Now, what is a financial plan?

A financial plan is a big picture of your personal or your household’s overall financial goals together with the specific activities and strategies  crafted to implement such goals. It’s like a roadmap that guides and leads you towards your destination, financially speaking.

 What does a (comprehensive) financial plan contain?

A good financial plan should be comprehensive, and pragmatic enough to  implement. It should contain and address the following components:

 Your objectives. These involve your or your household’s  financial priorities. These answer the question: Why am I doing a financial plan?  An objective could be to quickly accumulate cash for the downpayment of your dream home, to set up an education fund that will provide the education of your children until they graduate from college, to regularly save in a fund that will become your nest egg when you retire, etc.

 Current financial condition. This is similar to a company’s financial statements where it shows the current resources that you  (or household)have which you can tap to achieve your objectives. It therefore presents your statements of assets (cash, bank deposits, investments in mutual funds, real properties, etc) and  liabilities (credit card debts, mortgage or personal loans, etc.).

 Cashflow plan. This is an enumeration and analysis of your sources of income and expenses. Income or revenues can come from salaries, rental income, professional fees, investment income. Expenses could be non-discretionary expenses like food, utilities, tuition fees, children school allowances. The other category of expenses is discretionary expenses which include expenses for recreation and entertainment, hobbies, gifts and donations.

 Tax plan. A plan the aims to minimize taxes without violating the tax rules. It involves an intelligent application of tax credits, exemptions, and other tax benefits. A good tax consultant would be very helpful in this area.

 Investment plan. It is a plan that should maximize your cashflow in order to achieve your financial objectives. It takes into account the optimization of income generated from different types of investments like, bank products, mutual funds, government securities, stocks, etc.

 Insurance plan. This involves the minimization of the financial effects of untoward events like death, illness, or damage to properties. Depending on the level of protection you want to have, a good insurance plan utilizes the right amount of life (or term) insurance  and health insurance coverage that you or any member of your household should have; non-life insurance coverage for your house and other properties.

 In Part 2, I will show you four additional components of a financial plan that you need to have.