According to Gallup only 30% of Americans have a long-term financial plan. And yet, I believe the process of financial planning can benefit anyone. Financial Planning is frequentlytalked about and yet most people do not really know what it is. Many equate it with having investments. While savings & investments are part of a well-crafted plan, they are like the engine of a car. The engine alone without a body, transmission, tires, and steering wheel is incomplete – to put it mildly. Worse yet, many who are saving and have some investments think they are in good shape and that they do have a plan!
Another common misnomer is that a financial plan is a one-time event – like a baptism or marriage that can forever be memorialized. A large, stately looking document to be put on the shelf with other important mementos that serve as a reminder to all that you have a “financial plan”. In reality, financial planning is most effective as an ongoing process. It is the willingness to look at the various components of your financial life against the measuring stick that you create to determine if all the pieces create the picture you are striving towards. Like looking in the mirror to see how my physique compares to the chiseled and lean ideal I am striving towards. In other words, based on your goals is everything ok, or do you need to adjust? It is said that airplanes are off course 90% of the time, so it is the pilot’s job to continually adjust to get the plane (and its passengers) to the intended destination. Financial planning throughout life is much the same.
The following is a high-level list of many of the key ingredients of a well curated financial plan.
• Net Worth Statement – you may have heard your accountant or banker call this a balance sheet. It is simply a list of everything you own (houses, cars, investments, etc.) and everything you owe. When you subtract all you owe from what you own, the resulting number is your net worth. This single number is good to monitor year-over-year to get a sense of your progress.
• Cash-Flow Summary – At its simplest, this is just a list of all of your sources of income (salary, business, rental, pension, social security, etc.). Ideally, it would also incorporate your annual expenses to include taxes. Once added up it shows if you have more income than expenses or if you need supplemental income from work or investments to maintain your current lifestyle. If you are pulling from investments to make up the difference, you would also want to know what percent of your total investments you need each year to make things work. This is a very important number as it tells how long your investments could be expected to last.
• Investment Allocation – If you have multiple mutual funds and/or investment accounts, it can be challenging to know how your total portfolio is invested. This is where you put all your investments together and see what the mix of stocks and bonds is. Additionally, you want to know how much in domestic versus international stocks, how much is in small versus large, and growth versus value. The same is true for bonds. Do you have government, municipal, or corporate bonds? And how much of each? Investment grade or non-investment grade (aka “junk” bonds)? Once you know what you have, you can evaluate it against a prudent, evidence-based approach to investing to know whether you should make enhancements.
• Insurance – This is also known as risk-management. Ideally, at a minimum you would have a list of all the policies you have with key information about each policy. This would include homeowners, auto, life, health, disability, long-term care, and umbrella policy. Some have supplementary policies for cancer, cellphones, and just about anything else you can imagine. Key information to include in this summary would be policy number, premium, beneficiaries, agent’s contact information, benefit amounts, deductibles, etc.
• Estate Planning – This would include any documents you have which spell out what happens if you become incapacitated or die. This could include a Will, Power of Attorney, Living Will, Healthcare Surrogate, Pre-need Guardian and possibly a trust(s). It could also include a copy of the deed(s) to your home(s), beneficiary forms, lists of digital assets, safe-deposit box information, etc. Ideally, this area of your plan would be created by an estate planning attorney knowledgeable with your state’s laws.
Although this list of the big five areas of planning will go a long way towards becoming better financially organized, there are other aspects of your finances that may also need attention. Some examples include:
• Income Tax Review – are you missing out on tax savings opportunities? If retired, are there things you can do to avoid the Medicare surcharge? Or should you be considering converting some of your IRA to a Roth IRA? Reviewing your tax return to look for opportunities to reduce current or future taxes is something that must be considered each year.
• Debt Review – If you have many debts, this will be a top priority. A starting point is to know who you owe, how much, and the interest rate for each loan. Are there opportunities to refinance and reduce the rate to accelerate the payoff?
• College Funding – If you have children or grandchildren who you would like to help get through college, it is wise to know the differences between different types of plans to save for college. Then calculate how much should be saved each month or year to have enough by the time junior graduates high-school.
• Charitable Giving – For those who are charitably inclined, this is an area that is often overlooked. Whether it is giving appreciated stock or other assets, using qualified charitable distributions or other more advanced strategies, giving to charity in the right way can have paybacks beyond making the world a better place!
• Business Planning – Particularly for those who own their own business, there are many opportunities to reduce income taxes and increase savings. Considerations include how the business is owned, how much to take in salary versus distributions, having the right type of retirement plan, proper bookkeeping, and what expenses can be legitimately deducted through a business.
Reviewing each of these areas would be a very good start but is by no means exhaustive of all you need to consider. Keep in mind these are the primary ingredients of a financial plan. Once all the ingredients are in place, the next step is to look at them considering your unique goals and desires to determine if changes need to be made. Frequently, through life’s seasons, gaps develop between your ideal financial plan and what you actually have. Closing these gaps requires initiative, action, and an understanding of the landscape of possibilities. This is whereworking with a CERTIFIED FINANCIAL PLANNER™ professional can provide the greatest benefits.
The discernment, wisdom, and experience the right advisor brings to your situation can provide immeasurable value. This fiduciary advisor may be the unbiased voice of reason that challenges whether to leave a large lump-sum outright to an irresponsible child. Or they may question the validity of changing your investment strategy during a season of financial stress. Either way, if you don’t know how to address the components listed or just want the assurance and peace of mind that can come from an experienced professional, don’t be afraid to get help. You will feel better just knowing where you stand and have an ally to help you navigate the skies as you fly towards the destination of your dreams!