Factors of a Financial Plan

A small amount saved regularly over years can add up.
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The single most important factor in a successful financial plan is your determination to take it seriously. Temper your enthusiasm for creating the perfect plan that will enable you to retire early and in high style. The more restrictive your spending plan, the more likely you will be to cheat occasionally, when you want to spend a little extra money on fun. Cheating on your financial plan is addictive, and soon you might abandon it altogether.

Realistic Financial Data

A solid and realistic base of data on your spending and saving habits, including expenses, income and large future expenditures is the next important factor. Analyze one to three years of your financial data to identify average monthly spending on standard costs such as housing, utilities, transportation, insurance, medical costs, debt payments, alimony, child support, food, clothing, child care and entertainment. Add in recurring expenses such as subscriptions, memberships and professional development. Then look at your income tax returns, including refunds and payments. List all gross income, including bonuses, investment income, alimony, child support and gifts. Objectively create a budget that provides for all expenses plus leeway for cost increases. If there is no money left for savings, consider how to restrict your lifestyle in a comfortable way.

Goals and Expectations

The purpose of a financial plan is to make it possible to meet your goals and expectations. These may include buying a house, income property, vacation property, a new car every two years, providing a college education for your children or finishing your own. Include an estimate of your retirement needs, including medical costs. Whatever your goals, identify them in detail and know what they will cost.

Age-Appropriate Investments

Your age is a factor in making a financial plan. The younger you are, the more years you have to accumulate money to meet your goals. The U.S. Securities and Exchange Commission, in its online "Roadmap to Saving and Investing," recommends that if you have five years until you expect to retire, you should keep your investments conservative. If you have 35 years until retirement, you can afford some risky investments because you will have time to replace any money unexpectedly lost. Conservative investments are high-quality bonds, blue-chip stocks, preferred stocks and high-quality dividend-paying stocks. Riskier investments include growth stocks, rental property and mutual funds that invest in specific industry or country securities. Diversification tends to moderate risk. High-risk investments include speculative stocks, junk bonds and new business ventures.

Risk Tolerance

The success of your financial plan will depend on how it is designed to handle risk. Common risks include economic risk, interest rate risk, securities market risk, credit risk relating to the investments in your portfolio and geopolitical risk. In fact, your own risk tolerance is affected by how you make your living. If you have a secure job with a dependable salary, you can afford to take a bit more risk. However, if you have a commission-based job and your income varies with the economy, keep your financial plan conservative. Suze Orman is one of many financial advisers who warn that the 21st century will be very different from the 20th century in terms of what employees can expect of employer-supplied benefits. Social Security and Medicare may provide less assistance than in previous years. Your own risk tolerance is an important factor in your financial plan and should be approached realistically.

Professional Advice

Even if you are a savvy investor, seek professional tax, legal and investment-management advice. Just as it is difficult to write your own resume, it is also difficult to make your own financial plan. We tend to see things differently when they apply to us, so it is wise to get fresh eyes and objective professional skills involved in critiquing your plan.

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