Key Components of a Good Financial Plan

A sound financial plan is important for a financially healthy present and secure future and critical for your mental health. Financial stability and mental health are closely intertwined. Financial worries are one of the prime reasons for stress in modern life. According to a study by the American Psychological Association (APA), 72% of people worry about their monetary situation at some point in their lives. However, those with a financial plan had a way out of critically demanding monetary situations. In another study by Business Wire, 83% of people with a financial plan said they feel better about their financial situation after one year of following the plan. A financial plan aids you in making challenging financial decisions, eliminates the guesswork, and promotes informed decision-making, giving you motivation and boosting your confidence. According to a recent survey, people with a financial plan are more likely to pay their bills on time and save for their future. So, having a financial plan is beneficial, irrespective of your life stage, income, or financial responsibilities.

However, despite understanding the importance of a financial plan, most people do not take any relevant step in this direction. As reported by a recent survey, about three in four Americans are stressed about their financial future. They worry about paying their loan installments, saving for their home, saving for their retirement, funding their children’s education expenses, fulfilling health emergency expenses, and more. Such financial worries have aggravated in the present COVID-19 times as the pandemic continues unabated. Moreover, with the steeply rising inflation, lack of jobs, reducing salaries, minimal interest rates, etc., financial stress has become even more gruesome.

A foolproof financial plan can help you minimize your financial anxiety, create financial stability, and assist you in achieving long-term economic well-being. You can reach out to a professional financial advisor to help you create a financial plan that will enable you to achieve your present and future financial goals. For a good financial plan, it is also important to know what the components of a financial plan are.

Below are some of the key components that should be a part of your financial plan:

1. Well-defined financial goals:


Any financial plan is incomplete without financial goals. Know what you want to achieve before you strategize how to achieve it. Your goals are the fundamental component of your financial plan. Irrespective of whether you are working with a professional financial advisor or managing your finances yourself, list down your financial goals – all of them. Your financial goals could include buying a car, purchasing a house, saving for retirement, funding the education of your child, paying off your debt, creating an emergency fund, etc. Once you list all your goals, divide them into short-, mid-, and long-term. Short-term goals are aspirations you want to achieve within one-five years from now. Mid-term goals are those that you want to realize between five-ten years from when you set them. Long-term goals are those that you want to accomplish after ten years or more. For instance, if you want to save money to buy a car in six months, then that is your short-term goal. Whereas, if you want to fund your retirement life, that is your long-term goal. Apart from distinguishing your goals according to a time scale, it is important to set a dollar figure and realistic target date for your goals. For instance, save $10,000 to buy a car in six months or create a retirement corpus of $1 million in 20 years. Ensure all your financial goals are realistic, achievable, and measurable.

2. A clear understanding of your net worth:


A reliable financial plan accounts for your current monetary situation and, accordingly, helps set plans for your growth. Therefore, another essential component of financial planning is analyzing your present financial situation. For this, you can start by listing your assets (bank accounts, real estate, shares, valuable personal property, etc.) and subtracting the total from your liabilities or debts (including mortgage, student loans, credit card bills, etc.). Your net worth equals your assets minus liabilities. If your assets are higher than your liabilities, your net worth is positive. However, if your assets are less than your financial debts, your net worth is negative. Negative net worth is common for people who are only beginning their financial planning journey. An effective financial plan with steps like eliminating high-interest debt, reducing discretionary expenses, increasing income sources, enhancing investment returns, etc., can help improve your net worth.

3. A workable budget:


A workable budget with the right spending and saving allocation is critical to a successful financial plan. By creating a workable budget, you can adequately cater to your present and future needs. To create a budget, assess your current income against your discretionary and non-discretionary expenses. Discretionary expenses can be avoided, such as online subscriptions, dining out, gym memberships, etc. Non-discretionary expenses are necessities, such as food, medicines, telephone bills, utility bills, and more. The objective is to create a zero-based budget where each dollar you spend has a defined purpose. You can enhance your savings by limiting your discretionary expenses and wisely spending on your discretionary items. Creating a budget can help you identify areas where you are overspending, ways to cut down your expenditure, and redirect the money towards savings and achieving your financial goals.

4. A debt management plan:


One of the key components of financial planning is having a debt management plan. The interest burden of the loans can consume your current savings and jeopardize your future financial security. It is advisable to include an achievable debt management strategy in your broad financial plan to become debt-free in the future. A well-drafted financial plan with the right tricks can help you constructively manage your debt. Some effective strategies that can help you pay off your debt include debt consolidation, where you take a low-interest debt to pay off your high-interest loans. You can also consider increasing your income sources (by taking up freelance work, tapping the monetary potential of your hobby, etc.) to pay off the pending bills. That said, managing debt can often be complicated. Hence, if you are unsure about how to manage your debt, it is advisable to consult a financial advisor to help you take care of your debt.

