General Principles of Financial Planning
The basic building blocks of a financial plan.
Shrewsbury Financial Collaborative
Table of content
Basic Elements of a Financial Plan
At its core, a financial plan matches current and future income with expenses in a sustainable manner. At times when income exceeds expenses, this leads to savings which creates assets that are able to be invested and grow. Conversely, debt is accumulated when expenses exceed income and assets are either unable or not desired to be drawn down. The overriding goal of the financial plan is to coordinate income, expenses, assets, and liabilities over the course of one's lifetime.
The first step is to get a complete picture of one's current situation. This is usually accomplished by bringing together a detailed balance sheet and cash flow statement. Next, an emergency fund needs to be in place to provide ready cash for unexpected contingencies. Finally, a plan for dealing with unproductive and expensive debt is addressed.
The Details
A Balance Sheet is used to summarize assets, liabilities (debts), and net worth.
Cash Flow and Budgeting compares income with expenses, allowing for effective money management.
Emergency Fund Planning ensures that sufficient funds are available when unforeseen circumstances arrive.
Credit and Debt Management allows convenience and smoothing of lifelong consumption while avoiding financial pitfalls.