Ask Carrie: What Is Wealth Part 2: How Important Is a Financial Plan?

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Dear Readers,

A few weeks ago, I talked about a recent Schwab survey that discussed what wealth means to different people—and how the different generations think about and handle their wealth. One of the interesting findings was that when it comes to financial planning, Millennials are way ahead of the older generations. In fact, of the survey participants, more than a third of Millennials have written financial plans. Gen-Xers come in next at 21 percent with Boomers lagging behind at only 18 percent.

This got me thinking about financial plans in general, why they're important—and why so few people have them. According to the survey, those who put pen to paper with written financial plans are more confident, more engaged with their wealth, and demonstrate more positive saving and investing behaviors than average Americans. So with that kind of positive outcome, why don't more people have a written financial plan?

Maybe it's because the term "financial plan" conjures up a complex, difficult to create and difficult to maintain maze of numbers. But, to me, that's not the reality. A financial plan only needs to be as complex as your finances.

Three steps to creating your own financial plan

To make planning a little more accessible and, hopefully, to inspire more people of all generations to put their own financial plans on paper, I've divided the process into three progressive steps. They go from simple to more complex so you can follow them as your own financial situation evolves.

Step 1: Think about your goals—and how you'll achieve them.

Write down your long-, medium- and short-term goals. Your long-term list might include things like retirement and a child's education. Medium-term could be the down payment on a house or a new car. A vacation or new computer might fall into the short-term category. Whatever your goals, make them concrete. Then determine a dollar amount for each and the timeframe for reaching it.

Next decide how much money you'll need to set aside every month to meet each goal within the timeframe. An online savings calculator can help you figure it out. Once you have those figures, be realistic about how much you can afford to save each month. Start by looking at your cash flow—how much comes in and goes out each month—and create a budget that covers your basic living expenses as well as savings.

Setting concrete goals and understanding what it will take to reach them will help you be more thoughtful and organized about your finances in general. This is the beginning of your plan.

Step 2: Focus on your net worth

Net worth may sound complicated but it isn't. It's as easy as creating a simple list and doing some basic math. First, list your assets—what you own. Include the money in your bank accounts, investment accounts, your car, home, business interests, and personal property. Estimate the value of each and add up the total.

Next, list your liabilities—what you owe. This would include items like your mortgage, car loan, ongoing credit card balances and student loans. Add up the outstanding balances.

To get your net worth, simply subtract your liabilities from your assets. Are you in the plus or the minus? If you're in the minus, one of your top goals should be to reprioritize spending so that you can reduce debt. Decide where you can cut back. Entertainment? Transportation? Extras like gym fees?

Again, writing this down gives you something concrete to work toward. It can also be a benchmark against which you can measure your success—always a great motivator.

Step 3: Expand your plan to include all your finances

As life becomes more complicated, often so do your finances. Once you have a family, own a home, or grow a business there's more to think about, plan for and protect. This is where working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional and creating what the financial industry refers to as a formal ‘financial plan’ comes in.

A CFP® professional can help you create this type of comprehensive plan that includes steps 1 and 2 but adds in several other things to make sure ALL the parts of your financial life are working together. This would include:

  • Investments—Making sure you're properly diversified with a mix of different types of investments such as stocks, bonds, and cash that fit your timeframe and the amount of risk you're willing to take
  • Retirement—How much you're currently saving and how much more you need to save
  • Insurance—Making sure you have the right types and adequate amounts of coverage
  • Education saving—Planning in advance for education costs down the road
  • Estate planning—Creating at least a will and designating a guardian for your minor children. You should also make sure your beneficiary designations are up to date

While it's possible to do some of this yourself, working with a professional gives you the advantage of an outside perspective and expertise. Plus, a CFP® professional can develop a plan of action with concrete recommendations that can be a kind of financial roadmap. It's an investment of time and potentially money, but one that to my mind makes sense in terms of your financial future.

Whatever your wealth, a plan will help you manage it

To circle back to the survey, there was a broad range in the way people defined wealth. To some it was a specific number while to others it was good health, a sense of community or possibility. But whether the definition was dollars or dreams, there was one common theme: the need to carefully manage the wealth you have.

So wherever you are on your financial path, pay attention, plan ahead and—most important of all—follow through. Because planning leads to better financial decisions and greater financial security—which means greater freedom to live the life you want. To me, that's true wealth.

Have a personal finance question? Email us at Carrie cannot respond to questions directly, but your topic may be considered for a future article.

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This article originally appeared on You can e-mail Carrie at, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investing involves risk including loss of principal.


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