The 11 Key Components of Financial Planning You Need to Know About

Middle-aged American couple learning about the key components of financial planning

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When it comes to preparing for your long-term financial goals, there are eleven key components of financial planning you should consider. 

These can help you with anything from buying a new home, to saving for your kids’ college education, to planning for your retirement. 

Your future could be at stake — and at Iron Point Financial, we want to help you face this challenge with confidence and calm.

The idea of a comprehensive financial plan might seem quite a lot to take on at first, especially if you’re just starting out. Have no fear, though, because you’re about to learn the most important principles you will need to create a financial plan of your own — a plan that will prepare you for almost any financial challenge.

Once you can see how the 11 key components of financial planning fit together, you will be well-placed to achieve not just your own but your family’s financial goals, too. 

So, without further delay, what exactly are the essential elements of a high-quality financial plan?

Setting Smart Goals

Having clear and achievable financial goals is the cornerstone of any financial plan worth its salt. 

This could include setting a specific dollar amount to save every month, researching the best insurance options available, or even creating a plan to purchase a particular make and model of car. 

Listing out specific goals like these will enable you to focus your resources and energy on getting to these clear destinations, rather than wandering around, hoping you will magically end up where you want to go.

The best advice we can give you for differentiating between these goals is to break them up by time period:

  • short-term goals (within the next five years);
  • medium-term goals (the next five to ten years); and
  • long-term goals (more than ten years away).
 

With this big-picture financial perspective in place, you can take stock of everything you are aiming for in your financial life without getting overwhelmed: you can focus most of your action planning on the short-term goals while keeping the medium- and long-term ones within reach.

And if you’re working with a certified financial advisor, you can spend even less of your time worrying about your longer-term aspirations, as experts like these can help manage things like your investment portfolio and insurance options, all while keeping you well-informed.

A Comprehensive Budget

comprehensive budgeting is one of the key components of financial planning
Key Components of Financial Planning: Budgeting

Once you’ve laid out your goals, you’ll need to start taking steps to accomplish them. The first thing you’ll want to do is establish a budget for you and your family. This will help you track your progress on a weekly and monthly basis.

To begin, we recommend listing out all of your income (paycheck, investments, etc.) and putting those side-by-side with your current monthly expenditure (mortgage payments, utilities, credit cards, and so on). 

Taking the time to honestly and thoroughly set out your life in financial terms will give you an accurate picture of where you are at now compared to where you want to go.

With all of this information in front of you, you can see where your finances are working for you already, and where they might need a bit of work. You can check out some great budgeting templates here.

With a good budget in place, you can then align your regular spending with your financial objectives, while also ensuring that you have put up clear guardrails to prevent overspending.

Setting Up an Emergency Fund

Speaking of overspending, there’s always the chance of an especially expensive “rainy day” coming around… which is where having an emergency fund comes in. This fund will help you deal with unexpected life events or financial crises, like losing a job or a sudden, costly medical bill.

Ideally, you should aim to set aside between 3 to 6 months’ worth of expenses for your emergency fund. You can work out what this figure is by tallying up the monthly totals for your:

  • Mortgage payments or rent;
  • Utilities (electricity, gas, water, etc.)
  • Transport costs; and
  • Groceries.
 

Nobody wants the storm to come, but having an “umbrella” to deal with the rain is better than getting drenched. To put it bluntly: your emergency fund is your umbrella, so make sure you have it ready, just in case.

Emergency funds are one of the key components of financial planning
Key Components of Financial Planning: Emergency Funds

Sorting Out Your Insurance

Emergency funds are good for helping you stay afloat during crisis, but they aren’t enough on their own. That’s why another key component of your financial plan includes a complete review of your insurance policies.

Insurance protects your assets and income from potential losses. When you get to this part of the financial planning process, we recommend you assess your insurance options by running through hypothetical scenarios:

Will the coverage offered by this insurance be enough if “x” happens? How about “y”?

If you have a family, remember that your insurance will need to cover them, too. If you’re able, consider having these insurance types in place for the best protection.

What types of insurance do I need?

  • Health insurance;
  • Homeowners or renters’ insurance;
  • Auto insurance;
  • Disability insurance; and
  • Life insurance (especially if you have dependents).
 

There are many types of insurance, so make sure you’re focusing on the necessities, with a good balance between premiums and coverage limits.

