Having a financial plan is a lot like having a travel plan — it identifies where you’re going, how and when you’ll get there, how much it’ll cost, and things do along the way. Like planning a vacation, your financial plan can be loosely structured or highly detailed based on your individual needs. But having no plan at all could leave you stranded in the middle of nowhere.

A financial plan answers three primary questions:

1. How much, when, and where should you save while you’re spending less than you earn? Examine your wages, debt payments, living expenses and other budget items to determine how much to contribute to your plan (when you have a cash-flow surplus), and decide which account the money should go in.
2. How should your savings be invested until they’re needed? Identify which asset classes to invest in, how much to put in each, and which actual investments to use. Diversification helps you manage investment risk.
3. How much, when, and from where will you access savings when it comes time to spend them? Address situations when financial needs exceed available cash from income (a cash-flow deficit) and must be supplemented by withdrawing savings from your plan. This might be a limited-term need such as paying for a child’s college education, or a lifetime need such as partial or full retirement.

To properly address these questions, identify your financial goals. Questions to ask yourself include:

• What kind of current lifestyle do you want or need? How much will that allow you to save?
• What kind of future lifestyle do you want or need? How much will you need to spend?
• When do you want or need to stop contributing and start using savings?
• How much investment risk do you want or need to take?
• Do you want or need to leave a specific amount of money after you’re dead?
• What else do you want or need?

It helps to think in terms of both want and need. This may allow some goals to lean toward the “want” side, while others can be closer to the “need” side. For example, you may choose to work and save for a longer period of time so you can lower your savings rate to take nicer vacations now, or you might plan on spending less in the future so that you can lower your investment risk now. Planning can help you balance comfort and compromise.

A financial plan should have a constant method of evaluating whether it’s working, so that you can check it on a regular basis to monitor progress. Once you have a working plan, you can use it to make informed choices. Check to see what a sacrifice really gets you so you can decide if it’s worth making. Change the plan up to see how it would look if you lost a job, became disabled or died; this may help define your insurance needs. Figure out what to do with a bonus or unexpected tax refund. There’s a lot if useful information you can obtain from a measurable financial plan.

Lastly, here are a few tips and some common mistakes to avoid when maintaining your own plan. Even small errors can compound over time.

• Be realistic with investment returns; don’t plan to outperform the markets.
• Account for market risk; don’t assume the same return will occur every year.
• Don’t forget to plan for fees, taxes, and inflation.
• Don’t plan on dying too young.
• Revisit your plan regularly to see if it’s still working.
• Ask someone else to check your work, whether it’s a close friend, family member, or a professional planner.

Next time I’ll discuss when and how you should hire a financial planner.