A comprehensive financial plan typically includes the following elements:
Having a firm handle on your finances is about far more than just having a budget. A comprehensive financial plan can help reduce financial stress, create peace of mind, and help you reach your financial goals.
A recent industry survey revealed that individuals with a financial plan in place are far more likely to feel financially stable. They’re also more likely to have many financial foundations in place, such as an emergency fund and no credit card debt.
Wondering how to get started? Keep reading to learn what comprehensive financial planning is, the components of a holistic financial plan, and how to create your financial plan today.
What is Comprehensive Financial Planning?
Comprehensive financial planning is the process of creating a detailed plan for your finances to help you take control of your situation and reach your short and long-term financial goals. Financial planning can be done either on your own or with a professional financial planner, but it’s something that everyone should do, regardless of how much money they have.
While you can make a financial plan for any area of your life, comprehensive financial planning takes a more holistic approach in which you address each area of your financial life and how they interact with one another. Having this big-picture plan for your finances can help reduce stress and anxiety around money while helping you to reach your goals.
Components of a Comprehensive Financial Plan
As we mentioned, it’s possible to create a financial plan for any area of your finances. But a comprehensive financial plan should touch on each part of your finances, and therefore requires quite a few components.
Assets
One of the most foundational steps of holistic financial planning is taking inventory of your financial statements, using a balance sheet and cash flow statement.
A balance sheet, also known as a net worth statement, gives a three-fold summary of your assets and liabilities. First are your assets — anything you own, both cash and physical items, that has financial value. Second is everything you owe, meaning your debts or liabilities.
Finally, your balance sheet will include your net worth, which is the difference between the assets and liabilities. Your balance sheet can also be useful in making sure you have appropriate savings for emergencies and other expenses.
A cash flow statement is a summary of your annual earnings and shows where your money goes. Your cash flow statement can help you ensure you’re living within your means and leaving enough room in your budget for your financial goals.
Get Started: Calculate Your Net Worth with Personal Capital’s Free Tracker
Debt Management
Another important component of a holistic financial plan is a debt management plan. Data from 2020 shows the average American has more than $92,000 of debt made up of credit cards, student loans, mortgages, auto loans, and more.
Your financial plan can include a step-by-step of how you’ll pay off your debt, depending on your financial situation. You might choose to use the debt snowball, where you tackle your debts with the lowest balances first. You might instead choose the debt avalanche, where you prioritize your debts by interest rate, starting with the highest.
Insurance Planning
Insurance isn’t exactly an exciting topic to talk about, but it’s one of the most important components of your comprehensive financial plan. After all, it’s the part of your plan that protects the money you work so hard to earn and manage.
Depending on your financial situation, there are a variety of types of insurance that you might have. Here are a few policies you may need:
- Health insurance to cover medical expenses for you and your family. Many employers offer health insurance, but you may also choose to purchase it privately or through the federal healthcare exchange.
- Auto insurance to protect you in case your car is damaged and to cover your liabilities if you cause an accident.
- Homeowners’ or renters’ insurance to protect your home and the personal belongings within it. It also covers your liabilities if someone is injured in your home.
- Disability insurance to replace your income in case you become disabled and aren’t able to work.
- Life insurance to ensure your family can continue to meet their needs in case you pass away. You may choose either a term or permanent policy.
Retirement Planning
Retirement is likely the largest financial goal that most of us will save for in our lifetimes, and so it deserves an important place in your comprehensive financial plan.
For many people, retirement planning starts with a 401(k) plan offered through their workplace. It may also include either a traditional or Roth individual retirement account (IRA) or a self-employed retirement plan such as a SIMPLE IRA, SEP IRA, or Solo 401(k).
In a holistic financial plan, you can lay out an investment strategy for your retirement savings. Many people use a target-date fund to save for retirement, but that’s far from the only option available.
If you aren’t sure how much you should be saving for retirement, you can use the Personal Capital Retirement Planner to get started.
Investment Planning
In addition to your retirement plan, your comprehensive financial plan will also include your investment management strategy. Many people choose to invest in a taxable brokerage account, either to help them save for other financial goals or to supplement their retirement accounts.
The investment planning component of your holistic financial plan should include information about your financial goals, your risk tolerance, your asset allocation, and more.
College Planning
If you have children, then college planning might be an important part of your holistic financial planning process. After all, college is becoming increasingly more expensive. Over the past 20 years, the cost of college has grown by an average of 6.8% each year, and today the cost of attending a four-year in-state university is more than $25,000 per year.
When it comes to saving for college, there are several tools available to you. A 529 college savings plan is one of the most popular tools to save for college, but people also turn to UGMA and UTMA accounts, taxable brokerage accounts, or even savings accounts.
