How to Build a Financial Plan for the Non-Professional

We believe you should be able to build a plan to achieve your financial goals and easily find professional advice if you want it. In this post we’ll talk about how to build a financial plan that’s focused on goals, not investments. 

All of us have goals like retirement income, buying a house, or sending a child to college.  Many of us have been led to believe we need to master difficult financial jargon to attain our goals.  We don’t think that’s the case. 

Instead of talking about investments, we want to talk about your goals, and help you understand how to build a plan to achieve them.  A goals-based approach is better because it puts you in control of decisions you can understand and skips the financial mumbo-jumbo. 

The approach is based around four common ingredients that are shared by all goals-based financial plans. These ingredients are easy to understand and control.

Let’s see how it works.

Want to jumpstart your finance journey with a little money 101? Click here to sign up for our (totally free) 3-email personal finance course.

The Four Ingredients of Goals-Based Financial Plans

First, think about how to plan for a goal without any investing.

Suppose you would like to buy a house that requires a $50,000 down-payment. You put $5,000 in a shoebox today, and every month following, put another $1,000 in the box.  In 45 months, you have $50,000. 

From this simple example we learn that attaining a goal requires at least three ingredients:  current savings (e.g. $5,000), future savings (e.g. $1,000) and a time horizon (e.g. 45 months).

Can we lessen the burden associated with this goal?  Waiting 45 months and saving $50,000 is difficult. 

Enter investment returns. They are the fourth (albeit optional) ingredient common to all plans.  Investment returns are great because they shorten the time horizon or lower the savings requirements associated with a goal.  

Let’s see how this works using the example above. But now, instead of a shoebox, put your savings in an investment account that increases the value of your savings each year by a specific amount.

This can reduce the amount you initially have to have saved. Instead of needing $5,000 to start, the amount your money can increase each year may mean that you only need $1,000 of initial savings.  Everything else in your plan stays the same. 

Or, another possible scenario is if you want to keep your initial savings commitment of $5,000 the same, then the time it takes you to reach your $50,000 goal could be shorter and you may get there 5 months earlier.  Or as a last option, you can keep your $5,000 of initial savings and 45 months of time the same but reduce each of your 45 monthly payments by $100. 

In each of these examples we only changed one element of your plan. However, you could choose to update a few elements.

For example, you may want to keep your initial savings commitment of $5,000 the same, but you may want to both reach your goal faster, let’s say 3 months earlier, and reduce your monthly payments by $50. You can see how investment returns not only have the potential to reduce your time and savings requirements, but they also let you choose your preferred mix of time and savings in your plan. 

While investment returns may have sounded a bit like a magic potion for your plan, one important thing to be aware of is that those returns are not guaranteed.

No one can predict the future 100% accurately. So, even if you have a pretty good idea of how much investment returns may increase the value of your savings, no one can know for certain. That’s why it’s important to always revisit your plan and make sure you don’t have to change any assumptions.

Now we can see that all financial goals share four common ingredients; a time horizon, current savings, future savings and investment returns. Making choices around those ingredients results in a financial plan. This approach to planning is called goals-based investing. 

Goals-based investing is a superior way to invest because it allows us to focus on the goal itself, and not get distracted by the difficult-to-understand investment concepts.  Throughout a goals-based process process, you are making choices with your goal in mind and you get to choose your preferred mix of ingredients.

That’s it! You now have the tool box to get started on a goals-based approach to building the foundation of a solid financial plan.

Start your financial plan in under 60 seconds. Click here to download Lasso

2 thoughts on “How to Build a Financial Plan for the Non-Professional

Comments are closed.

Up ↑

%d bloggers like this: