Your Guide to Financial Planning
Frequently Asked Questions
How do you make a financial plan?
Financial plans help people live within their means, identify financial goals, and increase savings to help you reach those goals. To make a financial plan, you have to gather all relevant financial information, prioritize financial goals, and put a plan into action. Create a budget, and when writing down your financial goals, make sure they are reachable and realistic. To make sure your plan is effective, you need to commit to following it.
What is the first step in financial planning?
The very first step in the financial planning process is to take a deep dive into your finances. This includes reviewing your monthly income, outstanding debts, bank account balances, and monthly fixed expenses. In the case of a certified financial planner (CFP), they would ask the client questions about the client’s health, values, earnings potential, risk tolerance, needs, and more. By addressing all aspects of your financial lifestyle, you’ll be better equipped to determine what needs to change, and how to improve your financial situation.
What are the seven steps of financial planning?
The seven steps of financial planning typically refer to financial planners; however, an individual can follow them too. The first three steps are to understand and establish financial goals, determine your net worth, and estimate your income and expenses. Next, the steps include: reviewing your personal debt situation, allocating savings goals to reach, implementing the financial plan, and lastly, monitoring progress and continuing to update the financial plan.
How might taxes have an impact on your financial plan?
It’s important to consider taxes when creating a financial plan. Depending on your individual circumstances, such as age and income, taxes can have an impact. Say saving for retirement is a main goal for you, and your place of employment offers a 401(k) plan. By choosing to enroll in the plan you will have a pathway to meet your goal, and tax advantages may be able to get you there even quicker. Also, when considering your net worth as part of the financial plan, a liability to factor in may be income taxes or taxes due on the profits of your investments.
What is a financial planner?
A financial planner helps individuals reach their financial goals. It is someone who takes a comprehensive approach to their client’s finances, offering in-depth assistance with things like retirement savings, investing, taxes, estate planning, and college financing. In most cases, financial planners are certified in the practice and called Certified Financial Planners, or CFPs. CFPs have completed extensive training in financial planning and are held to strict ethical standards.
Financial health is a state of being in which a person, business, or financial institution measures their well-being by the condition of monetary assets and liabilities, such as debt and savings.
Your tax liability is any amount you owe a taxing authority, such as the Internal Revenue Service. Having liability means you’re responsible for something. There can be several components to your total tax liability with an agency, including unpaid taxes from prior years.
Discretionary income is the income you have left over to spend, save, or invest after you pay taxes and for other essentials such as rent or mortgage, utilities, food, and credit card bills. Discretionary income is less than both total income and disposable income because it's income you can use at your discretion.
Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the figure you get when you add up everything you own from the value of your home to the cash in your bank account and then subtract from that the value of all of your debts which may include a mortgage, car or student loans, or even credit card balances.
Estate planning is the systematic approach to organizing your personal and financial affairs to deal with the possibility of mental incapacity or death. Depending on your current family and financial situations, your foundational estate plan will include four or five essential legal estate planning documents.
Risk tolerance relates to the amount of market risk an investor can tolerate. In simple terms, it is how much you are willing to be unsure about (and how much money you're willing to spend on this unknown), in the face of possible gains. Risk itself comes in many forms, such as the volatility of a certain stock, or full market ups and downs. Financial planners often use a person's risk tolerance to get a feel for what to expect from them as a new client, and vice versa.
Adjusted Gross Income (AGI)
Adjusted gross income (AGI) is a tax term for your gross income minus tax deductions that are allowable whether or not you itemize deductions when you file your tax return. It is the determiner for many of the deductions and credits you will receive, as well as any taxes you will owe when you file your tax return.
A financial advisor is anyone who advises clients on money issues. It’s a broad term that could include any number of people who might help you with money. Duties include: offering advice on how much money to save, making investment suggestions, offering tax advice, and buying and selling investments on behalf of a client.
A 401(k) is an employer-sponsored retirement savings plan that lets employees set aside a portion of their wages for the future. It also allows them to reap tax benefits in the process.
A personal or household budget is a summary that compares and tracks your income and expenses for a defined period, typically one month. A budget will show you how much money you expect to bring in, then compare that to your required expenses—such as rent and insurance—and your discretionary spending, such as entertainment or eating out. It is a tool for achieving financial goals.
Social Security is a federal program that issues benefits to retirees who paid into the program during their working years, people unable to work due to a physical or mental condition, spouses and children of beneficiaries, and surviving family members of beneficiaries. Social Security benefits are administered by the Social Security Administration.