Tax Management
Taxes are a fact of life that we all have to deal with, whether we like it or not. Each year, most of us pay a variety of different types of taxes, including income taxes, sales taxes, property taxes, and more.
A comprehensive financial plan includes a tax planning component to help you reduce your tax burden. It might include strategies to save money on taxes, such as taking advantage of tax-deferred retirement plans.
An effective tax management strategy ensures you have money left in your budget to put toward other financial goals.
Estate Planning
No one wants to think about their death, especially when it should be decades away. Nonetheless, estate planning is an important part of creating a comprehensive financial plan. As you approach your estate plan, consider two different questions:
- What do you want to happen to your assets when you die?
- How will you ensure your loved ones are taken care of after your death?
Many people assume they don’t need an estate plan if they don’t have many assets, but having a will and other end-of-life documents in place can help your loved ones avoid probate court and receive the assets you wish to leave for them.
Financial Goals
We’ve talked about some major financial goals already, such as planning for retirement or college. But any other financial goals you have should also have a place in your comprehensive financial plan. For example, if you’re saving for your dream home, be sure to include it in your plan. Be as specific as possible. You can lay out how much you need to save, how you’ll save it, the costs of homeownership once you buy the home, and more. It will be helpful to have a prioritized list of all of your goals.
How to Create a Comprehensive Financial Plan
Are you creating a comprehensive financial plan for yourself? Here’s how to get started in five steps.
1. Take Inventory
The most important first step to creating your comprehensive financial plan is figuring out where you are today. This is where you’ll compile your financial statements, the foundation upon which the rest of a holistic financial plan is built.
Start with your balance sheet. When listing your assets, make sure to include everything from your bank and investment accounts to physical items like your home. Then make a list of all of your debt. To calculate your net worth, subtract your liabilities from your assets.
Many people start their adult lives with a negative net worth (due to student loans) and eventually achieve a positive one. Whatever your net worth, it is simply a tool to measure your progress moving forward.
Another part of taking inventory is creating your cash flow statement. The simplest way to do this is to go through your bank and credit card statements for the past few months and record everywhere your money went. Make a list of each spending category, and determine your average spending during the target timeline.
By figuring our your current spending, you can see what might be holding you back and make changes to achieve your financial goals.
2. Set Financial Goals
In order to craft the rest of your financial plan, it is critical to determine your financial goals. Sit down with a piece of paper and write down all of your financial goals, big and small. It might span everything from going on a vacation to retiring with $1 million in the bank.
As you’re writing down your financial goals, remember to prioritize and know that some goals may require compromising to ensure others are reached. For example, you might have a dream to own a vacation home. Put it on the list, but know that you may have to eventually compromise to reach other goals like retiring on time.
3. Create a Strategy for Each Part of Your Finances
Once you’ve completed the foundational steps of taking inventory and setting financial goals, it’s time to really create your financial plan. Review each component (as discussed above) and make sure you have a strategy in place. Some steps, such as college savings, may not be relevant to you. But most of the components on the list should have a place in everyone’s holistic financial plan.
4. Be Intentional About Where Your Money is Going
It’s not enough to simply know where your money is going. Instead, you should decide where you want your money to go and make changes in your spending to stick to your new budget.
Creating a holistic financial plan is an important step, but it doesn’t mean anything if you don’t follow through. By being intentional about where your money is going, you can turn your financial plan into a reality.
Work your strategies for each component into your spending plan. Do you need to put money toward building an emergency fund? How much will you put toward saving for retirement or college? How much do you need to spend on insurance each month?
Once you’ve answered these important questions, you can craft a budget that accommodates each component of your financial plan, as well as sets spending goals for your monthly spending.
5. Enlist Help
If crafting your own financial plan sounds overwhelming, you aren’t alone. The good news is that you don’t have to tackle comprehensive financial planning yourself. You might decide to hire a financial professional to help.
A financial planner is a professional who offers financial products that help clients create their financial plans. Some planners might advise clients on a certain part of their financial plan, such as managing their investments. Others, however, specialize in helping clients to build their comprehensive plans.
Not sure which professional to trust? A Certified Financial Planner is a licensed professional trained to help clients craft their financial plans. The CFP designation is considered the gold standard in the field. Another rule of thumb that can help you find the right planner is to seek out someone who is a fiduciary, meaning they have a legal and ethical responsibility to act in your best interests.
Next Steps
A comprehensive financial plan is one of the most important tools in your financial toolbox. It lays out a strategy for each part of your financial life in a holistic way. It’s a key step in setting and reaching your financial goals. After the plan is created, it’s important to think about implementation of the plan, monitoring the plan and making adjustments, as needed, over time.
