Think of a financial plan like it's your car. A car has many working parts that all work together to achieve a common goal – to get the engine running and take you to your destination. For the car to operate properly, it needs routine maintenance like oil changes, tire rotations, even car washes, but we don't have to explain this, all car owners know it! So like a car, your financial plan consists of many working parts like your cash flow, budget, savings, insurance, investments, estate planning, and tax planning that all work together to get you to your goals. These parts will also need to be reevaluated routinely to keep up with your life!
As mentioned before, there are several parts to a financial plan. To make understanding a bit easier, we will provide a brief summary of each part of a financial plan and how they all connect.
Find an advisor 🤝
We know the first step in anything is always the hardest, but when creating a financial plan, luckily, you have options! You can start working on it yourself by doing some research and understanding your personal finances and objectives and outsourcing help from there. However, there is room for error as it can be difficult to understand all the little nooks and crannies of all things financial… that’s why we exist! 🥳 We are certified financial planners and we take pride in being experts in analyzing personal and professional finances. Read here for more information on finding the right financial advisor for your needs.
Establish Goals and Objectives 👨👩👦👩❤️👨🏝️🏡
In order to build a plan, you need to first understand where you are heading. Establishing goals looks different for everyone! Whether it's traveling the world, getting married, buying a house, or having kids, it’s important to decide which goals will be a priority. If you need guidance on how to set up your goal, check out our blog, 3 Simple Steps to Create Financial Goals.
Review Your Cash Flow 🤑
Keeping track of how your money is coming in and going out is an essential part of your financial plan. Tracking your cash flow could be as simple as averaging your paychecks and your common expenses on a monthly basis to track any shortfall or surplus of cash at the end of the month. Cash flow is an essential part of your financial plan because it gives quantifiable information on how to get to your goals. Lucky for you, we have made a cash flow guide to help through this process. This guide provides several ways to improve your budgeting process, one of the first methods we recommend is structuring your bank accounts. This method works best once you've established your monthly cash flow and allows for an automated process. When you know how much of your income goes towards the categories of savings, debt, fixed expenses, and variable expenses, you can set up separate bank accounts dedicated to each category and allocate a portion of your income to each account that is determined by your cash flow. You can learn more about structuring your bank accounts here. If after establishing your current cash flow situation you discover that you have a surplus of cash at the end of every month, then we can allocate that extra cash to other aspects of your plan like your emergency fund, a travel fund, retirement planning, or children’s education depending on your priorities.
Risk management 🧐
There are many ways to look at risk management, but the main idea is to think about how prepared you are if the worst-case scenario were to happen. The scenario could be from one or both spouses losing their jobs to (the actual worst-case scenario) death of a partner. We can plan for these events using an emergency fund and utilizing insurance. An emergency fund should be funded with 3 to 6 months worth of your fixed and variable expenses, essentially giving you time to continue your daily living as is before you would need to find another income stream. To determine whether you need 3 or 6 months saved is dependent on your situation and what would make you feel comfortable having. If you are in a single-income situation, then we’d recommend having closer to the 6-month savings mark because if the income earner were to unexpectedly lose their job, there would be no other source of income stream for the household until they were to find another job and to allow time for that, it’s best to prepare for a period of about 6 months. For a dual-income household in different industries, we’d recommend about 3 to 4 months of savings, since it is less likely for both earners to lose their jobs at the same time than it would be for earners who are working in the same industry. Once we establish a goal for the emergency fund and start progress, we can look into other aspects of risk management like insurance.
As financial planners, it is essential for us to determine if our clients are adequately covered through their insurance policies, from home and auto to life and disability insurance. Most of our clients utilize their employers for insurance and through all of the options provided, it could be difficult to make sure that you're selecting the right plans for you and your family. We have written a blog to provide context to help when selecting insurance during your benefit enrollment period. If you and your partner are self-employed and looking for insurance options, we took care of that too! Now life insurance is another complicated topic that we broke down in detail here with 3 Questions to Ask Yourself Before Buying Life Insurance.
We think of investments as your long-term savings for your retirement, children’s education, or even a large purchase! If you're saving for retirement, you may have accounts like an IRA or a 401(k) or 403(b) through your employer. These contributions will increase your chances of a successful retirement and our job is to plan on how we can get you there! There are ways to save strategically like understanding how much to invest in your retirement accounts and which accounts to invest in. Most of the time, your retirement accounts will have you invested in a target date fund that chooses investments specifically for the year of your retirement and alters the investments each year as that date gets closer. They provide these generic funds as an easy way for an everyday investor to prepare for retirement, however, it is important to understand there are other alternatives. Through investment planning, we can help guide you through what you're investing in and provide you with options on alternative investments that could better align with your goals and be made specifically for you!
If one of your goals is to save for your children’s education or overall future, there are investment vehicles for that specific purpose! Some of the accounts could include bank accounts or 529 plans and we have linked a blog here that provides the nitty-gritty details on which account would be best for your goals.
Tax planning 💰
Tax implications are something we need to consider in each step of your financial plan. Every decision from changing your retirement contributions to receiving a bonus could alter your tax projections for the year. As students in finance we learn that you can’t avoid paying your taxes, but you can have a decision on when those taxes will be paid and that’s where a financial planner comes in! To understand how to reduce your tax bill, we first need to understand how you’re being taxed and what you're being taxed for then we can make decisions to put you in a better financial position. Another consideration is how you file your taxes. Some couples may benefit more from a married filing separately than filing jointly and to find out if that includes you, read here. Taxes are a daunting topic, but the best way to approach it would be to simplify it as much as you can, then reach out to experts for advice.
Estate planning 👵🏻👴🏻
Estate planning is a vital part of your financial plan because it allows YOU to decide where the assets you’ve built through your lifetime should go when you inevitably pass. The main aspects of your estate plan should include who to delegate as beneficiaries of your accounts and establishing a will, a power of attorney, and a healthcare directive. We have written a blog about everything you need to know about estate planning, but the most important thing to note is that owning an estate plan will prevent your property from intestacy (dying without a will) and in these cases, the state will decide where your assets go instead of you. Don’t let this be the case, build an estate plan!
As our lives change, our financial plans should change with us. Life events like getting married, having children, or getting a new job can shift your plan so that's why it's important for your financial plan to be reviewed multiple times throughout the year to make sure you are on track with your goals. If the year gets too busy, you should absolutely revisit your plan at the end of the year to make adjustments and prepare yourself for the year ahead. If you need a place to start, we’ve created an end of year to-do list for your finances. Along with this list, we would recommend revisiting your cash flow plan several times a year to make sure it is as accurate as possible for your overall plan.
We get it. This is a TON of information and understanding all these different aspects of your financial plan can be difficult, but through the help of a financial planner, it can be made a little easier and made as strong as possible. 💪😃
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.