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What are your future financial goals? When do you plan to retire? Planning is vital before undertaking any task. A personal financial plan example is a perfect blueprint that can help you develop a clear understanding of handling your finances.
Personal Financial Plan Example (Manage Your Money Like a Pro)
If you want to achieve financial success, it’s important to set specific personal financial targets. Let me walk you through what a personal financial plan entails, give you a personal financial plan sample and illustrate to you with a hypothetical personal financial plan example.
The current financial situation is composite and unpredictable in many regards. The decisions you make in regards to spending habits, investment, savings and retirement plans significantly affect your financial position over the long term.
A personal financial plan sample can clearly represent a framework that helps simplify and structure your financial matters.
If you fail to plan, you’re planning to fail, an old adage goes. Unfortunately, huge numbers of people fail to create a feasible financial plan which makes quite detrimental impact on their personal finance and financial growth.
Financial freedom can only be achieved if you put in the right financial measures at the right time. Financial discipline in matters such as budgeting and saving is of paramount importance in determining your overall financial outcome.
I’ve been investing for financial freedom.
I launched a book that highlights how to invest for financial freedom called Dividend Investing Your Way to Financial Freedom.
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Why are personal financial plans important?
You need to control and manage your finances as soon as you start earning. A key motivation can emanate from those that have made it.
A perfect way to tap successful people’s resilience in matters financial, for example, the likes of Warren Buffet is to read and try to implement what they have done. There are tons of quotes on financial freedom that can help motivate you in your financial path.
So, what is a personal financial plan?
A personal financial plan is a written and organized strategy that allows an individual to control their financial situation so as to maintain financial health and achieve financial goals.
If you want to create a feasible personal financial plan, you need to consider your financial situation, goals and implement them.
So, how can you determine your financial situation?
A measure of your financial health is perfectly demonstrated by your personal financial ratios.
If you determine your personal financial situation, then you can be able to set achievable financial goals that can help you attain financial freedom.
Important personal financial ratios that you need to determine include net worth, debt, and savings ratio.
Personal net worth
The personal net worth is calculated by adding up all assets and deducting all your liabilities. Your net worth should indicate to you the area that you need to focus on.
Why? A negative net worth simply implies that you need to focus on debt reduction to cover those holes. It is vital to value your assets properly to get an accurate value of your assets.
You should be prudent and realistic. A positive net worth helps you focus on the next area that you can prioritize like emergency, retirement or other saving goals.
Having calculated your personal net worth, you can check the value of your liabilities and work on reducing it. You should always make it your first priority.
You can first reduce the high-interest debt like credit card debt or personal loans. Then, move on to the other areas. You may want to consider eliminating all debt. For me, I like to eliminate all debt except a mortgage.
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I refinanced my student loans with SoFi, which saved me a boatload of money to pay down my debt. I was able to start saving earlier, which enabled me to purchase a home.
Another important aspect is the savings (obviously). You can classify your savings into three areas which include: Emergency, retirement and short-term savings goals. These are some of the most important financial emergencies that you need to plan for.
The emergency fund savings goal takes the first priority. Most financial planners advise that you should always set aside 3-6 months worth of your expenses in your emergency savings.
The second is retirement and finally the other money saving plans. If you are a millennial, here is how you find a financial planner.
A personal financial plan should uniquely be customized according to the individual clients’ needs, goals, and financial situation. The financial advisers can create one after looking carefully at the clients’ situation.
If you’ve saved effectively and want to invest, here how to invest your money.
Let’s look at a good example of a personal financial plan.
Keep in mind that this is a hypothetical case to illustrate to you what is typically included in a sample of a personal financial plan.
The personal financial plan example will illustrate the structure, cost and the contents of a good personal financial plan. Seek further advice of a qualified financial expert for your particular situation.
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Personal Financial Plan Example
The results shown in this financial plan sample are for illustrative purposes only. The data used in this example represent just assumptions of what could occur.
Personal Financial Plan: “Nathan & Rebecca” Sample
This is an example of a personal financial plan for Nathan and Rebecca. Their financial situation is as follows:
- Nathan and Rebecca are married and a middle-aged couple.
- In order to achieve their goals, they hope to retire and must, therefore, ensure they have enough savings to cater for their needs in their golden days.
- As a married couple, the have made several investments and are not sure whether they should file for Social Security benefits because they assume that their insurance coverage is adequate.
- They aren’t sure whether they have enough financial resources to last them for the rest of their lives.
- Additionally, they have decided to seek the help of a financial planner.
- Our example will show that they have filled out a personal financial statement worksheet to help their advisor figure understand their financial position prior to beginning their financial planning process.
The planner quotes a total cost of $2200 for the stand-alone personal financial plan.
This way, Nathan, and Rebecca are aware of what is involved in the financial planning process, what the plan cost, and what to expect from their financial plan. In today’s age, you may not even need a personal financial advisor to help you.
I use Personal Capital and I haven’t needed a financial advisor to achieve my goals.
Sample Personal Financial Plan Assumptions
Retirement: Rebecca would like to retire at age 65, and Nathan would prefer to retire when he is 67.
1. Asset evaluation
Nathan and Rebecca own the following assets:
- Cash & Cash equivalents (bank accounts/CDs/Money Market) – $100,000
- Brokerage account (stocks/bonds) – $315,000 current value, $200,000 basis
- Retirement Annuity ($250,000 current value, $130,000 basis)
- Rebecca’s IRA -$400,000
- Nathan’s 401(k) account ($520,000), employer match is 3%
- Without inflation adjustments or a survivor benefit at age 65, Nathan is entitled to a pension that will pay 40% of his highest average salary ($120,000) for life.
