Many find the concept of a financial plan hard to define. That's because it's both the journey and the destination—a noun and a verb. And October, recognized as National Financial Planning Month, is the perfect time to brush up on what a plan is, why it's needed, and how to get started creating one.
"There is not a universal definition of a financial plan, which creates a lot of confusion and some misunderstandings of what we are referring to when we use the term," said Kimberly Bridges, director of financial planning at BOK Financial®.
Sometimes people refer to it as a noun—a tangible, static document drafted by a professional financial planner at a point in time. And sometimes people use it more like a verb—the continuous process of creating and revising an intentional plan for achieving your goals. It's really a bit of both. No matter where you are in your financial awareness journey, it's a good time to create or revisit your financial plan.
"A financial plan provides a holistic view of your current financial situation, defines your financial goals, and outlines the best path for accomplishing your goals," she said.
“It's about taking a good look at where you are now, where you want to be and how you can get there while managing risk.”- Kimberly Bridges, director of financial planning at BOK Financial
Goal-setting experts find that we're 42% more likely to achieve our goals if we write them down—and that applies to financial goals, too. "It's difficult to achieve goals you haven't set," said Bridges. "By that I mean, it's easier to achieve financial goals if you've identified those goals and mapped out the course to get there. That's where a financial plan comes in."
A financial plan builds on the basics of creating a budget, building an emergency fund, paying off debt and saving for retirement. Bridges said a financial plan should address:
- Your comfort level with risk.
- The best types of accounts to use for saving and investing.
- Potential outcomes of multiple courses of actions (like home buying, selling a business or charitable contributions).
- Details on how to best allocate resources.
Bridges believes everyone, regardless of age and wealth, needs a financial plan.
"But financial planning is especially important for anyone going through, or heading into, a life transition," she said. "This could include preparing for retirement or the sale of a business, or putting your life back together after a divorce or the loss of a loved one."
However, financial planning isn't only for those navigating life transitions and milestones.
"If you have never gone through the financial planning process, doing so will help you prioritize your goals and make sure you're on track to achieve them," she said. "It's never too early—or too late—to make a plan for your future. Of course, the earlier you start, the more flexibility you will have with your plan. I think sometimes people put if off because they are afraid that they will be told they need to spend less and save more, and they don't want to face that reality."
But, Bridges said, the earlier you explore your options for improving your plan outcomes, the more options you will have. So don't wait. The pandemic has served as a catalyst that inspired many people to reflect on their lives, goals and priorities. "If you are one of those people, now might be a good time to create a financial plan," Bridges said.
Creating a financial plan means being prepared to answer tough questions like: When do you hope to retire? What does your ideal retirement look like? What are your financial goals and how much of a priority are they? What people or charities do you want to benefit from your wealth?
Determining the costs to fund your lifestyle is the next step. "Many people have a hard time with this and think they have to build their budget line-by-line from the bottom up in order to create a financial plan," said Bridges. "I actually prefer a top-down approach. Figure out your total annual income, subtract the amount you pay in taxes and the amount that goes to long-term savings and investments. What's left is a rough estimate of your annual spending."
Taking it a step further, Bridges suggests mapping out other expenses like travel, education, healthcare, and infrequent expenses like a wedding, home remodel or car replacement.
Getting started on the financial planning process will go smoother if you gather some documents ahead of time:
- Tax returns
- Pay stubs
- Social Security statements
- Pension statements
- Annuity statements
- Investment/bank account statements
- Will and trust documents
"From there, you're ready to work with a professional financial planner who will help create a plan that works for you, your lifestyle and your goals," she said.