During college, you probably followed your college’s catalog which identified which classes to take in order to attain your goal – your degree. Unfortunately, life doesn’t come with a catalog to show you how to live. There’s not even one for your career path – unless you intend to stay with one employer for the rest of your life.
A lot of your choices have multiple consequences but there’s no manual to help you move forward. Or is there? That’s really what a financial plan intends to do. Back in college your goal was your degree. Well in life, your goal or end result is really the lifestyle you envision. Of course, life is life and things change. But during those changes, you adjust your financial plan – no different than following a different section in a college catalog when you changed your major.
When developing your financial plan, the question you’ll be asked is, “What are your financial goals?” Said another way, how do you envision your life?
Do you want to take a 1-year sabbatical from work every 10 years?
Do you want to own multiple homes in multiple countries?
Do you want to return to school and study organic farming?
Do you want a graduate degree?
Do you eventually want to live in an upscale retirement community?
Do you want to own a 100-acre farm and have 5 dogs?
What is it Y-O-U want out of life?
No one can make this decision other than you — and if you have a spouse/partner, it’s a good idea to include them in the conversation.
Once you decide what your lifestyle will look like, this lifestyle becomes the basis for your financial goals. A financial plan will estimate how much you need for each goal. Three key components of a financial plan will include the following (there are many other components of a financial plan but these are in every financial plan).
1- Net Worth
Think of net worth as your scorecard to see how you are doing from year to year. It’s a snapshot of your financial health at one point in time. If you’re familiar with business finance, it’s your balance sheet. Make it a point to look at your net worth at least once a year to make sure you’re on track to living the lifestyle you envision. Pick a day of the year to review this information – whether that’s year-end, when you prepare your tax documents, or even your birthday. Pick a date that makes sense to you.
2- Lifestyle Spending (a.k.a. cash flow)
Lifestyle spending or cash flow is money-in versus money-out. The goal is to have money-in exceed money-out. Easy concept but can be difficult to implement if you don’t have control of your daily finances. Lifestyle spending will show you how you spend your money, including how much you’re allocating to saving for your future lifestyle.
3- Saving Strategies
This section will address each of your financial goals and suggest ways to save for them. Saving for your goals is based on your timeline for reaching each goal. Your goals can be short-term (within 1 to 3 years), mid-term (4 go 9 years) or long-term (10+ years). Some financial planning firms may title this section based on your financial goal such as “retirement planning” or “college planning” –the content is more important than the title.
Yes, you can continue living your life without a financial plan. But will you achieve the lifestyle you want for yourself … for your spouse/partner … for your family? Contact me if you’re ready to move forward and develop a financial plan.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Her firm bridges the gap between financial planning and coaching. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, she offers consulting services in three areas: financial review, life strategy and professional progression. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant and as a financial adviser. Her services include spending plan, financial plan, divorce financial review, life strategy and professional progression. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me’.”