A financial plan is like a blueprint. It is a description of what you want to achieve and the tools you need to achieve it. Financial planning is the process of asking questions to ensure that you manage your risk against unexpected events, save enough for retirement, avoid pitfalls in the investment process and think about what happens to your estate after you die.
Solid financial planning begins with risk management. If you can't work, you can't pay the mortgage. If you die early, you can't provide for your family. A financial plan analyzes the risk of these types of events and the impact they could have on you and your family. Then it offers solutions.
Social Security is not likely to provide you enough to live on when you retire. A financial plan will calculate your expected income from all sources, such as Social Security and a company pension. It will then look at your current and projected expenses to see whether you will have enough money. By developing a financial plan you will know how much you need to save in order to have the kind of retirement you want.
Another purpose of a financial plan is to develop a long-term focus and keep you there. Whether you choose your investments yourself or use a professional adviser, many people, from neighbors to advertisements to unsolicited sales people, will offer ideas and opinions suggesting that the grass is greener with their ideas or services. A financial plan gives you a context in which to evaluate new investments, and avoids the pitfall of trying to chase the highest return.
Purchasing insurance to care for a disabled child or to look after a spouse not used to financial matters is not enough. Specific instructions need to be laid out as to how the money is to be used. Similarly, families can split over questions about who runs the family business or who gets the cottage. It is the job of financial planning, specifically estate planning, to help you address these questions while you live so that your hopes for after you die will be realized.