The 10 Components of a Financial Plan

I’ve read a statistic that those who have a written financial plan accumulate 445% more assets than those who don’t. The source was an HSBC Future of Retirement study from back in 2013.

In Charles Swab’s 2021 Modern Wealth Survey, those with a financial plan are more likely than those without one to pay their bills on time and save each month.

But what exactly does a financial plan look like? I’ve done some research, and while some of the components vary a bit, there are ten main components. Of course, a plan defines what we want to accomplish, helps us stay on track, and gives us a tool to measure our progress. Plans must be adaptable to changing circumstances, and a financial plan should be revisited at least once a year. A plan should also consider the risk of market volatility, sequence of return, inflation, taxes, and interest rates.

Component 1. Financial goals

You need to define your goals as the first step in planning. Money is just a tool to help us achieve a goal.

Goals can be broken down into:

  • Short-term goals which are those you hope to achieve in the next five years—perhaps you have a major purchase, funding your education, preparing for a baby, or you just want to become debt free.
  • Medium-term goals are those you hope to achieve in the next five to 10 years—these might include purchasing a home, paying for marriage, or starting your own business.
  • Long-term goals are those that are ten or more years away—which could include college funding, retirement, purchasing a 2nd home, or paying for some vacations.
  • You should specify a dollar figure and a target date for each goal. Goals should be S.M.A.R.T.
  • Specific: Increase the chances that you can accomplish your goals by ensuring they’re well-defined. Determine the who, what, where, when, and why.
  • Measurable: Develop criteria for measuring progress toward your goals. Detail the key indicators that help you decide if and when you reach your goal by quantifying them.
  • Achievable: Create goals for your life that are attainable and achievable by ensuring that you and your family have the resources needed to reach the goal.
  • Relevant: Align your goals with the overall objectives with the realities of life.
  • Time-based: Give yourself a deadline for reaching your goal to provide a sense of urgency and the opportunity to schedule the steps needed to achieve the goal.

Many calculators and online tools help you run various financial numbers. You can also use my Retirement Readiness software, which has various financial numbers crunching and analysis.

I believe that as soon as you graduate from college, you should have a financial plan, whether it’s something you do on your own in a journal or on a spreadsheet or you hire a financial planner to help you create one.

A key to achieving your financial goals is to start saving and investing as soon as possible. Having a reliable and sustainable income source and living within your means allow you to save and invest as much as possible for those goals you’d like to achieve.

Component 2. Net worth statement

A net worth statement is critical to identify and track and plan how you will increase your net worth over time. My software identifies and tracks your net worth. Basically, you’ll make a list of all your assets (bank and investment accounts, real estate, valuable personal property) and another list of all your debts (credit cards, mortgages, student loans). Your assets minus your liabilities equals your net worth.

When young people are just starting out, their liabilities may outweigh their assets, particularly with car debt, student loan debt, and of course, when you buy a mortgage…this will be your biggest liability but will someday become one of your biggest assets.

Component 3. Spending and cash flow planning

Your spending plan helps you determine your day-to-day priorities for your money. Some people refer to this as a budget. But that word sounds restrictive to me. I like a spending plan better. Your cash flow is your income sources minus your expenses. You need to know and track your cash flow. The more cash flow, the more you have to save and invest. Having a spending plan and tracking it allows you to identify spending leaks and prioritize your spending better. As one of my spending categories, I also like to have savings and invest for the future. You need to pay yourself first.

A tracking tool like my Smarter Spending tracking tool in my software helps you get a great handle on all your expenses and, of course, your income sources. Just having visibility into your money creates better habits.

When considering how your goals fit into your spending plan, you may want to pressure-test it using “what if” scenarios: What if you want or need to retire earlier? What if you downsized your mortgage? What if you or your spouse gets sick and you can’t work?

Component 4. Debt management plan

I read somewhere that “Debt is sometimes treated like a four-letter word, but not all debt is bad debt.”  A mortgage, for example, is considered good debt because you’re building an asset, and as you pay down the loan, you’re building equity. And, of course, it helps build your credit score.

High-interest consumer debt like credit cards, on the other hand, is considered bad debt mainly because of the interest you pay to the credit card companies, and if you mismanage your credit cards with late payments and your credit score takes a big hit. Plus, every dollar you pay in interest charges is money you can’t put toward other goals.