5. Right insurance coverage:


Insurance coverage is a requisite for good financial planning. Insurance is your aid during challenging times. It is prudent to get the right insurance coverage to ensure you are adequately safeguarded in a distressing situation. Some insurance plans are a necessary investment irrespective of your age, financial responsibilities, income, and life stage. Primarily, you can have life insurance up to an amount that can sufficiently cover the living expenses of your dependents. Secondly, you can invest in health insurance for financial aid during a health emergency, such as an accident, COVID-19, etc. Moreover, as you get older, your financial plan should aim to include a long-term care insurance policy. Further, disability insurance is also a wise investment. A disability insurance plan financially protects your family when you cannot work because of a permanent or temporary disability. If you have employer-sponsored disability insurance, you should still consider getting a separate disability cover as the former only replaces 60% of your salary. Apart from these insurance policies, you may also invest in a sound insurance plan for your valuables like a car, home, jewelry, etc.

6. Requisite emergency reserve:


Having an emergency reserve is essential for a holistic financial plan. Emergency reserve refers to the funds you set aside to pay for any expected financial emergencies in the future, such as loss of job, health emergency, etc. According to experts, it is advisable to set aside at least six to nine months of your living expenses as an emergency reserve. However, this is only an indicative figure, and the precise amount for your emergency corpus depends on your lifestyle, current financial position, life stage (single, married, divorced, etc.), health condition, and other similar factors. Apart from saving the right amount, it is also critical that you safeguard your emergency reserve in an asset that offers reasonable return and immediate accessibility in case of need. For instance, you can keep an emergency reserve in your savings account, fixed deposit, mutual funds, etc.

7. An effective retirement plan:


Any type of financial planning is incomplete without an effective retirement plan that can help accumulate a significant retirement corpus to support you financially during the non-working years of your life. It is important to establish a retirement goal and lay down a defined path to achieve the target. You can do this by mapping your risk tolerance and investing in securities that align with your risk appetite and return expectations. The returns from your portfolio can help you create an adequate retirement corpus, provided you invest wisely. Further, it is wise to choose tax-optimized retirement saving mediums like a 401(k) account, an IRA (Individual Retirement Account), Roth IRA, etc. Each of these accounts has its contribution limits, tax rules, penalties, withdrawal criteria, age limits, income eligibility, RMDs (Required Minimum Distributions), etc. It is advisable to be aware of all rules and regulations before investing in these retirement-saving vehicles. Further, you can consult a professional financial advisor to know how to use these accounts to reduce your tax bill, maximize contributions, obtain penalty-free withdrawals, and more. The objective should be to create a retirement corpus that can support a lifetime of expenses. Good financial planning also involves understanding when to withdraw Social Security benefits and if delaying them could be advantageous for your case.

8. A holistic estate plan:


If you want to know what should be included in a financial plan to protect assets, the answer is a carefully drafted estate plan. An estate plan is not only a tool for the rich. It is an effective asset protection mechanism for everyone who owns anything valuable. Therefore, a holistic estate plan is essential for good financial planning. An all-encompassing estate plan can cater to your financial needs when you are alive and offer the utmost protection for your assets even after you are gone. An estate plan can be useful in mental or physical incapacitation. With the right estate plan, you can be sure to leave a tax-optimized legacy for your beneficiaries. The first step of estate planning is to take account of all your assets (tangible or intangible, including bank balances, retirement account balances, real estate, shares, valuable art, etc.). Next, estimate the value of all your assets and accordingly distribute them among your desired beneficiaries. To convey your distribution and estate plans, you can draft a will that specifies the estate share of each beneficiary against their legal name. Apart from the distribution of assets, estate planning also involves setting up living trusts to fulfill your desires when you are alive but financially incapable of making any decisions. Other than this, a foolproof estate plan will involve streamlining foreign assets, assigning guardians for minor children, deploying tactics to reduce estate taxes, and so on. Your estate plan can also specify directions on how your assets will be distributed and used after your demise.

To summarize

Financial planning is an evolving process that requires intricate preparation and discipline. The right financial plan comprising all the components of financial planning can help you sufficiently fulfill your current needs and safeguard your future. A sound financial plan aids you in optimally using your assets to achieve your life goals. If you require guidance on the types of financial planning and key components of financial planning, you can consult a professional financial advisor. Financial advisors work with you to understand your financial goals, current monetary situation, risk appetite, debt level, retirement plan, and more, and accordingly create a fail-safe financial roadmap for your future. To get in touch with a fiduciary advisor who may help you design a comprehensive financial plan to enable you to achieve your present and future financial goals, use the free advisor match service. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.

For more information on how to create a suitable financial plan for your unique financial requirements and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

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