What is a Financial Plan? Do you have a written Financial Plan? If not, you really need one. Just having a plan in your head is not good enough. It needs to be written. This may seem like a big task, but it is very important. Here I will discuss what a financial plan entails. It could be more than you realize.
What is a Written Financial Plan?
You can’t really have one or get one if you don’t know what it is, right? A financial plan has more than just budgeting or investments. It has those elements in it, but there is a lot more to it. A full fledged financial plan outlines every aspect of your financial life and what your plan is for each aspect in the future. Sticking to the plan is essential in seeing success from the plan.
Here is a general outline of what a financial plan should have. This is not in any particular order. There may be some sections you could add to it. The more comprehensive the better.
Use personal capital to track your finances and investments. I do. It’s a great tool.
Asset Protection and Insurance Plan
There is no sense in becoming wealthy if you just lose it all. You need proper insurance in place to protect you, your family, and your wealth. Insuring against financial catastrophes is essential in protecting your wealth. Self insuring and cash flowing any emergency is always best, but most of us can’t afford to just pay for a new house if it burns down right? That would be a financial catastrophe so we should probably have Home owners insurance for that.
As a Dentist or other medical professional, professional liability insurance is a must. Make sure you have a good policy in place before you ever see patients. Likewise, personal liability insurance is very important. Many will assume you are a rich doctor and sue if they have a chance. Protect yourself with high personal liability amounts built in your Home and Auto policies. Likewise stack an Umbrella policy on top of that.
Health insurance is also needed. Huge medical bills could bankrupt most people. If your family depends on your income then you should have Term Life Insurance (Probably not Whole Life Insurance). If you are not financially independent then Disability insurance is needed. You can read more in my insurance post and asset protection post.
Student Loan Plan
If you still have student loans then you need a plan to get rid of them as quickly as possible. Hopefully no more than 5 years out of school. If you let them stay in your life for 1, 2, or even 3 decades, they will weigh you down and prevent you from building wealth. See how I paid mine off in 3 years here. The first step is to refinance them if you are not going for PSLF. Here are some recommendations for great companies for student loan refinancing.
If you don’t have student loans, congratulations. You don’t need this as part of your plan. It is a great feeling not having it as a part of my plan any more.
Spending and Housing Plan
You need to control your spending if you want to destroy your student loans and build wealth to become financially independent. Have a budget and make sure you are on the same page as your spouse or other partner. It is vital that both parties are on the same page (or at least in the same chapter) financially. This can be the cause of a lot of problems if you are not.
A house and cars are some of the biggest purchases you will make. So have these things as part of this section of your plan. Spending mistakes on a house or a car can be big mistakes that take a long time to recover from. Make sure you know how much you are going to spend, how much of a down payment you will have, and what type of loan you will use for your home. I recommend keeping your home loan to less that 1.5 x your income, and to put at least 20% down.
Investing plan
Of course a huge part of your financial plan is your investing plan. You can save a whole bunch of money, but if doesn’t grow then you will likely never meet your goals. You need to have plan of what you will invest in. It will need to have the exact assets you want to invest in, and the exact allocation of those assets. It needs to be diversified and without uncompensated risk. You investments also need to be no more risky than you can handle in a bear market.
I generally recommend only investing in low cost stock and bond indexed mutual funds. Real Estate in many of its modalities is also a good place to invest. I usually think investing in single stocks, or cryptocurrencies is not a good idea. Read more in depth about Investment planning here.
Sinking Fund and future Kids expenses plan
There are many things in the future that you will need to save for. These things need to be above and beyond the money you save for in an emergency fund, and also what you invest for retirement. Saving for your kids’ college is one of these things. 529 accounts are a great way to do this and you need to plan for it. However, remember that this is on top of saving at least 20% for your own retirement Financial Independence.
Other things you may need to pay for in the future are vacations, cars, a boat, or second home. Have sinking funds to contribute to for each of these things on top of all of the other parts of the plan. That way, when the time comes you can pay cash for these things and not feel guilty because you didn’t borrow for them and you have already taken care of the other higher priority items.
Estate Planning
I am likely writing for some people who will be somewhat wealthy, but not the super rich. The super rich may need Irrevocable trust or other things I will not mention here. If you plan to be worth 8 figures, then you will likely need bigger measures than what I discuss here.
For most of us, having a revocable trust is a good idea. Making sure you have someone in charge of your minor children, your money, and health care decisions should be spelled out legally. I usually recommend to have the person in charge of the children be different than the person in charge of the money. However they should both be people you trust and who know and get a long with each other.
Take Home Messages
There may be some aspects that I missed. And certainly there is a lot more detail needed for each section I mentioned. This is a starting point so at least you know how a plan should be structured and what things you need to think about. There was a time not too long ago I did not think about a lot of these things and I don’t want that to be you.
So start thinking about these things and doing more research. Actually getting a full plan where all of this is spelled out in great detail is very important for your financial success and peace of mind. In the next post I will write about some ways to get a financial plan like this. In the meantime, remember you don’t have to be a slave to debt. Together we can become debt free, financially literate, and financially independent.
-Debt Free DDS
Use Personal Capital to track your investments and finances. I do. It is a great tool.
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*Nothing on my website is professional or legal advice. I am only sharing information that I have learned and it may or may not be accurate. I am not liable for any problems you may have by following this advice. Please do further research and get professional and/or legal advice about any of these topics.This post likely contains affiliate links. This site could be paid for clicks or purchases made through these links.See my disclosure here.
