What is a 'Financial Plan'

A financial plan is a comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. Most individuals work in conjunction with a financial planner and use current net worth, current lifestyle expenditures , tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans. These metrics are used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what steps need to be taken to ensure that they are.

A financial plan is based on an individual's or a family's clearly defined financial goals, including funding a college education for the children, buying a larger home, starting a business, retiring on time or leaving a legacy. Financial goals should be quantified and set to milestones for tracking.

  • Personal net worth statement: A snapshot of assets and liabilities serves as a benchmark for measuring progress towards financial goals.
  • Cash flow analysis: An income and spending plan determines how much can be set aside for debt repayment, savings and investing each month.
  • Retirement strategy: The plan should include a strategy for achieving retirement independent of other financial priorities. The plan should include a strategy for accumulating the required retirement capital and its planned lifetime distribution.
  • Comprehensive risk management plan: Identify all risk exposures and provide the necessary coverage to protect the family and its assets against financial loss. The risk management plan includes a full review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
  • Long-term investment plan: Include a customized asset allocation strategy based on specific investment objectives and a risk profile. This investment plan sets guidelines for selecting, buying and selling investments and establishing benchmarks for performance review.
  • Tax reduction strategy: Identify ways to minimize taxes on personal income to the extent permissible by the tax code. The strategy should include identification of tax-favored investment vehicles that can reduce taxation of investment income.
  • Estate plan: Create arrangements for the preservation and distribution of assets with attention to minimizing settlement costs and taxes. Review and update estate panning instruments, such as wills, inter-vivos trusts, power of attorney, medical directives, and marital trusts.
  • Education plan: An education plan is a strategy to allow you to help fund your child (or grandchild’s or your own) post secondary studies. Whether you want to fund part of it, or funded it entirely a proper drafted plan with regular reviews will allow you to achieve whatever the goal may be.