So What is a Financial Plan Anyway?

Here is a quick teaser of what I call the “Yellow Pad Plan”.  I call it that because when I work with people to create a financial plan, I start with a blank yellow pad and a number of questions.  It’s a basic roadmap for keeping track of your financial situation.  It’s not fancy, but it is based on 25 years of experience working with families to build and maintain their financial goals and it covers the main items that other, much more elaborate (and much more expensive), financial plans contain.

In the weeks ahead I’ll be going into more detail on some of these topics, but for now I just want to lay out the 5 basic items and the questions that go along with them.  Each of these topics could be the subject of a book (who knows? – maybe someday they will be!)

  1. Cash/Emergency Fund – “Do you have enough cash in the bank to get by for 3-6 months if your primary income goes away?”

  2. Retirement – “Are you saving money in such a way that you will be able to retire the way you want to?” or, if you are starting or already in retirement, the question becomes, “Do you know how to use what you’ve saved?”

  3. Other – “What else is there that you would like to have/do for which you need to save money?”

  4. Debt – “How much debt do you have, how much are you paying for it, and is it keeping you from completing items 1-3?”

  5. Protection – “Do you know exactly what happens if you don’t wake up tomorrow?”

For a long time I’ve debated about whether to add a few more items.  For example, I could add a section on taxes, but since taxation has an impact on each of these items, I don’t list it separately.  Also, I’ve considered adding a “giving back” tab to address and encourage charitable giving, but we end up covering that under both the “Other” and the “Protection” sections.

These five items and the questions that go along with them cover most of the issues that the majority of people face.  They also give us an easy way to start the financial planning conversation.  Regardless of whether you do your own financial planning or you work with an advisor, I encourage you to ask yourself each of the questions listed above.  Some of them are pretty straight forward.  Others, like the question under the “Protection” section, are more difficult and require some really candid reflection about what you want to happen once you’re gone.

Tune in next time when we’ll address the first item on the list – “Cash” – and talk about what an emergency fund is and why it’s so important.