Back to Basics: A Financial Plan
*This article was originally published on Sept. 12, 2018. It has been updated for 2020.
This is an interesting one, no? I mean, here you are on a website called Financial Planning Fort Collins, and you are going to read about what a financial plan is. But interestingly enough, I think this does need some explanation.
The reason I say this needs some explanation is because I’ve seen the term “financial plan” used so ubiquitously over the last decade that I feel it’s lost some of the value of what it actually is. I feel that many think a financial plan is something it’s not and, unfortunately, that leads to not actually having one.
What a financial plan isn’t
Let’s start by talking about what a financial plan is not. A financial plan is not
I’ve heard it before, and it goes something like, “I have a great financial plan! See, I have a whole life insurance policy, a Roth IRA, and my work gives me a great match on my 401(k).”
To be honest, that’s like saying, “I have a great building plan for my custom home! See, I have wood for the framing, pipes for the plumbing, and some super-energy-efficient windows.”
And that’s just it … there isn’t an account or financial product in the world that is a financial plan. It doesn’t matter how many bells it has or how big the whistles are, an account or product is not a plan.
What a financial plan is
OK, so what is an actual honest-to-goodness financial plan? Well, let’s turn back to the custom home example. With all of that wood, those pipes, and those windows, you still need to know how many of each you need, what needs to be cut to length, what needs to be fitted, and where it all goes. And what would you use in that situation? A building blueprint, of course.
Once you start thinking about a financial plan in the context of a building blueprint, it starts to become clear what purpose it serves — and what it actually is. A financial plan serves as a guide in showing you how much of what you need, where it belongs, and, most important, why it’s there.
Much like creating a building blueprint, you have a couple options when it comes to actually creating the plan. If you have a background in architecture and engineering as well as the time to do so, you may be inclined to design and draw up the blueprints for your next home. The other option is to hire a professional to do it with you or for you.
The same is true of a financial plan. If you understand what is involved in creating a financial plan — taking a true assessment of where you are today financially, determining where you want to be in the future, and understanding the proper steps to take to get there — and you have an appropriate background and the time, you may be inclined to create your own financial plan. Of course, the other option is to hire a professional to do it with you or for you.
Implementing your plan follows a similar pattern. Much like how some builders can guide you through the process from blueprint to construction while others will just work on the blueprint or the construction, the same is true with a financial plan and financial accounts or products. The important distinction here is that both parts, the plan and the products, are different things, and one is not the other.
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