Managing Your Debts

debt management is one of the key components of financial planning
Key Components of Financial Planning: Debt Management

Debt can be a huge burden. We get it. But you don’t have to deal with it alone, and you definitely shouldn’t ignore it. That’s why debt management is another key component of good financial planning.

Debt management involves creating a strategy for reducing and paying off debt to free up resources for other areas of your financial plan. This could look like creating a debt repayment plan or consolidating high-interest debt into a lower-interest loan.

And remember: not all debt is bad debt! Some debts, like mortgages, can actually work in your favor when you manage them well as, for example, paying monthly installments on time can improve your credit rating.

Optimising Your Tax Arrangements

With proper tax planning, you can minimize your tax burden and maximize your savings and investments. Tax planning is vital in ensuring that your financial plan remains tax-efficient.

There’s a lot of detail to cover when it comes to tax planning, and you might want to reach out to a legally qualified advisor to make sure you’re on the right track, but here are a few areas you could have a look at to start.

Examples of tax optimization:

  • Tax deductions
  • Tax credits; and
  • Loss harvesting.

Investment Planning

investment planning is one of the key components of financial planning
Key Components of Financial Planning: Investment Planning

A financial plan that doesn’t account for investing is incomplete. The best financial plans include an investment strategy. 

By investing in stocks, bonds, real estate, or other assets, you can increase the chances of growing your wealth over time, and achieve your financial goals in the process.

It must be said that any investment involves risk, and there is never a guarantee of growth, but with the right advisors and an investment plan that suits your unique needs and preferences, you can put your best foot forward.

For more on the benefits of investment planning, check out our in-depth analysis here.

Planning for Education

If you have children or are planning on furthering your own education, it’s crucial to include education planning in your financial plan. 

You might think education planning just means saving enough to cover tuition, but it can be a lot more complicated than that, and there are ways to make this key component of financial planning work well for you.

Specifically, you might want to look into 529 plans, which are tax-deductible, and also do not incur taxes on earnings that are spent on qualified education expenses. Some other good options include:

What are good alternatives to 529 plans?

  • Coverdell Education Savings Accounts
    (for families with an income of less than $220,000)
  • Roth IRAs; and
  • US Treasury Bonds.
 

All of these are tax-efficient options that will help you deal with your or your children’s tuition costs, campus living arrangements, and general cost of living while at college.

Retirement Planning

Remember those long-term goals we talked about at the start of this blog post? For many people, that simply means retirement planning: another integral part of a good financial plan.

The basics of retirement planning are simple: work out what your desired retirement lifestyle looks like (for example, in the form of projected monthly income and expenditures), and then how much you will need to save to achieve that lifestyle comfortably.

Although it sounds simple in practice, there are plenty of potential “roadblocks” that can halt your progress. To discover what those might be for you, you can check out our free resource on retirement planning roadblocks here, or even reach out to one of our advisers to co-create a tailored retirement plan for you.

Estate Planning

estate planning is one of the key components of financial planning
Key Components of Financial Planning: Estate Planning

Of all the key components of financial planning on this list, estate planning might feel the most daunting of all… but if you get on top of it now, it doesn’t have to be a headache for your loved ones later.

Estate planning involves preparing for end-of-life arrangements and making decisions about how your assets will be distributed after you pass on. 

Having the right estate plan in place can help to ensure that your loved ones are adequately taken care of and your wishes are carried out when you aren’t around anymore.

Good estate planning might include sorting out your will, keeping an up-to-date record of the beneficiaries of your insurance policies and retirement accounts, and maybe even registering a power of attorney with someone you trust so that they can manage your health and finance decisions when you aren’t able to.

Reviewing and Adjusting

As we close out this list of key components in good financial planning, it’s worth emphasizing that a good financial plan is not a one-time thing. It’s important for you to regularly review and adjust your plan as your life circumstances change. This might happen, for example, when you get married, have children, or change jobs. Regular reviews will help ensure that your financial plan stays on track with your goals.

Including these 11 key components of financial planning can give you a strong foundation for success. As you write up a plan of your own, remember it’s not about perfection, but rather about taking control and making informed decisions.

Last but not least, know that you can always seek the help of a qualified financial advisor if you need guidance or support on any of the many key components of good financial planning. If you’d like a little help on your journey, Iron Point Financial can help you.

Our plans include access to interactive financial calculators, goal planning tools, budget and expense tracking, and an education suite, to cover your financial planning needs.

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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA. 

We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.

Further Resources

*The opinions contained in this material are those of the author(s), and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.

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