfortunately, you may run your cash flow statement and find that the number is negative, meaning you spend more than you earn in a year. If that’s the case, you’ll have to make some difficult decisions. You may consider switching to a better-paying job, picking up a second job, or finding areas in your spending where you can cut back.

Your cash flow is also closely related to your net worth. Because your net worth grows when you save more or pay off debt, having more money left over in your budget makes it easier to grow your net worth over time.

If you’d rather not calculate your own cash flow, you can use our free financial dashboard, which includes a budgeting tool and a look at your cash flow for the past 30 days.

Your Priorities

One of the most important components of any financial plan is clearly-defined financial goals. Having these goals clearly laid out is critical because it helps you create actionable strategies to use them. Everyone’s financial goals are different, but here are some different financial areas that your priorities might include:

  • Retirement: Planning for retirement is an important financial goal for many people and something that should definitely be on your mind. A financial plan can help you address how much you hope to have saved in retirement, when you plan to retire, how much you’ll have to save each month to reach your retirement goals, and what retirement accounts you plan to use to save
  • Investments: Your investments may include those in your tax-advantaged retirement accounts, as well as those in taxable brokerage accounts. Investment planning requires looking at your risk tolerance and time horizon to build a well-diversified portfolio that fits your financial goals.
  • Taxes: While you may not think there’s much you can do about your taxes, there actually is. And tax planning is especially important for high-income and high-net-worth individuals. Your financial plan may include ways to reduce your taxable income in the present while reducing estate and other taxes in the future.
  • Insurance: An important part of building wealth is buying the necessary types of insurance to preserve it. Depending on your situation, you may need to make a plan for life insurance, home and auto insurance, health insurance, disability insurance, and more.
  • Estate planning: No one enjoys thinking about their own death, but it’s an important part of building your financial plan, especially if you have considerable assets or dependents to care for. Your financial plan is likely to include an estate plan for your assets after you die, as well as how you plan to care for those who rely on you.

Remember, while these are the categories most often addressed in a financial plan, you can include other categories as well. Your financial goals might include buying a home, paying for your child’s college education, traveling the world, and more. Your financial plan should address your specific goals and priorities.

6 Steps to Create a Financial Plan

Creating a financial plan doesn’t have to mean hiring a financial planner. In just a handful of steps, you can create a solid financial plan yourself and use it for years to come to help you reach your financial goals.

Take Inventory of Your Financial Situation

Before you can set your goals or take any next steps, it’s important to figure out where you stand today. The first step of creating your financial plan is taking inventory of your financial situation, which means calculating your net worth and cash flow. Once you’ve completed this step, you can use these numbers to guide the rest of these steps.

Set Specific Financial Goals

An important part of your financial plan is crafting a strategy to reach your financial goals. But to do that, you must have specific financial goals in place. Make your goal as clear as possible, writing down what you want to save for, the amount you want to save, and when you want to have the money saved.

Build Your Financial Safety Net

Before you can start tackling any of your other financial goals, you should first have a financial safety net in place. To do this, you’ll have to accomplish two tasks:

  • Build your emergency fund. Having emergency savings for anything that might come up is critical. Whether it’s losing a job or having to replace your car, having an emergency fund can help prevent an inconvenience from becoming a disaster. Most financial expertsåç recommend having between three and six months of expenses in your emergency fund.
  • Pay off debt. If you currently have debt, it’s time to make a plan to pay it off. While you don’t have to pay off all your debt before working toward any other financial goals, you should prioritize the high-interest debt, which includes credit card debt.

Mitigate Your Risks

Now is the time to make sure you’ve filled and financial holes that need filling. This step may not help you reach your financial goals more quickly, but it will stop financial emergencies from preventing you from reaching your goals.

When it comes to risk management, it’s all about making sure you have the right insurance policies in place. As we mentioned, those policies might include life insurance, home and auto insurance, health insurance, disability insurance, and more. In other words, think of everything that could go wrong and figure out what insurance policy could help lessen the blow.

Plan for Retirement

Many people prioritize other financial goals over retirement simply because retirement is so far away. But it’s critical that retirement savings be a part of your financial plan from the very start.

Not sure how much to save for retirement? Our Retirement Planner can help. You’ll connect your investment accounts and answer a few simple questions and our calculator will show you whether you’re on track to meet your financial goals and how much more you may need to save per month to get there.

Make a Plan For Extra Money

Now for the fun part of the financial plan: making a plan to reach your big goals. In the first step, you calculate your annual cash flow. Once you know how much money is leftover in your budget, you can use that information to plan for your goals.

Let’s say your cash flow statement shows you have an extra $500 per month in your budget. You know you want to buy a house in the future, so you can allocate some of that extra money toward savings for your down payment. You may also choose to allocate some of that money toward other financial goals you hope to reach along the way.

Unfortunately, you might run the numbers and learn you don’t have enough disposable income to reach your goals in the time you hoped. In that case, you have a few options. First, you can adjust your goals to something more realistic based on your current income and spending. Second, you can make a plan to increase your income. Finally, you can find ways to cut your spending to create more wiggle room in your budget.

Need Help?

Creating a financial plan may sound complicated, but it’s actually pretty easy, especially when you have the right tools by your side. Our free financial dashboard includes many of the tools you’ll want to reach your goals, including a net worth tracker, savings planner, budgeting tool, cash flow tool, retirement planner, and more. These tools take most of the heavy lifting out of building your financial plan so you can focus on reaching your financial goals.

Get Started with Personal Capital

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Todd Burnaford is a Senior Financial Advisor of the Private Client Group at Personal Capital. He has been with Personal Capital since 2017.
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Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.