What is a financial plan?

A financial plan can serve as a roadmap to help people achieve their financial goals. Understanding the financial planning definition can help you build such a plan on your own or with the help of a professional financial planner.

A financial plan is a full picture of a person’s current financial situation, his/her financial goals and methods chosen to achieve them. Financial planning involves details about savings, cash flow, debt, insurance, investments and any other elements of financial performance. It also includes the person’s long-term monetary goals and strategies.

Financial planning explained

The financial planning definition describes it as the process of framing objectives, procedures, policies, programmes and budgets regarding any financial activity of concern.

Whether a financial plan is created individually or with a help of a certified financial planner, it always starts with a thorough analysis of the individual’s current financial situation and future expectations.

Types of financial planning

There are numerous types of financial planning, touching every aspect of a person’s life, including family, work, social life, hobbies, etc. Some key categories of financial planning include: investment plans, tax plans, retirement plans, insurance plans, real estate plans and cash flow plans.

• Cash flow planning

Cash flow planning refers to the inflow and outflow of money. An individual or a business forecasts its long-term and short-term expenses against the expected cash flow.

• Investment planning

Investment planning refers to investments in financial assets. Wealth can grow, if it is invested wisely. Therefore, investment planning involves dealing with instruments an individual should invest in to get the best out of their wealth.

• Tax planning

Although you can’t legally evade taxes, you can minimise them wisely. By planning effectively, you can reduce your tax liability. For example, if you want to save tax, you may prefer to hold stocks for at least a year to avoid capital gains tax, or to invest in instruments that offer tax benefits.

• Retirement planning

This type of planning makes sure you have enough money to live on after retirement. To secure a serene retired life, you should make thorough investment decisions during your work life.

• Insurance planning

Insurance planning provides safety in case of unpredicted troubles. It ensures adequate coverage against insurance risks. It can help you get a wider coverage for the same or lower premium.

• Real estate planning

Real estate is considered a low risk and high return investment option. In case of unforeseen situations, real estate planning can become the best option for your family’s financial safety.

Financial plan example

To create a financial plan you should complete several steps:

• Calculate net worth. It means you should learn your current net worth. Take your assets (a home, a car, cash on your accounts) and your liabilities (student debt, credit card debt, a loan). Total assets minus total liabilities will give you your net worth.

• Determine cash flow. Learning where your money goes will help you see how much you spend every month on various necessities and how much you can spend for investing and saving.

• Consider your priorities. Define your goals clearly. You may want to buy a new home, start a business, save for college education for your children, etc. An effective financial planner can help you create a detailed savings and investment plan that will help you achieve your goals one by one.