Anatomy of a Financial Plan

A bunch more people have a money budget than a financial plan.

That's a simpler concept we are all familiar with. It's also the first step in the hierarchy of your financial needs. Step 1 of Dave Ramsey's 7 baby steps if you're into your personal finance gurus.

A budget's definition and purpose are clear: Where does your money go each month? Can you have some amount left over for other stuff?

For plans, the definition is the inverse: It is all the "other stuff" from the budget that the plan addresses. Whatever doesn't fit neatly into your monthly budget, would go into the long-term plan. Like "buy the dream car in a couple years at this new employer I'm interviewing at". Good luck budgeting for that.

If you're struggling to think long term, allocate your leftover financial resources efficiently or even just really holistically visualising where you're at financially at the moment - a budget won't save you.

You need a plan, my friend.

The purpose of a financial plan is essentially to act as a map towards a goal.

Most goals are clear. Buy a house, retire comfortably, have a second child, etc. If you're struggling to set a clear goal, take a step back and think about the most ambitious realistic version of what you want your life to look like. Most people undershoot, so don't worry about that. Start there and it's the plan's job to help figure out if it's achievable or you need to dial back a bit.

You start with in "[X] [years|months] time, I want to [be here]". And you work backwards from there.

The actual content of the plan is pretty straightforward. You'll have your:

And that's it. You have where you are, where you're going, what your path there will look like and what you need to be doing to get there.

Even cooler - you also get the confidence today that you will know what to do tomorrow if something happens on the journey. And by the way, something always happens. Say a year goes by, you don't get promoted, you won't panic anymore. Your financial model already exists and its job is to tell you "well, I will get [there] in [x] more months now".

To help you, here is a great financial model template popular on Reddit.

Start with your goal, do some stuff in between, end with your goal.

Boom. Done. That was easy.

But you see what I did there? The above makes no sense. That's not an explanation. That's like a footballer's step-by-step of how they kick a ball. That's a description.

Realistically, you'll open that template and will feel like… ok… now what?

The key insight is what you are actually trying to do is plot your path towards a goal. All the actual content of the financial plan exists only as an output of the exercise; to be referred back to and reassessed later.

But the creation process itself is the real financial plan. Because if you're able to create a good one, it means you:

Now that definitely isn't "Boom, done. That was easy."

Everyone's budget is the same: Income - Expenses = Buffer. Even if you want to zoom in and be more detailed, it's still the same: (Regular Income + Extra Income) - (Sum of Essential Expenses + Sum of Discretionary Expenses) = Buffer.

Load in your banking data, categorise all transactions, aggregate your last few months, average out, add in some non-recurring → come out with a reasonable estimate of next month. Find levers to optimise (in practice that basically means cut expenses) → live the month → repeat the exercise comparing your budget to what actually happened.

There are some time-consuming steps to it, of course, but they are generic and automatable. Tons of apps and spreadsheet templates exist to help you. So there really is no excuse for not budgeting.

Plans are not like this.

You see the triple whammy - the approach is completely different for every situation and this is a lot more difficult and the results contain uncertainty by default.

I submit to you that this is why you don't have a financial plan:

This s**t's hard, sure. But it's not that hard. You likely already do some version of this. Partly in your notebook as those money tasks you need to do. Partly in your head as ideas you might do later or if something happens. Partly in your spreadsheet as rough calculations on the margins of your monthly budget.

So take a weekend. Do some online research to improve your understanding. Use the template to put together a financial model. Talk to someone to review, and stress test your methodology and assumptions.

It's very doable. And, most importantly, it's very worth doing. Once you're done, you'll have much more confidence in your money and yourself, and much improved chances of actually achieving that dream you have.