Anatomy of a financial plan: Key components of financial planning

A strong plan involves every financial component of your life, including short- and long-term goals.

Tags: Planning
Published: June 19, 2019

You may think you need a certain amount of money to justify a formal financial plan. However, a written plan can help you take control of your money and work toward your financial goals no matter where you are in life.

Review these elements of a financial plan and how they may change for short- and long-term goals.

Anatomy of a financial plan
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Short-term planning

Long-term planning

 

6 months to a few years

More than a few years

Budgeting

Track and categorize your monthly expenses. Adjust your spending as needed, and plan ways to pay down high-interest debt, such as credit cards.

Revisit your budget when you have significant changes in your life, such as a job change, marriage or divorce. You might also design a budget for your retirement years in advance.

Saving

List your short-term goals, such as paying for a wedding or purchasing a house, and include how much money you will need.

List your long-term goals, such as retiring comfortably or paying for your child’s education. Online calculators can help you estimate the savings you will need.

Investing

Aim to take advantage of compounding interest as much as possible. Participate in a retirement account, such as a 401(k) or IRA.

Identify your risk tolerance and outline an investment strategy for your portfolio. Consider working with a financial professional.

 

Charitable giving

Identify any causes you would like to financially support. Short-term goals might include a donation to a new cause.

Think about your philanthropy and legacy wishes, which could include goals such as setting up or donating to a foundation.

Estate planning

Work with an attorney to set up important documents, such as a will and power of attorney. Consider if you need additional insurance coverage, such as life or disability, and if you’re nearing retirement, long-term care.

Revisit your estate plan regularly, especially after major life events, such as the birth of a child. Consider working with a financial and legal professional to ensure you have the right documents in place to carry out your wishes.

 

Let’s take a closer look at how these components of a comprehensive financial plan might look. Consider a woman in her late 20s who just received a big boost in her career through a new job and moved in with her long-term partner. Working with a financial professional can help her identify, prioritize and pursue the goals that matter most to her.

 

Financial Plan:

  • Budgeting:

    • Short-term goal:

      • Reevaluate her budget for her new living situation and figure out how she and her partner will split expenses.

    • Long-term goal:

      • Outline how she and her partner would combine their finances if they married.

  • Investing:

    • Short-term goal:

      • Figure out what to do with the retirement account from her previous employer and allocate extra funds from her pay increase to max out contributions to her new 401(k).

    • Long-term goal:

      • Work with a financial professional to develop a diverse investment portfolio that could include brokerage accounts, a health savings account (HSA) or traditional and Roth IRAs.

  • Saving:

    • Short-term goal:

      • Put money away for the European vacation she and her partner have been talking about taking.

    • Long-term goal:

      • Save for a 10% down payment on a home.

  • Charitable giving:

    • Short-term goal:

      • Donate to animal rescue nonprofits, selecting organizations that match her values and budgeting how much she can contribute.

    • Long-term goal:

      • Set up a private foundation devoted to the rescue and placement of animals in caring homes.

  • Estate planning:

    • Short-term goal:

      • Review beneficiaries on her retirement accounts and insurance policies, especially because she has new accounts through her job, and create a will.

    • Long-term goal:

      • Work with financial and legal professionals who could help her fully develop her estate plan, including designating a healthcare and property power of attorney.

         

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When it comes to creating a financial plan, you don’t have to go it alone. Learn about a goals-focused approach to financial planning.