When you discuss the importance of comprehensive financial planning, most people react in one of two ways: They dread the topic and run for the hills, or they get super excited about it. I definitely have the latter reaction — but as a Certified Financial Planner, or CFP®, what else would you expect?
To help those who would rather run screaming, here’s a step-by-step guide to creating a financial plan. But don’t be overwhelmed by these steps. Some of them are very simple and they don’t all have to be done at once. Nor do you have to do it alone. So, sit down, get comfortable, and let’s tackle this topic.
Understanding the basics of financial planning
What is financial planning? At its most basic form, a financial plan is simply an outlined strategy of how you will reach your financial goals. This includes both short- and long-term goals, and the outline can be as simple or as complex as you want or need.
For example, you could write on a napkin your plan to save $100 per month to reach your goal of saving $6,000 for a Hawaiian vacation in five years. Congratulations, you’ve just created a financial plan. It’s specific to your one goal to save for a Hawaiian vacation, but it’s a plan. Today, however, we’ll look at comprehensive financial planning, which touches all aspects of your financial life, not just one goal.
According to French writer Antoine de Saint-Exupery, “A goal without a plan is just a wish.” The same can be said for creating a financial plan. Without a plan for how to achieve your goals, you can easily miss the mark and find yourself looking back on missed opportunities.
Assessing your current financial situation
Begin by gathering your financial information — bank statements, investments, mortgage documents, life insurance documents, credit card statements and things like that.
Building the components of your financial plan
Once you have all your documents together, you’re ready to start building the components of your financial plan.
Budget or spending plan
First, analyze your income and expenses and develop a budget. If you already have one, that’s great. Think of this as an opportunity to see if you’re living within your budget. If you don’t have one, now is the time to create it.
One good idea for an initial budget is a 20/50/30 budget:
- 20% for savings and debt repayment
- 50% for needs
- 30% for wants
You can adjust from there, but keep in mind that the goal of any budget is to spend less than you earn. If you’re spending more than you earn, you will be constantly going into debt and it will be next to impossible to reach your financial goals. You can learn more about budgeting by visiting USAA’s How to Budget page.
Insurance considerations
Protecting your life, loved ones and possessions is the foundation of your financial plan. Protection through insurance is important because it’s a risk reducer. It reduces the risk of devastating financial hits due to unforeseen events.
Here’s an example. Let’s say you are doing a great job of paying down debt but get into a wreck without auto insurance. The cost to repair your vehicle or that of the other driver could easily undo any financial progress you’ve made. It could even set you back further than when you first started.
The same logic applies to life insurance, but on a bigger scale. If progress towards your financial goals would be hindered by the loss of a spouse, that’s a good reason to have life insurance. That’s why I have life insurance. My family depends on my income, so I want to make sure they don’t find themselves struggling financially if I die before we achieve our goals.
Here’s a list of types of insurance that are important to revisit and analyze as part of a financial plan:
One quick note on health insurance: While you can purchase an individual policy on the insurance marketplace, you might find more value with a plan provided and subsidized by your employer. That’s especially true for military members who have access to TRICARE.
If you are a small business owner, insurance is also very important. Check out these 6 reasons insurance is important for small businesses.
Debt management
The next consideration is debt management. Debt can be crippling and extremely stressful. Have a plan to pay down debt and avoiding going into further debt. Strategies and tips on paying down debt can be found on USAA’s How to Pay Down Debt page.
Emergency fund planning
Next, focus on having an emergency fund. Ideally, that means you have enough money saved to cover three to six months of your living expenses. Don’t get discouraged if you don’t have that much saved. Also, don’t let it overwhelm you if that amount feels like a large sum of money. Set an initial goal of $1,000 and then work towards your three- to six-month goal little by little.
In fact, the initial goal of a $1,000 emergency fund should be a higher priority than even paying extra towards debt. Try paying the minimum payment required on your debt until you’ve saved $1,000. Then you can continue your debt paydown plan. If you don’t have at least a small emergency fund and an emergency arises, you’ll simply go further into debt — and that’s what we’re trying to avoid.
Retirement planning
Retirement may seem far off, especially if you are just starting out. Maybe you’re at your first job or you’ve just joined the military. But that’s the perfect time to begin saving for retirement.
So, where do you start your retirement planning? Ideally, you begin by envisioning the type of retirement you want. That becomes your goal. Then calculate how much money it will take to accomplish that goal and save for it over the years. The reason you start with a goal is because it takes more money to travel the world in first class each year in retirement than to sit on your front porch and watch the grandchildren. Plan for the life you want to live.
For most of us, that’s almost impossible to do. When I was 20 or 25, I didn’t know what I wanted my retirement to look like and you might not either. That’s why USAA gives an initial rule of thumb of saving at least 10% of your paycheck for retirement. Start there and then you can adjust the amount over time.
One of the easiest ways to save for retirement is through an employer retirement plan, especially if they provide a matching contribution. That’s free money you don’t want to leave on the table. That’s the case with military members under the Blended Retirement System when they become eligible for a match of up to 5% of basic pay.
If you’re just starting out, check out our guide for saving for retirement while time is on your side. Maybe you’re nearing retirement and want to make some adjustments to be sure you’ll arrive at your destination as you intend. Check out some ways you can finish strong in the retirement homestretch.
Finally, part of retirement planning is deciding what type of account or accounts will help you achieve your goals. Your decision is based on what’s available to you. This list might include 401(k), 403(b), Thrift Savings Plan (TSP), or a Roth IRA versus a traditional IRA. Unsure which one is best for you? Check out these two articles that can help guide your decision:
And remember that your goal can also dictate what type of account you use. Here are two examples we all might face.
If I’m saving for a vacation in 12 months, I would not want to put that money into an investment account that has a potential for loss. With that short timeframe, that money belongs in a savings account. I might even consider a CD.
On the flip side, if I’m saving for retirement, which is 40 years away, parking my retirement savings into a savings account might be a bad idea. I probably won’t earn a return that outpaces inflation, which is why I’d lean more towards investing that money.
Calculate net worth
Now, do a simple calculation of your net worth by subtracting your liabilities from your assets.
Here’s a simple net worth calculation: If you have $1,000 in checking, $1,000 in savings, a car that is worth $5,000 and owe $750 on your credit card, you have a net worth of $6,250. The value of your checking account, savings account, and the car are your assets, and the credit card debt is your liability.
Net Worth = $1,000 + $1,000 + $5,000 - $750
Net worth is important to calculate for a few reasons. You can track it over time to see if it increases, which is proof your efforts are successful. You also can see how much risk you might be exposed to as USAA believes you should protect your net worth with umbrella insurance.
Creating a timeline and milestones
Divide the goals you’ve identified into short-term and long-term goals. But no matter how far off the goal is, set realistic milestones.
If I plan to save $50,000 for a down payment on a home I plan to buy in 12 months, but I only have $100 left over each paycheck after expenses, I’m not going to reach that goal. It’s unrealistic. Don’t set yourself up for failure by giving yourself an unrealistic timeframe to achieve your goals.
Implementing and adapting your financial plan
Once you’ve developed your financial plan, it’s time for the hard part: Living by it. I can plan to lose weight, but it’s hard to say no to donuts. They’re so delicious, and it’s so tempting to forget my weight loss plan and just enjoy the moment.
The same logic applies when it comes to managing money. Once you’ve prioritized cash flow to achieve your goals, it needs to stay that way unless a higher priority arises that would cause you to adjust.
We recommend reviewing your plan annually or when major life events occur, like having a baby, getting married or divorced, or changing jobs. These occasions often come with changes in income or living expenses, which might mean you need to adjust your plan.
A change in goals is another reason to revisit your financial plan. If your retirement plans change, revisit your plan. If you change your mind and decide to pay for your children’s education, revisit your plan. If you hit snags in your ability to save for goals or your investments don’t perform as expected, revisit your plan.
Estate planning considerations
One of the final aspects of your comprehensive plan is estate planning. What happens with your stuff when you die, and is everything set up to pass to your heirs as you desire?
Estate planning can be as simple as having a will and appropriate powers of attorney, and ensuring your beneficiary designations are correct. Learn more about estate planning by exploring these 5 key pieces to an effective estate plan.
Keep in mind that your estate plan needs will grow as your assets do. While a will might be enough for someone who’s young with few assets, it might be insufficient for those with more complex financial situations, especially if there are multiple marriages or blended families involved.
Resources and tools for financial planning
One of the best tools for comprehensive financial planning is a qualified financial advisor. They put their experience to work for you, ask questions you might never have thought of and see gaps or risks you might not see. Also, they can help each time you need to revisit your plan based on life changes. As you think about working with financial advisors, check out these 5 questions you should ask your financial advisor.
Maybe you want to work alone and use financial planning software. Many of the big investment firms offer access to financial planning software to help with different portions of your financial plan. But the plan might not be comprehensive. Investment firms can typically provide some great resources to help with creating a retirement plan or saving for college.
I hope this has helped explain the basics of a comprehensive financial plan and helps guide you through the process. We really just scratched the surface. There are obviously more things that you can include in your plan. For example, your situation might require things like special needs trusts, bypass trusts or complex tax sheltering strategies.
But most people need to focus on the basics: Spend less than you earn, protect yourself with insurance, and have a plan to achieve your future goals, especially retirement. The key is to just get started and let your financial plan grow with you.