Key takeaways
- A comprehensive financial plan considers every aspect of your financial life.
- This includes investments, cash flow, insurance needs, debt management, taxes and more.
- By taking a holistic view of your finances, you can optimize your plan to give you the best chance of achieving your goals.
When you take your car in for a tune-up, you generally expect the mechanic to take a look at all of the car’s major systems—and you’d probably be pretty disappointed if all they did was check the tire pressure. After all, every component has a purpose that can help or hurt your car’s continued functioning.
Financial planning operates similarly. When you only focus on one area of your finances, you risk missing details that could ultimately keep you from reaching your goals. That’s why comprehensive planning is a vital approach to meeting your goals and maximizing your wealth.
What is comprehensive financial planning?
Comprehensive financial planning goes beyond planning for a single big financial event, like retirement, and also considers how each facet of your financial life can work together to help you achieve all your goals.
The process of creating a comprehensive financial plan involves determining your goals, gathering relevant information about your finances, creating the plan itself and then executing it and making tweaks as needed over time, says Alvina Lo, head of advice, planning and fiduciary services at BNY Wealth.
Core components of a comprehensive financial plan
Financial planning isn’t just about budgeting for your day-to-day expenses and allocating a portion of your paycheck to a 401(k).
“A comprehensive plan is really a full, 360-degree view of your financial life,” says Tara Thompson Popernik, CFP, CFA and executive vice president of wealth planning at LPL Financial. “It’s not just investing or budgeting, but it’s also retirement planning, insurance planning, estate planning, tax planning, education expense planning, etc.”
A comprehensive financial plan typically includes:
- Your goals: This is the “why” of your financial plan that will guide the decisions you make and the strategies you use. Your goals might include being able to retire early, becoming debt-free, purchasing a home or paying for your children’s college tuition.
- Investment strategy: Investing is typically the best way to reach your mid-term and long-term savings goals, so you’ll want to make sure your taxable and tax-advantaged investing accounts are optimized for your time horizon and risk tolerance. If you have a longer time horizon before you need your savings or a low risk tolerance, you might prefer to invest in safer assets like bonds. Assets with higher risk, like stocks, can come with better returns, but tend to be more appropriate for those with longer time horizons who have years to recover from potential losses due to market volatility.
- Retirement plan: In addition to ensuring that your retirement accounts are invested according to your goals, as you get closer to retirement, you’ll also need to have a tax-efficient strategy for spending those savings to ensure you have enough income to last the rest of your life.
- Cash flow management: A high net worth isn’t particularly useful if you don’t have the liquidity to cover your everyday expenses. Your financial plan should account for costs you have to pay in cash. This includes regular spending, such as monthly bills, as well as less frequent expenses that can sneak up on you, like taxes or home maintenance.
- Emergency savings: Everyone should have at least three to six months’ worth of living expenses saved in a liquid account that’s easily accessible on short notice, Thompson Popernik says.
- Debt management: If you have debt, your financial plan should include a strategy for paying it down that balances lowering your monthly debt payments with saving for the future.
- Insurance needs: Lo says insurance is often overlooked when making financial plans, but it can keep everything on track when the unexpected happens. Having sufficient homeowners insurance, for example, protects your investment in your home in case it’s damaged or destroyed in a natural disaster. Life insurance can also provide an important financial safety net for your loved ones after you die.
- Tax plan: Tax planning aims to help you keep more of your income and can guide your decision-making in other areas of your financial plan, such as retirement income planning.
- Estate plan: Estate planning is essential to ensure your assets are distributed according to your wishes. “If you don’t have a will or beneficiary designations on your accounts that direct where your assets will go, the state that you live in has a procedure for disposing of your assets and state law will dictate who it goes to,” Thompson Popernik says.
How to build a comprehensive financial plan
Find an advisor or determine your DIY process
Qualified financial advisors have the training needed to create comprehensive financial plans and the experience to ensure the plan actually works in practice. If you aren’t well-versed in financial planning, it might be worth paying a professional to build your plan rather than trying to do it yourself.
When choosing a financial advisor, look for professionals who are fiduciaries, meaning they have to put your best interests ahead of their own. Pay attention to their credentials as well. Thompson Popernik says certified financial planner (CFP) or chartered financial analyst (CFA) designations can indicate an advisor has the technical expertise needed to create a holistic plan.
If you want to go the DIY route, there are many apps and programs that can help you plan. You can also track your finances with a simple spreadsheet or notebook. Many financial firms also provide free tools you can use to aid your planning, such as retirement income calculators.
