Do you have a comprehensive financial plan? If you make a fairly average income and don’t have a complicated money situation, you may not feel the need for one. After all, those kinds of plans are only for people in the 1% wealth bracket, right?
Actually, that assumption is far from the truth. Recent studies have revealed that a financial plan can actually help people of all income brackets.
So what exactly is a comprehensive financial plan? It’s not just retirement savings, although that’s an important component. It also covers other savings and investments; education, emergencies and major purchases; and insurance needs.
Would you ideally like to be in a higher income bracket? Of course you would. Well, creating a comprehensive financial plan and sticking to it is one of the best ways of getting there.
The most financially successful people have been making money-savvy decisions for a long period of time. Think about the concept of compounding. The younger you start making investments, the more time they have to grow. That means in the end you’ll have to contribute less money in order to receive the same profits as someone that gave their money less time to grow. It seems so simple, and yet far too few people take advantage of this concept.
With that in mind, let’s take a look at some of the other top reasons why you should create a comprehensive financial plan sooner rather than later.
1. Increased ability to save and ward off debt
If you have a plan, you’re more aware of your overall financial picture. As a result, you’re more likely to save and pay off credit card bills in full. Those with lower incomes were actually more likely to pay their credit card bills off each month if they had a plan, versus those with higher salaries without a plan. Imagine that!
2. More likely to identify and address risk
A comprehensive financial plan helps you examine your biggest risks in life and act accordingly. You should ask yourself about your risk of becoming disabled and being unable to support yourself or your family. Obtaining proper life disability insurance could prevent the possibility of leaving your family with a mortgage and other payments they can’t afford. In some states, a lack of life insurance could result in half your assets being passed down to your parents and not your spouse.
3. Ability to measure progress on goals
When you set up a comprehensive financial plan, you’ll establish measurable goals to work toward. For instance, you can decide on a specific amount to contribute toward either savings or debt over a one-year period. After that time has passed, you can evaluate how you did and make appropriate changes. If you reached your goal, perhaps you can set a more ambitious one for last year. If you fell short, perhaps you can adjust your goal to something more realistic and easy to attain.
Many goals such as saving for retirement, a mortgage, a child’s college education, and paying off debt take years to accomplish. However, with a clear plan in place, it’s been proven time and again that one is much more likely to actually accomplish such financial goals in a timely fashion.
4. Reveals what money errors you may be making
If you never really analyze your money situation, you’ll be unaware of what mistakes you’re making. And without identifying such mistakes, it’s very unlikely you’ll ever fix them. For instance, you could be overspending each month in certain areas like dining out. If you identify this issue and set a cash limit for yourself, you’ll be much more likely to stick to it and reduce your spending in that particular area. You should also take a look at how much you’re paying in interest on credit card debt, versus how much you’re contributing toward investments. Having those numbers in front of you will likely be much more motivating to make a change than if you had never identified any of your issues.
5. Discovery of new money-savvy techniques
If you create a comprehensive financial plan alongside a financial professional, I guarantee you’ll find some new ways to maximize your money. Having an outside perspective helps reveal opportunities for saving and/or investing that you may have not previously considered. For instance, many people don’t take advantage of flexible spending plans offered by employers. These plans could provide significant discounts and wind up saving you hundreds, or even thousands of dollars a year. Other people realize they aren’t contributing enough to receive the company 401(k) match, which is a guaranteed 100% return on your investment.
The bottom line:
Don’t delay in creating a comprehensive financial plan. With consistent monitoring, it’s pretty amazing to see how much of an impact it will make on your overall financial success.
Did I leave any questions about financial plans unanswered? Let me know in the comments below.