-Studies continually show that those that have a financial plan are much more likely to pay bills on time than those who do not have a financial plan. It’s important for everyone to spend smarter and improve upon their wealth, which is why creating a financial plan that works for you is often a wise thing to do. However, financial literacy is one of the hardest parts of life to learn, and coming up with a good financial plan without any experience doing so can feel daunting. So, what are the components of a good financial plan? At A.G. Campbell Advisory, a wealth management firm with offices in Baltimore, MD and Naples, FL we have compiled a list of essential components that need to be included in any financial planning strategy.
Components of a Good Financial Plan
Here are a few things that are essential to any financial plan:
1. Financial Goals
It’s impossible to make a plan if you don’t know what you are striving for. It’s important to assess and list both your short and long term financial goals. Short term goals are goals that you would like to achieve in the next five years, whereas long term goals are goals that you would like to achieve in the next 10 years or more.
When looking over each of your goals, assign a dollar value as well as a time you would like to achieve each by. Actor Jim Carrey once famously spoke about his financial goal of making $10 million dollars in five years, and how he was able to achieve that goal. Now, while making millions of dollars in five years is not realistic for most people, it is still possible to achieve any and all of your financial goals by being determined and smart.
2. Net Worth Statement
Every financial plan needs a baseline, so your next step should be to determine your net worth. Compile two lists. The first should include a list of all your assets including bank and investment accounts, real estate and valuable personal property. The other list should include all of your debts including credit cards, mortgages and student loans. Your assets minus your liabilities equals your overall net worth.
Budgeting is the foundation of financial planning. Without budgeting, none of your goals will become a reality. Having a budget will help you keep track of where your money is going each month, as well as indicate what you may need to cut back on in order to reach your goals. It’s also important that when you are budgeting to make sure that your budgeting is also goal – oriented. Consider going over all the hypotheticals for your goals, such as: what if I need to retire earlier than expected? Or what if there is an unexpected event that I need to pay for? Make sure that you are adjusting your budget to meet the realities of life.
4. Retirement Plan
One thing most people look forward to in life is retirement. It has been said that it is important to plan to have 80% of your current income in retirement. However, is that realistic? We suggest that aiming to save even more for retirement is the smartest move. This will ensure that you will be able to cover any medical expenses not covered by Medicare, and additional income should provide a supplement if you have not yet paid off your mortgage by retirement.
5. Emergency Funds
Over the course of your life something unexpected will happen. Whether that is losing your job, getting hit with an unexpected medical bill, or something else – an emergency fund will help you avoid tapping into your long-term savings plan to make ends meet.
A general rule of thumb is to save enough to cover between three months to six months of essential living expenses (e.g., groceries, housing, transportation, and utilities).
6. Insurance Coverage
Insurance is an important part of protecting potential financial downside risks – but be careful not to overpay for coverage you don’t need. In general:
- Health insurance: Without it, even routine care can cost a pretty penny, while a serious injury or hospital stay could set you back tens of thousands of dollars.
- Long term care insurance: usually covers all or part of assisted living facilities and in-home care for people 65 or older or with a chronic condition that needs constant care. This type of insurance is an important safety net and protects you from depleting other assets to pay for nursing care.
- Disability insurance: This coverage protects you and your family in the event you’re unable to work. Employer-provided disability insurance typically replaces about 60% of your salary.
- Auto and homeowners’/renters’ insurance: If you own a car or home-or rent and can’t afford to replace possessions out of pocket-make sure your adequately protected.
- Life insurance: This is generally a good idea for those with dependents. Work with an insurance agent to understand what type of-and how much-coverage makes the most sense for you.
7. Estate Plan
At a minimum every person should have a will, which states your final wishes with regards to your assets, dependents, and who you want to administer your estate. You should also make sure the beneficiaries of your insurance policies and retirement accounts are up to date.
A.G. Campbell Advisory, LLC
A.G. Campbell Advisory, LLC is an independent investment advisory firm with offices in Baltimore, Maryland and Naples, Florida, offering individuals and institutions custom investment advice, financial planning and family office services. A.G. Campbell was founded in 2012 by veteran industry professionals to address the need for a high-quality firm where clients have access to the resources of a large firm, without the inflexibility and conflicts of interest inherent in a larger financial institution. The principal objective of A.G. Campbell is to advise our clients on how to grow and preserve their wealth for themselves and for their families. Our client’s best interests are of paramount importance and the foundation of our work.