Gather information on your financial life
Whether you’re creating the plan yourself or with an advisor, you’ll need to gather all the documents and data so you have a clear picture of your finances. This information might include tax returns, W-2s, statements for any bank or investment accounts you have, loan documents, insurance policies, credit card bills and any other documentation you have that can help you understand what your total net worth is, how much income you generate annually and all your expenses.
Decide on your goals (and how you’ll reach them)
Lo says your goals are your North Star, and the financial plan is your roadmap for achieving them. Your goals can be whatever you choose, but having enough money for retirement is a common one.
Once you have a full picture of your finances, you’ll be able to strategize how to reach your goals. Advisors often use software to determine the likelihood that a client will achieve their goals based on their current financial situation and savings rate. If you aren’t on track, you’ll have to adjust your strategy. This might include cutting some expenses so you can boost your savings allocation or planning to retire later so you have more time to save, for example.
Plan for the unexpected
“Financial planning isn’t just planning for the future, it’s also planning for some of the what-ifs,” Thompson Popernik says.
Risk management is a vital part of any comprehensive financial plan. Otherwise, an unexpected death, health crisis, job loss, recession or natural disaster could completely derail your financial stability. This type of planning involves assessing your insurance needs, making sure your coverage is sufficient and stress-testing your plan to understand how it might hold up in different hypothetical scenarios.
“A good financial plan not only gives you the outcome if everything goes according to plan. You should also be able to stress-test it,” Lo says.
Many financial advisors use a Monte Carlo simulation to understand how different market conditions could impact your ability to achieve your goals. In financial planning, a Monte Carlo simulation models many potential outcomes for your financial plan based on different market conditions to understand how likely your plan is to succeed or fail. You can also stress-test your plan by modeling the ways your personal situation could change, such as if you’re forced to retire earlier than expected or if an illness or disability requires you to pay for long-term care.
Implement the plan
Once you’ve determined your goals and how you’re going to achieve them, you need to actually put the plan into action. This might include upping the savings rate on your retirement accounts, adjusting the asset allocation of your investments or purchasing insurance.
Monitor regularly and make updates when your life changes
Both Lo and Thompson Popernik say financial planning is an ongoing process and your plan should evolve as your life changes.
Thompson Popernik recommends reviewing your plan at least every few years or as part of your annual review with your financial advisor. Changes to your life, market conditions or tax law can also necessitate an update to your plan.
Benefits of a comprehensive approach vs. piecemeal planning
It’s hard to isolate a single aspect of your finances since they all impact your overall financial picture. For example, whether you should save more aggressively for retirement depends on whether you have high-interest debt you want to pay down, your ability to cover emergency expenses and your other financial goals.
“My favorite ‘advisor answer’ in financial planning is, it depends,” Thompson Popernik says. By taking a holistic view of your finances, you can be sure you’re using the right strategies to meet your goals.
FAQ
How often should I update my comprehensive financial plan?
You should review your comprehensive financial plan regularly and make updates when your life or financial situation changes. Depending on your needs, you might want to look over your plan annually to see if tweaks are needed.
Can I build a comprehensive plan on my own, or should I hire an advisor?
It is possible to build a comprehensive financial plan on your own, but it can still be worth it to pay an advisor to do it for you. The best financial advisors have a lot of experience helping clients set goals, stay on track and ultimately achieve those goals, so they know what works and what doesn’t. A good advisor can also help you stay the course when normal market fluctuations have you rethinking your strategy.
Do comprehensive financial plans include tax and estate planning?
Yes, tax and estate planning services are generally included in a comprehensive financial plan. Tax planning can make it easier to reach your goals by reducing the amount you pay in taxes and ensuring you’re invested in a tax-efficient way. Estate planning ensures that your assets are distributed according to your wishes after you die.
What tools help track progress on a financial plan?
Popular tools to budget and track a financial plan include apps like YNAB or Rocket Money. These programs make it easy to track your finances from your smartphone. Quicken also offers desktop software for those who prefer to do their financial planning from a computer. If you’re more old-fashioned, a spreadsheet or pen and paper might be all you need.
How do I balance short-term needs with long-term planning?
It’s important to strike a balance between your everyday spending and your long-term financial goals. That balance is going to be different for everyone—if you have a lot of necessary expenses or you want to prioritize activities that make day-to-day life more fun (like dining out or going to concerts, for example), you might have less to save. It’s important not to be so short-sighted that you struggle to make ends meet in retirement, but you might also want to consider your daily needs and wants and what you’re willing to give up to meet those bigger goals.
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