Who needs a financial plan anyway? You do! A carpenter doesn’t build a house without a blueprint — can you build a secure future without a financial plan?
There are many elements of a financial plan that should be integrated into an overall strategy for your personal economic future. Many financial advisors agree that there are seven elements to a successful financial plan. Depending upon your current situation, you may not need to spend much time worrying about some of these basics; however, you should think about each of these planning categories and assure yourself that you are covered. While you may categorize them differently, collapse some into others or add new categories for your situation, the components of a successful financial plan are essentially the same and include:
Saving and Investing
It’s important to learn the fundamentals of each and make an informed decision on the impact planning or lack of planning will have on your financial situation.
Living paycheck to paycheck is often a difficult way of getting through the month. No matter what your income level is, you may wish to consider the merits of implementing a household budget. In general, a realistic budget will help you control where you are spending your hard-earned dollars and allow you to make informed decisions on how to control your spending habits.
Saving and Investing
If you are not currently saving, you may never achieve financial independence. Many financial professionals agree that you should strive to save at least 10% of your gross income each month. Don’t worry if you can’t save 10% — saving just a small amount each month is a good idea. Creating a savings plan may help you reach your short-term goals, such as establishing an emergency fund or funding a special vacation. You may also have long-term savings goals, such as creating a college education fund for your children or buying a new house. Once you commit to creating savings, you must define an investment strategy that works for you. You’ll want to assess your risk tolerance and then invest so you will have enough money to reach your goal when you are ready.
Insurance is all about protecting yourself from risk. Insurance is intended to minimize your risk and liability in the event of loss related to your family and the things your family owns. Virtually all of your household belongings, as well as your salary and your health, can be insured. An insurance plan should take into account how much the lack of insurance might risk your personal situation. For example, it may not be necessary to pay for an insurance policy to protect your landscaped garden, unless it contains imported bonsai trees that cost thousands of dollars each! There are some policies you cannot go without, such as certain minimum auto insurance requirements, and then there are some policies you’ll have to weigh very carefully, such as life insurance, to make sure you have the right amount of coverage.