- Home is worth $388,000 with a $120,000 mortgage at a 4.5% interest rate
- Nathan’s car is 3 years old and worth $27,000. The loan balance is $9,500.
2. Insurance Coverage
Nathan and Rebecca have the following life insurance coverages:
- Nathan’s life insurance coverage is through work ($305,000) at $100/month.
- Rebecca’s life insurance coverage is a whole life policy ($95,000 death benefit, $25,000 cash value, $23,000 basis) at $85/month.
- Nathan has taken a disability policy to compensate him if he becomes disabled through work which replaces 60% of his income and Rebecca has no disability insurance.
- The couple have taken homeowners and auto property coverage but no umbrella liability and no long-term care insurance.
3. Other Situation Details
Other assumptions in our personal financial plan sample include:
- Nathan is maxing out his 401(k) annually. Rebecca does not have a retirement plan and is self-employed.
- Nathan grosses approx. $140,000 per year; Rebecca makes approx. $50,000.
- They spend approximately $6,000 a month on basic living expenses like utilities, entertainment, basic needs like food, property tax, and other expenses.
- The overall fixed income to equity ratio is about 40% fixed income and 60% equities (40/60) of all investable assets.
- Nathan’s Social Security statement illustrates that he receives $2,450 month at age 66; Rebecca’s shows $1,500 at age 66. Both plan to file for Social Security benefits as soon as they are eligible to receive them which is most likely at retirement.
- The couple has not drafted a will.
Personal Plan Presentation
|NET WORTH FOR NATHAN & REBECCA|
|Individual Retirement accounts||400,000|
|Employer Retirement plans||520,000|
|Annuities and Tax-deferred products||250,000|
|Tax-free and taxable accounts||415,000|
|Total Investment Assets||1,585,000|
|Cash value life||25,000|
|Total Other Assets||440,000|
Here is how the figures have been derived:
|NET WORTH FOR NATHAN AND REBECCA|
|Employer Retirement plans|
|Rebecca SEP IRA||0||0|
|Individual Retirement Account|
|Rebecca Rollover IRA||400,000||400,000|
|Annuities and Tax-deferred products|
|Nathan Non qualified annuity||250,000||250,000|
|Taxable and/or tax-free accounts|
|Total Investment Assets||250,000||0||415,000||1,585,000|
|Cash Value life|
|Rebecca whole life||25,000||25,000|
|Total Other Assets||440,000|
This illustrates the total net worth of Nathan and Rebecca. Net worth shows the difference between what you own and what you owe.
Personal Financial Plan Recommendations
After considering the couples stated retirement goals and using the existing asset allocation, the financial plan shows a probability of success of 63%.
The couple can reduce portfolio risk profile from 37/63 to 55/45 (fixed/equity). They can also purchase a $250,000 term life policy on Nathan for 15 years to cover the risk that may be brought by an early passing. Then change from replacing cars every 5 years to every 7 years. You can save money on health insurance.
Modify Social Security claiming and delay Nathan’s benefit until 70 and for Rebecca to file a restricted application at 66. This can guarantee the maximum Social Security benefit possible to the survivor. They need to reduce the luxury vacation budget from $10,000 to $9,000 per year.
They can buy a slightly less expensive home $250,000 instead of $388,000. Rebecca can set up a SEP IRA and save an additional $1,000 per month until retirement. They can extend their working years until Nathan gets 67 years and the probability of success will increase to 90%.
1. Income Tax Strategies
The couple’s likelihood of ending up in a 25% bracket when they are 70 is high. They also have full Social Security and can be forced to take minimum distributions. This income should cater to their entire cash flow needs at that time.
2. Insurance Analysis
They do need an umbrella liability policy because the gap in coverage leaves a huge liability uncovered. It is recommended that Rebecca should cash in her universal whole life policy.
They should also consider long-term care insurance and have a keen interest in a 15-year term life policy to protect Rebecca’s if the Nathan were to pass before age 80 because the financial projections reveal a negative effect on Rebecca.
Here is an analysis of how you should size your life insurance.
3. Investment Analysis
From the financial plan projections, the couple needs a much more conservative portfolio of investments. If they use asset allocation and a 45% equity portfolio, they will keep risk in line with overall goals which will still produce a long-term return sufficient to cover the goals.
They can segment asset classes by tax treatment across qualified and non-qualified accounts, where 85% of their taxable income will be kept in the tax-deferred accounts and the 15% that remains will produce mostly qualified dividends, which are taxed at the lower long-term capital gains rates.
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4. Estate Plan Review
The couple should acquire estate planning documents. They require getting a lawyer who can help them draw up a will, as well as execute a statutory durable power of attorney, medical directives and medical power of attorney.
Check out our other accumulated wealth tips that should help you plan your financial future AND improve your personal financial ratios.
Personal Financial Plan Example Conclusion
This personal financial plan example is based on hypothetical information and thus you need to provide your details regarding your present resources and objectives to your planner.
I hope that the illustrations within this plan will be a valuable insight into the evaluation of your finances even though it does not fully represent the culmination of your planning path.
Financial planning has no one fit all approach as it is a continuous process. This hypothetical illustration of mathematical principles is custom made to model some potential occurrence.
Use these money hacks from millionaires to continue your personal financial planning and stay on top of the game.
Will you use this personal financial plan example? Have you created a personal financial plan to help secure financial success? Please let us know in the comments below. We’d love to hear from you.
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