What are the key components of a financial plan?

A sound financial plan can keep you on track for the long term. Even when the road gets a little bumpy

By Kelly+Partners Team  |  30 May 2022

It’s always surprising that when you mention financial planning, many people just assume you’re talking about their superannuation and retirement. While planning for your retirement is certainly something we should all be thinking about, creating a good financial plan takes a little more time and has a few more moving parts. It’s also something you should be considering well before you reach retirement age.

So what are the key components of a financial plan, what sorts of things should you include and how do you even go about putting one in place.

That’s a great question.

What is a financial plan?

A financial plan is a document setting out your financial situation. It covers your current financial situation, your financial goals and everything in between. Most importantly, it sets out the strategy you plan to use to get from where you are today to where you want to be tomorrow. Or even further into the future. 

A financial plan isn’t something you create, put away in a drawer and forget about. It’s a living breathing entity and should be regularly updated. A well drafted financial plan can help you make the most out of your assets and allows you to strategically create and build wealth.

Once considered the domain of the wealthy, a financial plan is a crucial tool for anyone with an estate (yes you do have an estate and here’s why) who wants to make the best use of their assets. 

Financial goal setting

The first thing you, or your financial planner, need to do is have a very thorough look at your current financial situation. All money coming in and all money flowing back out (your cash flow) needs to be documented and accounted for. This may prompt you to do some financial spring cleaning. Or you might find you do have a few extra dollars a month to top up your superannuation account, taking advantage of those tax breaks. 

You then need to figure out what your financial goals are. Do you want to retire with a substantial superannuation fund? Do you want to invest in property now, then retire on the rental income you receive from those property/s? Maybe you dream of travelling the world in five years’ time.

Financial goal setting isn’t only about saving for your retirement. It’s planning so you can do the things you want to do in life.

What are your priorities? 

At the root of every successful financial plan is a clear understanding of your financial goals. There may be one or two, there may be many more. Short term, long term and those somewhere in the middle. Once you have these down on paper, you can establish your priorities.

Are you saving to buy an investment property? Do you wish to be debt free within X amount of years? Does retiring at the tender age of 55 seem like paradise for you?

Everyone is different and we all have different priorities. There are no real right or wrong answers, just what’s important and meaningful to you.

Cash flow and redirecting funds

Once you or your financial planner has looked at your finances, you can work out your cash flow. You can see if you’re wasting money, where you’re not fully utilising your funds and how you can make your money work better and harder for you. You may be able to redirect funds to repay a loan or debt faster, saving on interest. Or put a bit extra away in savings to build up an all important financial buffer when things get tough (like a global pandemic).

This may involve a few simple tweaks or it may be an entire financial overhaul.

Debt management 

While paying down debt is a good thing, not all debt is bad. Good debt is the kind of debt you use to buy assets that will increase in value or earn you money. A mortgage is good debt because your home will increase in value. A credit card used to buy dinners, clothes and weekends away is bad debt. This is the kind of debt you want to minimise or erase entirely. 

Emergency Funds

It’s always a good idea to have some money put away for a rainy day. Most financial planners will suggest you should have enough money tucked away to support yourself for anywhere between six and twelve months.

Risk Management

Risk management involves looking at your life and deciding where your greatest risks lie. Simple things like having your home and car insured should be no-brainers. But how would you cope financially if you couldn’t work for an extended period of time?

Investment Strategy

Depending on your goals, appetite for risk and how long you have to go before retirement, your approach to how you invest your money will differ. For some people, it will be important to ensure they have good intergenerational wealth strategies in place, for others you might like to ensure you only invest in ethical and sustainable businesses. A financial planner will work with you to create an investment mix that is right for your individual circumstances.

Is it too late for me to set up a financial plan?

It’s never too late to start financial planning. Of course, the ideal is you start planning the moment you start working but, when you’re young, thinking about 70 year old you may not be at the top of your to-do list. 

This is by no means an exhaustive list of key components of financial planning. Because everyone is different. But it should give you a good place to start planning to be better off. 

Whatever stage or time of life you start thinking about the future, it’s a great idea to talk to a professional financial planner. They can advise on investments and opportunities you might never consider or perhaps, aren’t even aware exist. They can also assist with other aspects of financial planning such as estate planning, intergenerational estate planning and even  financial planning for your family business

 

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