Five Foundational Elements of a Financial Plan

Now that I’ve finally discussed insurance planning, I have touched on all of the foundational elements of a comprehensive financial plan. And since I have scattered my choice of money topics, I want to give you my five key elements to developing a solid plan all in one place.

General Principles of Financial Planning:  You should start with examining your current situation. You need to determine your cash flow (how much comes in and how much goes out) and figure out your net worth – your assets (house, car, investments, etc.) minus your liabilities (mortgage, car loan, student loans, etc.). Your budgeting tool, whether self-constructed with Excel or through online or computer software such as Mint or Quicken, should track your spending and include a balance sheet. From there you can develop a plan for determining the right financial balance for your life. In addition, you can use this analysis as the foundation for learning how to share your expenses and communicate with a spouse.

Insurance Planning:  Now that you know what you have, you need to determine the proper way to protect it. You can do this by having an insurance company share your risk of loss. Most people need five types of insurance: health, homeowners/renters, auto, disability, and life.

Estate Planning:  In addition to protecting your assets, you need to determine what happens to them in the case of your death, disability, or incapacity.  Creating a will, trust, and durable powers of attorney will help ensure your wishes are followed.

Investment/Retirement Planning:  Now it’s time to plan for the future. While some planners separate these topics, I think they go hand-in-hand. The fundamental principle for both include diversifying your investments and keeping your expenses low.

Income Tax Planning: Last, but certainly not least, you need to figure out the tax aspects of your financial plan. Income tax underlies all other areas in your planning, so you need to make sure that your objectives are tax efficient and balance the financial aspects of your life with your goals.

So there is your roadmap. Obviously, we have a lot more to discuss in order to flesh out the intricacies of these topics, but you can use this overview as a guide to make sure you have developed a comprehensive financial plan.