How to Organize a Financial Plan
Through an effective financial plan, it is possible to improve your standard of living and even create independent wealth over the long term. Organizing a financial plan, however, can be an overwhelming task because of the infinite amount of investment and banking products that are available. To begin plotting out your financial plan, you must first list out important life goals that will serve as motivation. From there, you can make informed investment decisions that weigh financial risks versus potential rewards.
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Instructions
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Prioritize your financial goals. Common financial goals include saving money for a mortgage down payment, tuition bill or retirement lifestyle. For a good financial plan, you should articulate your goals in detail. Perhaps you will need $2 million to retire to a Florida Keys condominium in 25 years.
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Review your recent bank statements and subtract monthly expenses from monthly income to calculate cash flow available to strengthen your finances. After this exercise, you may find that some expenses can be eliminated to improve your cash flow.
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Take inventory of your current assets, debt and insurance policies. As a foundation, you should look to build six months worth of living expenses in cash, alongside life and health insurance coverage to provide relief amid emergency situations. From there, you should direct cash flow to pay down expensive credit card debt to minimal levels.
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Toggle through investment projections--with the help of an online financial calculator. The financial calculator will help you figure out the amount of money that should be invested at a certain return to arrive at a lump sum of cash in the future.
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Differentiate between retirement and taxable accounts. Retirement plans, such as 401(k) and IRA accounts, offer tax breaks for long-term investors. In exchange for tax breaks, you generally cannot withdraw retirement account money until after age 59½. Taxable accounts allow for greater flexibility, but you will be responsible for paying taxes on realized capital gains and investment income as they occur. To combine tax efficiency and flexibility, you will put money into retirement and taxable accounts. If available, you should be certain to take advantage of the 401(k) match. With 401(k) matching funds, your employer also puts money into the account on a dollar-for-dollar basis with your contributions.
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Classify prospective investments according to risks versus rewards. Equity investments, such as common stocks, carry ownership rights over an underlying business. Stocks are volatile because share prices track business profits that can fluctuate between zero and infinity. Credit securities, such as bonds, are low-risk and low-return investments. As a creditor, you collect interest payments on loan principal.
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Create a diversified portfolio according to time frame. As a young professional, you should maintain a heavy exposure to stocks because of their long-term growth potential. When you age and retirement nears, you may add more bonds to the mix. As a smaller investor, the SEC recommends that you purchase mutual funds for professional money management and automatic diversification.
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