If you have high-interest debt, create a plan to help you pay it off as quickly as possible. If you’re unsure where to start, we have resources that can help you prioritize, then determine how much your money should go toward paying down your debt each month.

Component 5. Retirement plan

One rule of thumb says you’ll need approximately 80% of your pre-retirement income to live off of in retirement. Some financial planners say to assume you’ll need the same amount of income in retirement since some expenses go down and some go up. The best approach is to create a spending plan with as many best guesses as possible to determine how much income you’ll need in retirement to cover your expenses.

Many people significantly underestimate the cost of healthcare in retirement. Plan on $300,000 over the course of a 30-year retirement in out-of-pocket healthcare costs for a couple. And this doesn’t include long-term care needs.

My retirement readiness software has all the bells, whistles, and calculations to help you figure out these numbers and identify potential financial gaps.

Remember, if you have $1,000,000 saved, you can safely withdraw $25,000-$30,000 a year for 30 years from that portfolio without running out of money.

If you’re saving 20–30% of your pre-retirement income, then you could start with an 80% income-replacement rule. Otherwise, it’s safer to aim at covering 100% of your pre-retirement income, less whatever you’re saving for retirement. As with any general rule, there are plenty of exceptions. So be sure to sit down and fine-tune your retirement budget as the time draws near. This should be your top priority since you can borrow for most other goals but not for retirement.

Component 6. Emergency funds

It’s recommended your plan has 6-12 months of liquid money in an emergency fund. Many Americans would be unable to cover more than a $1,000 emergency. We clearly have a savings problem in this country.

Having this fund allows you to weather some unexpected expenses without borrowing from your retirement savings or putting the expense on a credit card.

Save this money in a highly liquid checking or savings account so you can access it quickly should an emergency need happen.

Component 7. Insurance protection

Protecting yourself and your family with insurance is an important component of a financial plan. Everyone should have a few different types of insurance and a few others that are important to consider. It all comes down to which risks you are willing to assume and which risks you want to protect against.

  • Health insurance: Without it, even routine care can cost a lot. Medical bills are reported to be the number-one cause of U.S. bankruptcies. One study has claimed that 62.1% of bankruptcies were caused by medical issues.1 Another claims that medical expenses adversely affect over two million people. As you get older and as part of a retirement plan, you may also want to consider long-term care insurance.
  • Disability insurance: This coverage protects you and your family if you cannot work. Employer-provided disability insurance typically replaces about 60% of your salary and is usually short-term disability insurance. Many experts believe the more important disability insurance to have is a long-term disability, especially if you are the primary breadwinner. Both types are important if you’re self-employed. Stats show that two-thirds of Americans don’t have either type of insurance but probably should.
  • Auto and homeowners’/renters’ insurance: If you own a car or home—or rent and can’t afford to replace possessions out of pocket—you obviously need to ensure you’re adequately protected.
  • Life insurance: If you have dependents, life insurance is a good idea. It’s also a good idea if you want to leave your heirs an inheritance.

Component 8. Saving & Investing

I believe every financial plan should have a saving and investing plan. There may be some overlap with the retirement plan section, but this section is focused on other types of saving and investing that you may do, such as brokerage accounts, gold, real estate, etc.

Component 9: Taxes

Many people don’t include taxes in their financial plans. Being tax-aware and tax-smart is important to improve your financial outcome. Both before retirement and in retirement, proper tax planning can help you keep more, legally, of your hard-earned income, savings and investments.

Component 10. Estate plan

An estate plan is comprised of a will and various types of trusts. At a minimum, you should have a will, which states your final wishes regarding your assets, dependents, and who you want to administer your estate. You should also keep the beneficiaries of your insurance policies and retirement accounts up to date. The plan will also identify powers of attorney and health care proxies in case you become incapacitated. Trusts are important for those with bigger estates and help to protect real estate and minimize probate and probate costs.  Statistics show that 67% of Americans don’t have a will.

At Her Retirement, we give our clients access to a really affordable trust and will company that significantly slashes the cost of traditional estate plans.

If you or someone you know needs help creating a financial plan, I can connect you with a certified financial planner who offers fee-only planning services. Not having a financial plan is one of the major regrets of many older people.

Here’s to creating a plan to help you know more and have more about your goals and your money. Let’s Get Her Done.


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