There are various methods to choose from when it comes to developing a financial plan, but the proper plan needs a few components, regardless of the process utilized for creating it.
Components for financial planning
1. Your net worth statement
Every financial plan demands a baseline. So, it is worthwhile to determine the net worth before finding a financial plan. Make sure to note down all the assets and debts.
This will include investment accounts, bank accounts, valuable personal property, real estate, mortgages, student loans, and credit cards.
Make sure to deduct your liabilities from your assets to find your net worth. If you find that your liabilities are outweighing the assets, make sure to not be discouraged because when people are starting to establish a solid financial plan, it is something that happens. So, it needs to be considered when looking for the components of financial planning.
2. Financial goals
You cannot consider making a financial plan until you understand what you are going to do with your money. Your plan needs to begin with a complete list of goals, both small and big.
A proper list can help you organize all the goals. Be aware that your short-term goals will be those that you are hoping to achieve in the next 2-5 years.
When it comes to medium-term goals, those are the ones that you want to achieve in the next 7-8 years. Finally, your long-term goals will be those that you want to achieve in the next 10 to 50 years. Listing down financial goals is one of the primary components of financial planning.
7 Types of Financial Planning
3. Debt management
Having a debt management strategy is something that can help you reach your financial goals. If there is high-interest debt, ensure creating a strategy that can assist you to pay them quickly.
You can also hire a financial professional advisor if you are not certain about where to begin. They will help you determine the amount from your budget that should be spent on the debts every month.
4. Cash flow and budget planning
Your budget assists you to find out where all your money is going and it helps you cut back to meet your goals. You can make use of a proper budget calculator to be sure that you do not ignore the important expenses.
While jotting down your list, make sure to separate the expenses into two categories when considering the components of financial planning.
One category will have must-have items and the other will have luxury items. When you are considering how the financial goals will fit within the budget, make sure to consider all your expenses.
You can also take the help of any advisor that offers procedures and tips that enable you to adjust particular assumptions to check how they would affect the savings plan.
Financial Planning Contingencies
5. Retirement plan
You are going to need 80% of the income you’re earning today in your retirement. But, you can also assume that retirement can free you from taxes and other work-related expenses.
You must consider that medical insurance does not cover everything. You need to keep those expenses under long-term health care expenses.
Make use of a savings calculator for your retirement to help you understand what you might require during your retirement period.
6. Insurance coverage
Insurance refers to an integral part of safeguarding your financial downside. Disability insurance, health insurance, life insurance, and home insurance are some of them.
When it comes to life insurance, it is a good concept for people having dependents. Make sure to talk to an insurance professional to acknowledge what kind of coverage works best for you.
When it comes to disability insurance, just like the components of financial planning, it safeguards you and your family when you are not able to work.
It replaces approximately 60% of your monthly salary. If you have a home or a car and you cannot afford to pay the entire bill from your pocket, ensure that you have adequate protection. The same is true with health insurance which can get you back thousands of money during a severe injury.
Wrapping Up
These components of financial planning are growing effectively to confirm that the present plans in your life are in a positive direction.
In a nutshell, you need to –
- Keep a regular check on your enrolled plans, mutual fund, and assets;
- Analyze your essential expense;
- Cut down excess expenses for your future investment to be more structured;
- Optimize your goals.
So, follow the above-mentioned components of financial planning to make your financial goals realistic as well as achievable. It is one of the best and workable ways to help take a step toward your financial goals.
FAQs
How do I determine my net worth?
List all assets and debts (e.g., investments, bank accounts, loans), subtract liabilities from assets to find net worth.
Why is goal setting essential in financial planning?
Goals provide direction. Categorize them into short-term (2-5 years), medium-term (7-8 years), and long-term (10-50 years) goals.
How do I manage debt effectively?
Create a strategy to pay off high-interest debt. Seek advice from a financial advisor if unsure where to start.
Why is insurance coverage crucial for financial security?
Insurance safeguards against financial downsides. Types include disability, health, life, and home insurance, offering protection in various situations.
