What Is A Financial Plan Used For?

We all know we should have savings.

But when it comes down to actually doing it, Americans tend to fall into 2 camps: planners and non-planners.

Planners usually know what they’re saving for, how much they need to sock away, and how long it will take them to realize their goals.

Non-planners, on the other hand, save when they can, maybe by making small contributions to a workplace retirement plan in the hope that everything will work out in the long run.

If the second type sounds more like you, you’re not alone: A quarter of American taxpayers (23 percent) don’t have a financial plan, according to a 2021 AICPA Survey.

With our busy lifestyles, planning for anything more than a few months or years in advance can seem daunting. It’s natural to wonder: What is a financial plan used for?

Here are a few purposes of a financial plan:

1. Boost Your Savings

A financial plan gives you a good understanding and insight into your income and expenses.

When you know where your money is going, you’ll be able to frame a concrete plan that will let you save more.

Cutting down your expenses will automatically boost your savings in the long run.

2. Improve Your Standard of Living

Investing for the future without compromising on the standard of living is every investor’s ultimate goal.

It’s a common misconception that you have to lower your standard of living if you’re trying to make better financial decisions.

With a good financial plan under your sleeves, you’ll be able to pay monthly bills and other expenses while living in relative comfort.

3. Helping You Prepare for Emergencies 

Having a financial plan is a good way to be prepared for any unforeseen situation.

An emergency fund will help you to procure funds in case of a job loss or family crisis.

For most Americans, the goal is to have 3-6 months’ worth of daily living expenses stashed away in an accessible account. This way, you’ll not have to worry about dipping into your savings when an unexpected expense comes knocking or when your financial situation radically changes overnight.

The emergency corpus will help you handle unforeseen expenses on time and with much less anxiety.

4. Creating an Investment Portfolio

A financial plan can help you understand your goals and objectives, how much time you have to accomplish them, and how comfortable you are with risk.

With a comprehensive view, it’ll be easier to figure out how to reach every individual goal. These goals can include investing, which is the process of buying assets that grow in value over time and provide returns.

Whether you choose your investments yourself or use a wealth manager, with your financial plan as a guide, you’ll be able to evaluate new investments and make informed investing decisions.

Instead of jumping in impulsively with no sense of direction and just praying for the best, you will pick the right investments based on your income capacity, risk profile, and long-term goals.

5. Risk Management

If you can no longer work, you’ll have difficulty paying your mortgage.

If you die prematurely, you’ll no longer be able to provide for your family.

A financial plan analyzes the risk of such events and the impact they could have on you or your loved ones.

Then it offers viable solutions (such as insurance and estate planning) that ensure that you and your family members can maintain the same standard of living with reduced or no income.

6. Managing Debt Effectively

We take loans to finance things such as cars, homes, and college education.

Without proper planning, these liabilities might turn into debt traps and seriously damage your financial health.

Thus, a financial plan is essential to ensuring you don’t end up in a financial crisis.

Eliminating high-interest debt will allow you to focus on other important financial targets.

7. Building a Roadmap to Retirement

Social Security is unlikely to provide you with enough income to live on after you stop working.

With a financial plan, you can calculate your expected income from all sources, then look at your current and projected expenses to see whether you’ll have enough money to retire comfortably.

A financial plan will tell you how much you need to save for a carefree, relaxed retirement.

More and more younger people are looking to join the FIRE movement. If you’re looking to join the bandwagon, a financial plan will help you reduce your expenses, increase your savings and boost your investments so you can start enjoying post-retirement life in your 30s or 40s instead of 60s or 70s.

Conclusion

A financial plan is basically a description of your goals and the tools and strategies you need to achieve them.

Writing a financial plan may sound like another chore, but if you want to be successful, it’s the foundation on which to recognize, build, and accomplish your goals.

Wherever you are in your financial journey, having a written financial plan can improve confidence and result in more constructive financial behavior.

How to Get Started

Households that work with a financial advisor who takes a holistic look at their needs are more likely to make better overall financial decisions than those without.

We can help you cut through the clutter by having a thorough understanding of your situation and creating a customized financial plan that works for your unique goals.

WWM Financial is an SEC Registered Investment Advisor

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

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