Every good achievement in life requires effective planning and extra work towards achieving that specific goal or aim. The financial sector is also involved in this phenomenon of life. In order to achieve any goal or aim relating to our finances, we need to have an efficient plan on how to go about the whole process.
A good financial plan will contain key details of all your finances. Are you trying to create a financial plan but you don’t know how to go about it? This article will highlight everything we need to know about an efficient financial plan and the key components of financial planning in order to enable you to achieve your financial goals.
The finance quote “when money realizes that it is in good hands, it wants to stay and multiply in those hands” is talking directly about proper managing of money and our finances in general. In order to be able to achieve both financial freedom and independence, we have to create an efficient financial plan and adhere strictly to it.
What Is A Financial Plan?
A financial plan is a document that has the sole purpose of serving as a guide for your money in order to enable you to achieve your goals. The financial document is comprehensive and gives a present evaluation of your financial state, it contains your long-term financial goals and specific strategies that will be employed towards achieving the set goals.
You can create your own financial plan or ask for assistance from a professional financial planner. Before starting to draft your financial plan there are certainly key components of financial planning that you must put into consideration. An efficient financial plan will enable you to better navigate through unforeseen financial roadblocks.
What Is Financial Planning?
The process of financial planning involves the management of our finances and determining a long-term plan for finances while trying to implement a proactive approach to any financial obstacle.
An appropriate financial plan will completely remove any worry you might have
about money, your financial assets, and your financial needs and goals. With Financial planning, we can never be caught unawares with anything relating to finance because it would have employed efficient tools to enable you to save and invest money for the future, especially during retirement or emergencies.
Financial planning considers the future needs of a business or project in the terms of efficient financial administration, resources for funds generation, and investments.
What are the key objectives of a financial plan?
A financial plan should have objectives that it focuses on in all it does. The
main objectives of a financial plan are
1. Estimating capital
The initial objective of a financial plan is to estimate the capital required to kick off a project or business. Estimation of capital requirement has to be researched in two ways which are the long term and short-term requirement. The capital requirements are dependent on the cost of current and fixed assets, operational expenses, and long-term planning.
2. Creating an efficient financial policy
A key objective of a financial plan is to create efficient financial policies that
guide the movement of cash. An efficient financial policy will prevent the generation of unnecessary funds hence ensuring the maximization of finance. it will also guide you or your company in making decisions that is fundamental to the growth of your finances.
3. Risk management
A financial plan is able to identify risks or potential financial roadblocks that you might face in the future hence offering a remedy to the situation early. A financial plan serves as a counter strategist for risks in order to ensure the smooth completion of the project or financial goal.
What Is The Importance Of A Financial Plan?
There is a popular misconception that a financial plan is meant only for the wealthy and businessmen embarking on new projects. The financial plan or process of financial planning can be employed by anyone from the poor, middle class, and the rich. Everyone needs an efficient way of managing their finance and achieving their financial goals.
Below is the importance of employing an efficient financial plan with key components:
What Are The Key Components Of A Financial Plan?
Are you trying to create an efficient financial plan? Creating a financial plan for the first time can seem as a difficult task but when you understand the key components of financial planning, it’s quite an easy process.
Financial plans don’t have a general layout with each plan being tailored to your goals and objectives, despite having different formats they mostly focus on the same objectives. The key components of a financial plan are various features that should be considered in drafting our financial plan in order to ensure achieving set goals. They include;
1. Income statement
The income statement is also known as the profit and loss statement. This is a key component of a financial plan. It summarizes all the expenses, costs and revenue from a specific period of time. It is one of the most important components of financial planning as it shows how much profit or loss you are making either personally or in a company. The income statement can be prepared using the cash or accrual method.
2. Net worth statement
Every financial plan needs a reference point, your net worth statement should serve as your reference point. The net worth statement is a financial plan component that contains your net worth which is a list of all your assets I.e., all valuable properties, investments and bank accounts and your liabilities which are your mortgage, credit card, student loans and outstanding debts. The net worth statement is basically the minus of your assets from your liabilities.
This enables you to know how much exactly you have and plan forward using those figures.
3. Budget planning
The key to successful financial planning is appropriate budgeting. Spending on unnecessary goods only deplete your finances, an appropriate budget plan will enable you spend smartly on only things of importance.
Budgeting enables you to set a goal and move towards the goal. Budgeting is of importance in monitoring cash inflow in an organization or personally. A cash budget is employed by companies to determine if they can continue operating in a specific period of time. It gives a general overview of all cash inflow and outflow in an organization over a specific period of time.
4. Risk management plan
Every positive leap involves taking a risk. Creating a financial plan without
trying to mitigate future risks and emergencies is just like a problem bidding its time before striking.
Risk management is the process of analyzing an investment or financial decision and working towards mitigating the probability of a loss or at least reducing the impact.
Inadequate knowledge of risk management can lead to a huge financial consequence to businesses and individuals when investing. When making a financial plan it is advisable to have an in-depth knowledge of risk management especially if you employ financial investment planning. The risk management plan is one of the most important key components of financial planning.
5. Retirement and special funds plan
Drew Carey is known for saying “As far as your personal goal are and what you actually want to do with your life, it should never have to do with the government. You should never depend on the government for your retirement, for your financial security. If you do, you’re screwed.”
This reminds us of the importance of having a retirement plan or a special funds plan for our financial security. A retirement plan is a multi-step plan that is needed in order to have a comfortable retirement. Retirement planning requires early planing in order to attain your retirement goals.
Having this key component in your financial planning removes any dependency on government aids like Medicare as you’re financially stable and able to be comfortable without the aid of the government.
Frequently asked questions
A financial plan is meant to help you plan and organize your finances in order to achieve both short term and long-term goals.
You have to first identify the aim and goal of the financial plan before calculating your net worth and Identifying unhealthy spending habits to be removed.
Yes, you can create your financial plan personally but if it seems too complex you can always enlist a professional business planner to help.
Every individual financial plan is tailored to fit the goal of an individual or organization but they are similar in containing budget plans and retirement plans.
An efficient financial plan will help you in securing financial security and keeping a good distance from falling in debt.
The various components of a financial plan help in efficient managing and controlling of our finances. The budgeting plan will help you prevent unnecessary spending while investing and securing your financial future. With a financial plan you can access where you are and where you want to be in the next few years. It gives us goals and strategies to use towards striving to achieve them.