For years I’ve been telling anyone who will listen how important it is to have a financial plan – and to have the right financial plan. Maybe it’s about time to define exactly what the right financial plan looks like and how to use it.
What A Financial Plan Isn’t
In order to really understand what a financial plan is, let’s look at what it isn’t first.
Many financial advisors say that a financial plan is a road map. This is not correct. A financial plan can’t identify every side road and off ramp you need to take in order to reach your destination. Why not? Because the financial terrain changes all the time.
There are too many unknown variables and they are unknowable. How can you possibly create a document today that builds a fixed game plan around a changing situation? Football coaches call plays based on what’s happening in the game real-time. You need the same dynamic flexibility with your own financial playbook.
The economy, market and interest rates all change. And most things that make up your personal financial life change too. Your spending, savings and family situation shifts in ways you simply cannot foresee. That’s why a “one and done” approach to creating a financial plan is “no bueno”.
What A Financial Plan Is
A good financial plan has one goal – to tell you what you need to do right now in order to get closer to achieving your most important financial goals. It doesn’t guarantee that if you do “x, y and z” you will absolutely achieve your goals. It doesn’t do that because it can’t. Nobody can guarantee the future because things change as I said. And because the financial climate changes and because your own financial situation changes, the plan must be updated every year or two to make sure you are doing everything you can to stay on course given the facts on the ground at the time.
The Good News
If you read between the lines, you’ll see there is a lot of good news here. The main point is that this is not complicated and you can do a lot of your own financial planning. Remember, a good plan answers the question, “what do I have to do differently now in order to maximize my financial situation?”
To answer that question you really only have to answer 4 sub-questions:
- Do I need life insurance? If so, how much and which kind?
- Do I have the right beneficiary designations and estate plan documents?
- How much do I need to retire?
- Am I saving enough to reach that goal? Am I saving enough to reach my other financial goals? If not, what do I have to do differently in order to get on track?
Not many people can answer these 4 questions. But they are not difficult to address. Take your time. Read the accompanying posts, create your own financial plan and update it periodically.
Do you make your own financial projections? How often? How has it helped you? Have you changed your tactics as a result of your projections?