What's a Financial Plan, and Do You Need One?

Key Points

  • A financial plan provides a roadmap for your financial life.
  • A comprehensive plan makes sure all parts of your financial life are working together.
  • A financial plan is a great investment, provided you do your part.

Dear Carrie,

I’m in my early 40s with two young children. My wife and I want to be diligent about our finances, but sometimes it feels overwhelming! Between saving for retirement and our children’s college, trying to understand what we can afford for other goals (like a bigger house), and feeling confident about all of the financial decisions that crop up, it’s complicated. How can we get a handle on it all?

—A Reader

Dear Reader,

You are absolutely correct; as life gets more complex, so do our finances. With children, retirement, large purchases, vacations—what have you—you can feel pulled in far too many directions. What once seemed like a clear path becomes a more complicated journey with lots of twists and turns. So to keep moving forward, I suggest you get a map—in the form of a comprehensive financial plan.

Why a financial plan makes sense

First, a financial plan is about developing a realistic and informed perspective on how you can put all of your financial resources to their best use. The process starts by examining and articulating your goals (some that you've already thought about, and some that may not be obvious), and then sorting out your priorities. This can be an excellent opportunity for you and your wife to step back, rethink and agree on what's most important to you.

Second, a successful financial plan is holistic. It looks at all the interrelated parts of your financial life—income, expenses, investments, retirement planning, the role of insurance in risk management, income tax liability, estate planning needs and desires—to make sure they're all coordinated. This is essential because if you don't have a handle on how much money is coming in and going out every month, it’s next to impossible to know how much you can save. If you don't have a savings plan, you won’t be able to manage your most important goals like buying that bigger home, paying for your children’s education, or funding a comfortable retirement. And if you don't have adequate insurance, you may not be able to protect these savings in the face of some unexpected event like an illness or job loss.

Finally, a good financial plan will include a series of concrete recommendations. Otherwise, your experience remains an academic exercise: interesting, perhaps, but not that useful. The goal of a financial plan, after all, is to make your goals a reality.

What a financial plan includes

A comprehensive financial plan can have many parts, including:

  • A personal net worth statement—a snapshot of what you own and what you owe.  This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.
  • A cash flow analysis—so you can see how much money comes in and goes out every month.  This is the foundation for your budget (including identifying what’s fixed and what’s discretionary) and can also help you get a handle on your debt.
  • A retirement plan—specifying how much you need to save each year. This can include a recommendation on how best to maximize your Social Security benefits.
  • A plan for funding education.
  • An investment plan based on your goals, resources, and risk profile.
  • A review of your insurance coverage—ensuring that you have the right types and amounts.
  • A review of your income tax profile.
  • The foundation for an estate plan—which is important for everyone, but especially when you have children.

Putting all this together takes time and expertise—and that's where an experienced financial planner comes in. By gathering your information, evaluating your financial status, and developing and helping you implement specific recommendations, a financial planner can help your get your financial life on track.  

What you can expect

A comprehensive financial plan generally follows a six-step process, designed to keep all the pieces on track as you progress from your initial consultation to eventual implementation and follow-up. This process includes:

  1. Agreeing how you'll work together, with a clear explanation of roles and responsibilities. At this point it’s important to ask lots of questions so that you’ll understand exactly what you can expect in terms of deliverables, cost, and time frame.
  2. Information gathering and goal setting. Once you’ve set the ground rules, your financial planner will start the process of obtaining a full understanding of your resources, obligations, and expectations. At the same time, your planner will delve into your goals, time horizon and risk tolerance. This is your chance to make your wishes clear so that your plan will truly reflect your values and priorities.
  3. Evaluation of your financial status and creation of a strategy. Once you’ve provided your input, your planner will craft a preliminary plan, based on all of the information listed in step 2.
  4. Next, your planner will present you with recommendations, including possible alternatives. Nothing is cast in stone at this point; your goal is to understand your options and make choices.
  5. Now it’s time to put your plan into motion as you select the best products and accounts to meet your goals (for example, you will be able to examine the benefits of a Roth vs. traditional IRA, a custodial account vs. a 529 account for college savings, or even term vs. whole life insurance). At this point you might begin to work with other professionals including an accountant, attorney, or insurance agent. 
  6. Last but not least, it is essential that you and your planner continue to monitor your progress and make adjustments as your goals, priorities, and time frame evolve.

Working with a CERTIFIED FINANCIAL PLANNER ® professional

There are many types of financial planners, but I recommend working with a Certified Financial Planner ® professional. The individuals with this credential have completed extensive training, passed a rigorous test and meet ongoing continuing education requirements.

The key is to find a financial planner that you trust and are personally comfortable with. Many offer a complimentary initial consultation so you can ask questions and see if you're a good fit. You might start with recommendations from friends, colleagues or other financial professionals. Make an appointment for a consultation and, before you meet, make a list of questions. Ask about cost, background, types of services and number of clients.

An extra word about cost

Financial planners can be compensated in different ways. Some may charge an hourly fee; others may give you a set price based on the complexity of your financial situation. Be cautious when it comes to financial planners who are paid by commission. When interviewing a potential planner, be sure to ask if he or she is compensated for selling you any particular financial product. If so, consider how that inherent conflict of interest may impact his/her ability to provide you with the best and most objective advice for your situation.

Many people think a financial plan is only for the wealthy. But to me, it can be well worth it for most everyone, and can more than pay for itself if you follow the recommendations.  In fact, in today’s complicated financial world, it can be the one guide you need most.

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