Everyone should have a financial plan. With an exception for small children, so we’ll go with teenagers and on up. At its most basic, you'll need to learn how to write a financial plan that details where you are, where you want to get to, how you will accomplish that, and how you will deal with roadblocks.
Very often, this is a lengthy document, 100 or more pages. But it does not need to be.
The most effective part of the plan is what you put together first; there are diminishing returns from the work you put into a plan beyond the basics. There is nothing wrong with having a detailed, even very detailed, financial plan. There is no downside to that.
There is an upside to knowing how to write a quick financial plan. The upside is that you can have a financial plan that covers the basics in about 30 minutes.
It won’t address planned giving issues or wealth transfers; those are not 30-minute topics. But it can address the four key areas of where you are, where you want to get to, how you will accomplish that, and how you will deal with roadblocks. Here’s how you can strategize a plan for your money in half an hour.
Where You Are Now
Where you are now has two components: your net worth and your cash flow.
Your net worth is the sum of what you own minus what you owe. List all of your assets and their approximate worth.
The number you want to use is the number for which you could realistically sell the asset. Be specific with big things like cars, boats, airplanes, and houses. Lump other categories together, such as putting a single number on any group of assets worth less than $50,000.
For example, if you have less than $50,000 worth of tools, but have a few thousand dollars’ worth of tools, use one number for the set of tools. Or if you have less than $50,000 worth of jewelry, but a few thousand worth of jewelry, use one number for the jewelry. And finally use one number for the remainder of the assets that were not in any category.
Add up these numbers; this is your asset total.
Next calculate your liabilities, which is simply what you owe. It is very helpful, and very quick, if you have online access to all your debt accounts.
You can simply go online and look up the current balance of each liability. Be sure to include all credit cards, personal loans, auto loans, mortgages, and any other debt you might have, such as money owed to a friend or your parents.
Add up all these numbers; this is your liability total.
Subtract the liability total from your asset total; this is your net worth. You will want to track this across time; increasing net worth is a sign of improving financial health.
The other aspect of where you are now is your cash flow. You have money coming in on a regular basis (hopefully!).
You have ongoing expenses and hopefully savings as well. Over and above what goes out on a monthly basis, there may be either some left over or there may be a shortfall. This is the number you want; the overage or underage once all your needs have been met.
Many people have a general idea of this number: They know there is money left over, or, conversely, they know there isn’t enough, and they are growing their debt.
If there is some left over, you can check this easily. It has to go somewhere, and typically it will accumulate in the account your pay is deposited into unless you move it.
Let’s say for example, you believe you have about $500 per month left over after you pay all the bills. If this is true, the balance of the account your pay gets deposited into should have grown by about $1,500 over the last three months.
If it has not, there are two possibilities: You did something with the money, such as move it to an investment account, or you spent it, in which case it is not left over.
You don’t need to do a formal budget here. You need to know what the payments on your debts are. You need to know what you save systematically and where, and you need to know where you end up, ahead or short, and by how much. This is either a resource you have to work with or a problem that must be fixed.
Where You Want to Get To
Here's your next step in learning how to create a financial plan.
Where you want to get to is your goals, both long-term and short-term. For many people, this includes retirement and education of their children. It can be any goal for which you would need to have a sum of money at a future date. It could be for a vehicle replacement or for a vacation. It could be for a home or for another home.
For each goal, you should know about how much you need and when you want to have it. There are online calculators that can help with laying out the details.
Also, here you should prioritize the goals. Identify which goal you would work on if you could have only one. That goal is number one. Work through that little process until you have the goals numbered in priority order.
Your Plan to Get There
You know what you have from the first step. You know what you need to have from the second step. Now you need to allocate any unassigned resources to your most important goals.
Typically retirement resources are in retirement accounts and that is clear. But you may have a brokerage account or another investment account that is not tied to a specific goal.
For many people it is helpful if accounts are earmarked for specific goals.
It makes it clear what is supposed to be used for each goal. And it makes clear what goals have no resources assigned.
Once the assets are clearly tied to goals, it is time to divvy up any leftover cash flow. Most people have too many goals for their resources, and something has to give. If there is no leftover cash flow, it is a good time to find some. There may be ways to streamline some of your expenses and free up some dollars to help with your goals.
The good news is that there are a finite number of options. You can delay when you need money for a goal, target a smaller goal, eliminate any goals that are not that important, invest more for a goal, or be more aggressive in your investment approach.
Don’t be discouraged if you can’t fund all your goals from the start. That’s normal. Do your best at this point and move on. Once you are moving in the right direction, it will be easier to tweak your course. The most important thing is to start moving forward; you can optimize later.
Plan for Obstacles
Life does not flow smoothly without roadblocks. Not real life. Real life can be a little too real sometimes. And we need to be prepared for the financial ramifications of life’s challenges.
For the purpose of your 30-minute plan, you will want to address whether or not you have a system in place for a few of these challenges.
You should have a will, you should know where that will is, and you should know where your assets are going. And for any accounts that name beneficiaries, you should know who those beneficiaries are. This will generally include all of your retirement accounts and sometimes investment accounts.
Write who the beneficiaries are on your plan, with a date. This will help you check if you need to make changes at some point.
You should have sufficient life insurance, and sufficient disability or long-term care insurance, depending on your age and whether or not you have reached financial independence.
If you have not reached financial independence, you should have adequate disability insurance; if you have reached financial independence, you should have adequate long-term care insurance. If you have a lot of money, you might have both for a spell.
You should have an emergency fund of three to six months’ worth of expenses. This allows you to navigate many of the most common financial setbacks without detracting from your goal funding or incurring debt. This is essential. If you don’t have this, it should be a top priority.
The Bottom Line on How to Write a Financial Plan
In 30 minutes, you can paint a clear picture of where you are financially, where you want to be, and how to get there, along with an understanding of where you stand in relation to potential roadblocks.
The idea is not to be perfect, but to be 80 percent of the way there — you can refine as you go, and it's much easier to optimize while moving forward.
Accountability is a big part of meeting goals. There’s a reason for that — financial success is about behavior. It isn’t about making perfect decisions, but rather about taking action on good decisions and adjusting as you go. Thinking about decisions does not get you to your goals; acting on them does.
An accountability partner can do wonders, whether it’s a spouse or significant other, a trusted friend, or a financial advisor or financial coach. Financial advisors don’t generally hire an advisor for their own situations because they think another advisor knows more; they hire them for accountability.
Simplicity wins. Knowing how to write a financial plan in 30 minutes can steer you toward your goals. You may find that you want a more formalized plan at some point, or you may find updating your 30-minute plan once a quarter is sufficient. Either way, those who plan have a far greater likelihood of achieving their goals.
If your goals are important to you, you will want to have a plan.