Profit & Loss - February 2000

A Financial Plan: What’s in it for me?

While you can’t predict the future, you certainly can plan for it. And, the best way to ensure that you’ll be fiscally secure is to have in place a sound financial plan. A good plan provides an accurate snapshot of your current financial situation, focuses on your goals and estimates their costs, and then establishes strategies for meeting those goals. What goes into a plan depends on what you want to accomplish. However, a comprehensive plan prepared by a reputable financial planning professional, typically covers the broad spectrum of your finances.

Getting started

A good financial plan begins with a complete and accurate compilation of facts about your family’s financial life. You’ll need to gather basic documents such as insurance policies, income tax returns and retirement plans. You also will need to provide your planner with a clear picture of your income and expenses, the amount and types of investments and assets you hold, and a list of your debts.

In addition to this factual information, you will need to identify your goals. Do you want to purchase a home? Put your children through college? Start a business? Retire early?

Defining your priorities and being forthcoming about what you want out of life are critical to building a financial plan. To ensure the development of a plan that reflects your personal qualities and is in alignment with your values, you also need to share with your financial planner the level of your financial knowledge and expertise, your general attitude toward money and your tolerance of risk. A good financial plan takes into consideration general economic conditions, tax laws and the current investment climate.

Financial plan components

In addition to providing a means for you to clarify your financial position and identify your goals, a financial plan recommends specific strategies aimed at achieving your highest priorities.

Net worth: Before you can begin to plan your financial future, you must take stock of where you are now. Most financial plans begin with a personal balance sheet, which is a statement showing your assets — the value of what you own, minus your liabilities and debts. This statement offers a snapshot of your net worth, and serves as the foundation for your financial plan.

Cash flow analysis: The cash flow statement included in your financial plan reflects your income flow and shows, for better or worse, how you’re actually earning and spending your money. From this statement, you can work, either on your own or with your financial planner, to devise a budget that will help you set spending parameters that are in line with your financial goals.

Investment planning: Your financial plan can outline how much capital you need to accumulate to meet certain long-term goals, such as paying for college or providing a secure retirement. A plan may also recommend an asset allocation strategy that reflects your current financial situation, your objectives, your age and your risk tolerance, as well as the current economic environment. Based on that asset allocation, a well-conceived financial plan provides recommendations for assembling a balanced and diversified portfolio of investments.

Insurance needs: A key part of your financial plan calls for protecting your assets by determining whether you are properly insured against sickness, disability, and death, and whether you, your family and your property are well protected against damage, injury, and law suits. In recommending the types and amounts of insurance coverage you need, your financial plan takes into account lifestyle, objectives, number of dependents and other sources of income.

Tax planning: Minimizing taxes is a primary goal of most financial plans. A systematic plan that evaluates the tax implications of your situation and provides strategies for minimizing your federal, state and estate tax liability is critical to your financial success. Deferring tax liability, maximizing the use of income adjustments and deductions, shifting income and utilizing tax-favored investment instruments are some of the strategies your financial planner might recommend.

Estate planning: Last, but certainly not least, a thorough financial plan outlines a strategy for protecting your assets for your heirs. In addition to a review of your will, your financial plan might include a comprehensive plan involving gifts, trusts, and other strategies for transferring wealth to your children, your favorite charities, and other beneficiaries.

Ultimately, a good financial plan must be clear, concise and doable. A financial plan is of little use until and unless it is implemented. And once implemented, it is important to review your plan regularly, and have it updated whenever there is a change in your personal circumstances.

Prepared by the Nevada Society of Certified Public Accountants