January 2021
Financial Planning is a lot like vacation planning. You need to ask many questions to create the right trip. You decide on a destination, do research, and weigh your choices to give yourself the best experience. Many of the same questions go into developing a financial plan; you need to establish goals and make decisions about money, timing, security, and how you will get there. Key to making good decisions is having the right information. That’s why you ask all the questions - to know what your options are. Your goals and circumstances may change. Two key things to understand about financial planning are the components and the process.
FINANCIAL PLANNING COMPONENTS
CASH FLOW AND BUDGETING
How much money do you have? The foundation of a good financial plan begins with understanding how much money is coming in - your income and how much money is going out - your expenses. You can further break down the expenses into items you need to pay for like your mortgage/rent or college and then the items you want in life, like that dream vacation or new car.
RISK MANAGEMENT
Are you prepared for the unexpected? Covid has changed everyone’s life to some degree but does your plan include insurance to cover all the necessary areas including the basics – medical, car, home, life and disability – and the new concerns including cyber security and identity theft?
RETIREMENT
Will you have enough money for retirement? Strategies to ensure you have enough money to last through your retirement years are a big part of a financial plan. We need to consider many factors including your cash flow goals, tax impact to you and your heirs, healthcare including Medicare and long-term care planning, Social Security Income, pension planning, and distributions from IRAs, 401Ks, 403Bs.
COLLEGE
How will you pay for college? With the costs of schools skyrocketing over the last few years it’s now more important than ever to understand all the various saving options and how best to maximize the government programs.
INVESTING
How should you invest your money? You need to properly define your goals and then match up the right investments to achieve those goals. Developing a personal investment philosophy is the key to your success. Each goal needs to consider your timeline and risk tolerance to guide your decisions. We can help you develop an investment philosophy and then apply it to your various accounts.
ESTATE
What happens when you die? In addition to having current legal documents, you will need to decide how you want your money to be distributed after you pass. Wills, trusts, taxes, durable power of attorney, and medical directives are important elements to protect your family after you are gone.
TAXES
How much tax will you have to pay? It is essential to consider the tax impact of your financial decisions to maximize tax incentives and deductions and minimize the tax you have to pay. Now that you’ve asked all the questions, how do you create the plan?
FINANCIAL PLANNING PROCESS
There are many factors that go into a professional financial plan. Each step is carefully considered and integrated into a unique plan.
Step 1: Understanding Your Personal and Financial Circumstances
Determine your current financial situation including income, savings, living expenses, and debts. A list of current assets, debts and expenses gives you a foundation for financial planning activities.
Step 2: Identifying and Selecting Goals
Review your financial and personal circumstances, understand the effect that selecting a particular goal may have on other goals and discuss reasonable assumptions and estimates
Step 3: Analyzing Current Course of Action and Potential Alternatives
Assess whether your current strategy maximizes the potential for meeting goals and consider alternatives that may be more effective.
Step 4: Developing the Financial Planning Recommendation(s)
Create an action plan by choosing the methods you will use to achieve your goals.
Step 5: Presenting the Financial Planning Recommendation(s)
Review all recommendations and the supporting information so that you understand your plan and have realistic expectations.
Step 6: Implementing the Financial Planning
Put your plan into action by identifying products and services that are consistent with your goals and priorities, then transferring assets and managing the investments to keep you on the path for reaching your objectives.
Step 7: Monitoring Progress and Updating
Your situation and goals may change over time, so revisit the plan to adjust for these changes. A regular review of these steps will help you adapt your plan to your new circumstances.
As you can see, this is a very detailed process. Working with an experienced financial advisor will make it easier for you to access the latest information, understand the implications and decide on the best alternatives for your situation.