What is a Financial Plan?

I’ve included this in the General section because it is a topic that applies to all knowledge levels.  Why? Well, I’ve found that even the most sophisticated investors lack a financial plan. You can have the most properly diversified portfolio in the world, proper asset allocation and great returns but it doesn’t mean squat if you are not achieving your goals.

Why is that? Well, if this sophisticated investor was averaging 1% more per year in his portfolio than everyone else, but was saving $50 a month thinking that his investing prowess will make him/her retire early, but the person who is earning the average return (1% less than the sophisticate) but putting away $1000/month – who do you think is better off?

Of course it’s not quite as simple as that either, but I think it adds to my point.

Think of a financial plan as similar to a business plan for a company. A business plan is going to include information on every aspect of that company, including projections for growth rates, tax analyses, risk management protocols, etc. Everything is well defined.  And it isn’t just crafted at the company’s inception and then forgotten about! It is continuously reviewed and revamped as things change.

So now we have a loose concept of what a financial plan is supposed to be like, but let’s take it further.  There are generally 8 main categories that a financial plan will encompass:

1. Cash Flow Management

2. Investment Planning

3. Retirement Planning

4. Mortgage Planning

5. Estate Planning

6. Tax Planning

7. Credit and Lending Planning

8. Insurance Planning

…and believe you me, each category is very expansive.

A Financial Plan will co-ordinate all these categories together and at different times will focus on some categories more intently than others (depending on your life stage).  I’m going to tell you that most people think that a table that shows them compound growth of $100/month with a return of 8% is a financial plan, and when you ask them if they have one, they truly believe they do!

Most Financial Plans are under 10 pages which I think is better than no plan, but not good enough. Now, perhaps because of my scientific background and being ANALytical beyond belief my average financial plan is about 75 pages long. I have written plans well over 100 pages and rarely are they below 40. Of course I include some serious analyses in my plans like a Monte Carlo Sensitivity Analysis on the clients current plan and compare that with the same analysis on the recommended plan.

(In a nutshell, the Monte Carlo Sensitivity analysis allows for greater confidence in your plan writing as it takes into account the fact that if you use an 8% rate of return for the investments as the AVERAGE, the portfolio will have returns above and below that over the course of the plan – and the sequence of returns has a huge impact on your net worth as you retire.  It also randomizes your life expectancy so you could see if your plan would work if you lived 15 years longer than your family’s average life span. It’s uber cool stuff for a geek like me! I’ll write a post about it later in more detail.)

I’m going to clean up one of my financial plans from any mention of client names, change some data and remove some logos and then post the pdf on this site so you can download and take a look see. If you have a financial plan you will want to take a look and compare – and then go to your advisor and ask them to write you one.  If you don’t have a financial plan, you’ll still want to look and see what you should be getting… and the sooner the better!




Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
Related Posts