We’ll discuss myths about financial planning, how to begin the process, what you need to start, how to create a coordinated approach and the integration of your plan.
What are some of the myths about financial planning?
- Financial planning is only for wealthy individuals and families
- Financial planning and investment management are the same thing
- I have to give up control of my money
- Creating a financial plan is too intimidating
- I don’t need a plan…things will just work out
- Financial planning is a destination
Overview of the financial planning process
The first step in the process is defining your priorities and objectives. Next comes the data collection task, where you bring together all the necessary information to start to build your plan such as your income, debts and retirement accounts. From there, you will analyze all of that information to find the weaknesses and gaps that exist and work to fill those in. When your plan is done, if should feel solid and sound and relate back to your goals and objectives. At that point, your plan needs to be implemented, but don’t put the plan on a shelf and forget about it. Every year you should check your plan and make sure you are tracking towards your goals and adjust when needed.
Identify your objectives & priorities
Start by asking yourself what you are trying to accomplish, what your aspirations are and when you want to reach your goals. For some clients, your goal could be retirement or saving for your kids’ college. This will help you develop a timeframe and prioritize your goals to achieve them when you want. You then want to identify why this is important to you. Using retirement as an example, one way to determine the timeframe is to ask yourself, “It is important for me/us to be in a position to retire at X age, with an annual income of X dollars because of X.” You are essentially asking yourself if you are taking the steps required to achieve that goal. For many of us, we will have multiple goals as we formulate our financial plan.
How to get started
The next step is to figure out where you are now and create your financial profile. Take inventory of your assets including savings, investments and retirement accounts, liabilities such as debt and loans, insurance policies, tax returns and estate planning documents. Then take an analysis of your cash flow, or the amount of money going in and out of your household, which can be thought of as an income statement for a business.
When it comes to understanding cash flow, it’s important to understand the standard of living principal—people do not work for money, they work for the things that money can provide; and people do not live off their income, they live a lifestyle. When we look at that component when you are putting together a financial plan, you are determining if you break even, have enough to save money or are living above your means at the end of the month. If you are breaking even or spending too much, you will want to take a look at your discretionary expenses such as going to the movies or eating out and cut back.
What we are trying to figure out is where you are, what you can do about it and what this means to your future goals and objectives, making a financial plan that works for you and identifying what is most important to you.
How coordinated is your plan?
When it comes to your financial plan, think of yourself as the CEO of a company. Just as the CEO’s goal is to keep the company in business, it’s your goal to keep your household profitable. To do so, the CEO would coordinate with the treasury team, risk management team, human resources and tax department; and in turn, you will want to coordinate and talk about your plan with your ‘team.’ Your team includes your bank, investment professional, tax advisor, insurance professional, attorney or legal team and making sure you are getting the most out of your employer benefits.
When you think about the bank relationship, they can serve as the foundation within your household and will help you achieve your future goals and objectives, especially when it comes to the management of your liabilities and cash. You will want to allow your bank to talk with the insurance professional and all members of your team so that everyone is aligned on your financial goals and everyone is working towards meeting your objectives and priorities.
The integration of your plan
Once you have in plan in place, you want to integrate it into all planning strategies including:
- Your present situation: It’s paramount that you understand your current net worth, not only what it is and the composition of it but how to track it moving forward to ensure your assets are going up and liabilities are going down. This will also help you project future income and needs as they relate to the expenses that you have.
- Your protection strategy: Your present situation will help you determine a protection strategy such as what to do if you are disabled or have health concerns and look at what expenses will go up or remain the same.
- Your wealth accumulation strategy: Know how your portfolio is designed, what range of returns you need to earn and what risks you are taking.
- Your tax planning strategy: Manage your federal income, estate, gift and generation-skipping taxes (GST) and see how you can reduce your overall tax liability.
- Your retirement strategy: Project the impact of an earlier or later retirement and think about how much you will realistically need in retirement. This goes back to your present situation and seeing how much you spend on a monthly basis and determining what the lifestyle you want in retirement.
- Your wealth preservation strategy: To preserve your wealth, you have to think about how you will maintain it. That involves less risk and more diversification and asset allocations in your strategy. It also involves what plans you have in place to help manage your estate and provide protection when you transfer money to the next generation.
When you start to think about your overall financial plan, recognize that the decisions you make in one area, typically will impact other areas of your plan. We often think about our goals in a linear way, but when it comes to the integration of your plan, you should be looking at it horizontally and that every action can impact every different strategy. This goes back to the basics as to why you systematically want to look back at your progress and adjust as you go.
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