If you’re just getting started with your financial plan or want some free tools to help simplify the process, check out Personal Capital’s financial dashboard. It features a net worth calculator, cash flow planner, retirement planner, and more.
You can also get in touch with a financial advisor to learn more about our investment services to help you manage your investments and reach your financial goals, both big and small.
- Assessment of current financial situation, including income, expenses, assets and liabilities
- Goals and objectives, both short-term and long-term
- Budgeting and cash flow management
- Retirement planning
- Investment strategy, including asset allocation and diversification
- Risk management, including insurance needs analysis
- Estate planning, including wills and trusts
- Tax planning and strategy
- Debt management and repayment plan
- Ongoing monitoring and review to ensure plan stays on track.
The specific components of a financial plan may vary depending on the individual’s circumstances, but these elements form a comprehensive framework for managing one’s finances.
comprehensive financial plan
Sure, let me explain each element of a comprehensive financial plan in more detail:
- Assessment of current financial situation: This involves taking a detailed look at your current financial situation, including your income, expenses, assets, and liabilities. This provides a baseline to determine what changes need to be made to achieve your financial goals.
- Goals and objectives: This involves defining your short-term and long-term financial goals, such as paying off debt, saving for a down payment on a house, or planning for retirement.
- Budgeting and cash flow management: This involves creating a budget that helps you live within your means and manage your cash flow. It helps you allocate your resources effectively and prioritize your spending to meet your financial goals.
- Retirement planning: This involves estimating your future expenses and determining how much money you’ll need to save to have a comfortable retirement. This can also include decisions about when to start taking Social Security benefits and choosing the right types of retirement accounts.
- Investment strategy: This involves determining how to invest your money to achieve your financial goals. This can include a review of your current portfolio, developing an asset allocation strategy, and making recommendations for diversifying your investments.
- Risk management: This involves protecting your assets and income by assessing your risk tolerance and choosing insurance policies that meet your needs. This can include life insurance, disability insurance, and liability insurance.
- Estate planning: This involves planning for the transfer of your assets and property to your heirs after your death. This can include creating a will, setting up a trust, and determining how your assets will be distributed.
- Tax planning: This involves developing strategies to minimize your tax liability and make the most of your money. This can include determining the best type of investment accounts for your goals and taking advantage of tax-deductible expenses.
- Debt management: This involves creating a plan to pay off debt, such as credit card balances or student loans. This can include developing a budget to live within your means and making extra payments to reduce the balance of your debt.
- Ongoing monitoring and review: This involves regularly reviewing your financial plan and making changes as needed to ensure that you’re on track to meet your financial goals. This can include tracking your progress, reviewing your investments, and making adjustments as your circumstances change.Sure, let me explain each element of a comprehensive financial plan in more detail:
- Assessment of current financial situation: This involves taking a detailed look at your current financial situation, including your income, expenses, assets, and liabilities. This provides a baseline to determine what changes need to be made to achieve your financial goals.
- Goals and objectives: This involves defining your short-term and long-term financial goals, such as paying off debt, saving for a down payment on a house, or planning for retirement.
- Budgeting and cash flow management: This involves creating a budget that helps you live within your means and manage your cash flow. It helps you allocate your resources effectively and prioritize your spending to meet your financial goals.
- Retirement planning: This involves estimating your future expenses and determining how much money you’ll need to save to have a comfortable retirement. This can also include decisions about when to start taking Social Security benefits and choosing the right types of retirement accounts.
- Investment strategy: This how to invest your money to achieve your financial goals. This can include a review of your current portfolio, developing an asset allocation strategy, and making recommendations for diversifying your investments.
- Risk management: This involves protecting your assets and income by assessing your risk tolerance and choosing insurance policies that meet your needs. This can include life insurance, disability insurance, and liability insurance.
- Estate planning: This involves planning for the transfer of your assets and property to your heirs after your death. This can include creating a will, setting up a trust, and determining how your assets will be distributed.
- Tax planning: This involves developing strategies to minimize your tax liability and make the most of your money. This can include determining the best type of investment accounts for your goals and taking advantage of tax-deductible expenses.
- Debt management: This involves creating a plan to pay off debt, such as credit card balances or student loans. This can include developing a budget to live within your means and making extra payments to reduce the balance of your debt.
- Ongoing monitoring and review: This involves regularly reviewing your financial plan and making changes as needed to ensure that you’re on track to meet your financial goals. This can include tracking your progress, reviewing your investments, and making adjustments as your circumstances change.