The 5 Essential Components for Starting a Financial Plan

Are you thinking about creating a financial plan but aren’t sure where to begin? 

In this article, I’ll share what I believe to be the 5 essential components for starting a financial plan.  You can (and most likely will) add more bells and whistles as you go along, but here are the basics.

1)  How do you want your life to look 5, 10, or 30 years from now?

It may sound cliche, but you’ve got to begin by setting goals.  Before you embark on any kind of a journey, you have to know where you are going.  

I tell my students to think about their financial plan as a cross-country trip they're outlining.  You wouldn’t start the trip without first mapping out your route.  Similarly, the first essential component for starting a financial plan is to determine YOUR destination, aka what you want your life to look like. 

Starting with the end in mind will give you direction. Here are a few questions to ask yourself:

• How do I envision spending my time in the years ahead? Do  I see myself doing a lot of traveling or will my life be more centered around being at home?
• Do I plan to retire early or perhaps never totally retire at all?
• Will I be caring for an elderly parent or special-needs child?

You’ll also want to consider the major spending events or what I call  “stops’” along the way. Just as you’ve got to think about lodging and meal stops along your trip across the county, you’ll want to include similar expenses when building your plan. Stops may include:

• Purchasing a vacation home
• Making home renovations
• Paying for a child or grandchild’s college education.  

Bonus tip: Take time to actually write down your goals. A study from Dominican University found that you’re more likely to achieve your goals when you actually put your pen to paper!  Click here to reference the Dominican University Study

2)  Determine EXACTLY where you are financially right now.

Becoming clear on where you financially stand right now will make your planning efforts more realistic. As you project how much you’ll need to save in order to reach your goals, having an absolute starting point allows you to record your progress more accurately.

To do this, you’ll want to gather and securely store all of your financial information in one place so that it’s easily accessible. 

Next, create a list of all your assets (bank accounts, investment accounts, personal property, etc) as well as your liabilities (mortgage, credit card debt, student loans, etc).  

Now, subtract the total amount of your debts from the total amount of your assets.  The result is your net worth.  By keeping track of your net worth over time you can more realistically evaluate the likelihood of achieving your goals. Regularly reviewing this number may give you just the reason to adjust your spending and/or savings habits.

3)  Pay yourself first by investing regularly.

The best time to start investing was when you were 18. The next best time is now.

Studies show that maximizing contributions to your company retirement plan and personal IRA’s can ease financial stress over time. The tax advantages that accompany these types of plans provide a unique tool for achieving financial success.

Dollar-cost averaging (adding a similar dollar amount to an account on a regular basis) is another tool that can help individuals meet their financial goals over time.

But the unfortunate truth is that because financial literacy (or investing in particular) is not a required subject in most schools, you may find this area to be stressful or even overwhelming. 

Reading books or taking a personal finance course may be a logical step to gaining basic knowledge. Being open to learning more about asset allocation, diversification, risks, and the fees involved with investing will work to your advantage.

Your savings and investing plan will be extremely important as you implement these 5 essential components for starting a financial plan. Seeking out a professional wealth coach, mentor, or financial advisor to review your options may help you feel more confident about the actions you’re taking to meet YOUR goals. 

4)  Protect your assets and your income. 

Even the most well-thought-out plans can (and most likely will) run into obstacles. 

Your initial plan should include the necessary insurance and estate planning documents that will protect your health, your property, your life, and your loved ones. 

As you think about this component of your financial plan, consider who would be financially at a loss if you become disabled or pass away.  

Here are a few examples to consider:

• Is a portion of my income earmarked to help my kids with college expenses? 
• Would my partner be able to afford to remain in our home if I became disabled?
• Will my business have to close its doors if I die?
• Will my kids be fighting over my money or my house at my funeral because I don’t have a will?

These are the tough questions you must think about when starting a financial plan.

5)  Implement your plan and pivot as necessary.

Make the commitment to put your plan into action! 

Create a checklist to keep you motivated and on track. Put specific, non-negotiable dates into your calendar to review your plan regularly. Include your attorney, investment advisor, CPA, etc. when needed.  

A good rule of thumb is to review your goals and insurance plans at least yearly. Monitor where you are financially (your net worth) quarterly, if not monthly.

When major life events such as a divorce, job change, or extreme health issues occur, be sure to revise your plan and update beneficiary information accordingly.

Bonus Tip:  Plan rewards for achieving certain milestones! Too many times we tend to recognize what we’ve done wrong, rather than acknowledging the things we did well. Celebrate your wins and successes, no matter how big or small!

Creating a financial plan will never be a "one-size-fits-all" strategy. It's an intentional process where YOU get to be in the driver's seat. Using these 5 essential components for starting a financial plan will put you on the path to future success.

Laurie Bodisch is the CEO & Founder of Her Wealth Coach™, an educational empowerment company on a mission to provide immersive customer-focused solutions to help women gain the self-awareness and financial confidence to take control of their own narrative.

For more information about Her Wealth Coach™ or to join one of our upcoming live workshops visit our website at www.herwealthcoach.com.

DISCLAIMER: All information contained in this article is intended for educational purposes only.  Under no circumstance should the above discussion be taken as legal, investment, or tax advice as we do not have an established client relationship.  Past performance of any investment vehicle does not guarantee future returns and you may lose money.