Education plan. The objective of this plan is to have a sufficient amount of fund during high school, college or perhaps graduate education of your children or members of your household. The amount to be earmarked on a regular basis is dependent on some factors like  the type of school that you intend your children to go to, and the projected increases in tuition fees.

 Retirement plan. From the desired level of lifestyle that you (and your spouse) want to have, you can set up a sinking fund fior it. This can be funded by regular contribution to this fund coupled with corresponding investment activities that aim to maximize the fund’s returns.

 Estate plan. Planning your estate involves questions like: Are you going to donate real properties to your children even before you “kick the bucket” or just let them inherit these properties when you leave this world? In other words, what’s the cost-effective way of transferring wealth. This may involve making a (testamentary) will and consulting with a good tax lawyer.

 Special needs plan. These take care of other needs such as a wedding, a vacation abroad with the whole family, buying a second house, setting up a fund for charity or foundation, etc. Just like the other concerns, these need preparation and planning.

 A Financial Plan may not be as comprehensive as outlined above or it may not  be in black and white at all. I strongly suggest, however, that if you decide to have one, you might as well do it properly by incorporating the above components. A Financial plan is nothing if you will delay its implementation. A good financial planner can help you a lot not only in the implementation itself but also later on when you review and monitor your plan.

 Visit this blog again if you want to learn how the above components of a financial plan are being done.

 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.