What does a comprehensive financial plan look like? (Part 1)

This is a 2 part series article and this is the first article.

As I have been writing this blog, I have received a lot of different forms of feedback. But one of the most common feedback I have received is “God, this all feels so overwhelming. I don’t even know where to begin. I need to get all my financial #$@% organized!”. Often, I find myself trying to explain that Rome was not built in a day and you just have to chip away at it one by one. But of course nobody likes to hear that. One of them told me “I just need a blueprint – I will simply follow it.” Of course, I would tell them to read my blog 🙂 but sometimes I recognize that’s not going to work for everyone. So there is a way to actually develop a blueprint and put it all together with some professional help. And you just need to execute on that blue print. That blueprint is what is typically called a ‘Comprehensive Financial Plan’. 

So what is a comprehensive financial plan? There are many ways to think about this but at a high level, I believe a good comprehensive financial plan integrates as many different aspects and parts of your life. Now if that sounds like boiling the ocean, bear with me. Our finances are an integral part of us and we need to ensure the way we manage it and save, spend, invest it are aligned with our values and goals. Obviously, money is not the most important part of our lives but it is an important one that if well taken care of, will make the other things in your life more comfortable. 

In today’s article, I want to talk about a high level framework of the four different things to consider when you make a comprehensive financial plan. Calling it a financial plan may be a bit of a misnomer because a financial plan is considered more narrowly and is actually one of the four things I highlight – its a broader plan that just considers different aspects of your life which happen to intersect with your finances. If that was too confusing, don’t worry – just read on and I promise you this will make more sense. But before we dive into these, let’s briefly talk a bit about the why. 

Why do I care about this?

A lot of folks may ask why they even need to bother with all this? Other than the obvious reason that it is good to plan for securing your financial future, a lot of this has to do with timing. In our lives, we go through good and bad times. Unfortunately, we start to worry or think about these financial plan elements only when bad things occur – a job loss (or the prospect of one), death, divorce, a healthcare incident – the list goes on. It is human nature to not want to worry about these things when times are good. So my counsel to you is – if you spend the time defining all of these plans during the good times, you do it from a position of strength and it is one less thing to worry about when times are bad. More importantly, when bad times occur, we are not in any mental state to sit and prepare financial plans. 

The four elements of a comprehensive financial plan

A comprehensive financial plan broadly should encompass the following (btw, there is no textbook definition of this but this is a general framework. Different financial advisors will offer different views of this):

In this first article, I will go into the first 2 elements – Financial planning and Tax planning. In my next article, I will go into Estate Planning and Asset Protection planning. 

Financial planning

I know a friend of mine who said when she hears the word ‘financial plan’ it sends shivers down her spine. Another one said it puts him to sleep! 🙂 A lot of times, this is because people look at the complexity of this and feel overwhelmed. Well, let me explain to you at a very basic level what a financial plan is. It answers 3 fundamental questions:

1. What are my financial goals – long and short term?
2. What is my current financial situation?
3. How do I get to where I want to go from where I am? Basically bridge the gap between 1 and 2. 

That’s it. I know I oversimplified that. But if you understand this, then you understand what the basics of a financial plan is. I won’t go into a lot of detail but let’s quickly examine the 3 items I laid out above:

1. What are my financial goals – long and short term? You need to think of your life goals with some self-reflection. The traditional long term goals people focus on are retirement at a certain age, saving up for college for kids (if you have kids or you wish to fund their college), shorter term goals maybe saving up for a downpayment for a house, a big vacation, buying a car etc. Once you define these, you then quantify all this with numbers. I wrote an article on how much do you need to retire which helps you quantify some of this. You can use similar logic. Of course, you don’t need to figure out the quantitative part all by yourself. You can work with financial advisors who have tools to help you do that.
2. What is my current financial situation? This is where you take stock of where you are currently. You will fundamentally need to know 2 things – your net worth and your current savings. I talk about this in the article on ‘If you can measure it, you can improve it”. 
3. How do I get to where I want to go from where I am? Now that you have your goals and know where you are, you need to define strategies on how to get there. As part of this, you want to make sure you secure your financial foundation first before you go into doing any investing. Securing your financial foundation involves building your emergency fund, and deciding what debts to pay off. Then, you ensure your expenses are optimized for your income and goals, and finally make decisions on where you want to invest your money to allow it to grow.  There are obviously a number of other things that can be done as well but honestly, if you are doing all this, you are setting yourself up for a strong financial foundation. 

Tax Planning

To be clear – I am referring to Income taxes here. For the longest time, I viewed tax planning and tax filing as the same thing. This might seem obvious but you really cannot tax plan for the previous year once the year is done. Tax filing is like reporting the news after the fact. Tax planning is being proactive about how to ensure you can pay the least amount of income taxes. I won’t go into detail here because I have provided a framework on how to do this in my article on “How can I reduce my income taxes?”. If you think about it, for a lot of folks, their largest expense is actually taxes. So having a plan to reduce as much of your tax liability in a legal way possible is going to save you a lot of money over your lifetime. 

I would like to offer a couple of pieces of advice here:

• Tax planning should begin as early as possible in the year or at least right after you file your previous year’s taxes. Don’t wait till Dec to start thinking of end of year tax moves. 
• Don’t simply think of tax planning as a plan for a single year. A good plan will think multi-year and long term. But don’t let that scare you – start with planning for the following year and then scale up eventually.

As you get started on your financial journey, financial and tax planning are good solid foundational places to begin with. In the next article, we will examine the remaining 2 elements.

Thank you for reading and I wish you success in your financial journey.  

Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.