Financial Planning Model Definition
A Financial Planning Model is a framework that helps you identify how much money you need, what sources of income will be available, and the expenses you expect.
This model is helpful for business owners, entrepreneurs, or anyone who wants to know how they can better plan their financial future.
Financial planning starts with creating a budget so that you know where your earnings are coming from and where all of your spending’s are going.
The financial planning model takes this knowledge and uses it to balance your earning, spending and build up assets like savings.
Who Develops the Financial Planning Model?
The financial planning model is usually developed by a professional who understands all the laws governing investing and financial planning. This person can be a financial planner trained to make the model or someone like an accountant or lawyer.
These professionals will take information from the client and use it to create a financial plan that can be used for future growth of income, expenses, or savings goals.
The financial planning model provides a blueprint for future success with money, so it needs to be created by someone who knows what they are doing.
How Does a Financial Planning Model Work?
The financial planning model will take the information you provide to the professional and create a plan based on it.
This can be done in several ways, like balancing your earning sources with outgoings or creating an asset allocation that works best for you.
Different modes of financial planning use different models; some are better than others depending on what kind of financial planning you need.
The model will give an output, like a balance sheet or statement of income and expenses that shows what kind of plan is best for your situation.
Why Use a Financial Planning Model?
There are many reasons why people use these tools.
- They make the financial planning process easier by taking a lot of information and creating something useful.
- The model is based on knowledge and expertise, so it will be accurate and useful.
- The numbers and financial data it provides can be used to better understand your situation.
- There are professionals who feel more confident about investing with guidance from this kind of financial plan rather than going it alone without understanding all of the numbers behind making decisions.
- It can help you implement a plan that will lead to financial success.
Using a financial planning model is a great way to better understand your financial situation and give you the tools that you need to be successful.
Examples of Financial Models
There are many financial models that you can use. Some of the most common types include:
Cash flow model – It is a financial model that helps you to understand how cash flows in and out of your business.
Retirement planning model – The retirement planning model helps create a steady stream of income that you can rely on when you get older.
However, it needs to be worked into your financial plan from the beginning so that there will still be money available decades down the line.
How Do You Build a Financial Model?
You will need a list of all current assets and liabilities, an income statement for at least one year’s time period if possible, and a rough idea about how much money you want to have in savings by specific dates.
If your budget is already balanced, this part should be easy enough since you know where every penny goes each month.
However, if your finances are not balanced, you may need to do some work to ensure that all of the numbers add up.
This is where a financial model might be helpful. A financial model can be built in a spreadsheet program like Microsoft Excel. You’ll need to have at least the following columns:
- Inputs for monthly income and expenses
- Assets/liabilities that you own or owe over time, including current asset values as well as projected future value if they are investments
- Projected bank account balances each month using your inputs so far plus what is needed to pay down debt or add towards savings goals
If there are any other figures you would like included, these should also be added along with their formulas so that it makes sense mathematically when looking through them later on.
Once your financial model is complete, review all of the inputs and make sure that they are accurate so that there won’t be any problems with projections over time if things don’t turn out as planned financially.
Common Mistakes People Make When Creating Their Own Financial Plans
The biggest mistake people make when creating their financial planning model is not learning all of the required information.
If you don’t know about tax laws or how interest rates work, that can lead to problems in your plan where money isn’t being saved or invested in the most effective way possible. This can lead to problems down the line if you hope to reach specific goals for your finances.
Some common mistakes include:
- Not understanding inflation rates over time
- Assuming numbers will stay consistent without any changes being made, so they don’t take into account future expenditures or income sources where there are unknowns at this point in time
- Not starting with a plan and instead just diving into creating the model so that it is harder to pinpoint what changes need to be made along the way.
Why Should You Hire a Professional to Help With Your Finances?
There are many reasons that people choose to work with financial planners and other types of professionals when it comes time for them to create their own financial plan or model.
Some expected benefits include:
- Knowing all of the rules and regulations that come along with different financial products
- Having someone who can explain complicated terms in a way that makes sense for their client’s specific needs
- Understanding how interest rates, income tax brackets, investment returns, inflation rates, or other economic factors can impact what you decide to do financially over time
- Having someone work with your numbers to be personalized for what you want to achieve rather than something generic because not everyone’s financial situation is the same.
If you want a better future or just feel like you need someone to help guide you through your financial decisions, then hiring a professional is the best way to go about it.
A financial plan model will help you create a plan that can be tracked over time to see if you are meeting your goals or falling short of them.
These plans will look at income from all sources and expenses and debts, allowing the user to make changes for their financial future to remain secure.
With these models in place, it is possible to reach savings goals faster, invest more efficiently, and avoid costly mistakes when working with a professional who understands how finance works best.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.