By Ben Feldmeyer CFP, CDFA, CLTC

 

Financial planning isn’t something you do one time; it’s a way of continually tracking your financial progress toward your goals.

I like to call it “having a relationship with your money,” because much like healthy communication between people, having a well-designed financial plan provides clarity—clarity about what to do, why you are doing it, and answers to “what if” scenarios.

Let’s explore the key elements of a comprehensive financial plan and what they look like in practice.

 1. Understanding Your Current Financial Position

At the heart of any financial plan is a clear understanding of your current lifestyle. Because without knowing what it takes to maintain the status quo, it’s pretty difficult to move forward or add new goals into the mix. In fact, most discussions I have with prospective clients end with me saying, “If I understand you correctly, under any scenario, at a minimum, you want to maintain your current lifestyle. Is that right?”

Their response?

“Yes!”

So, what is your current lifestyle? What do you prioritize spending money on?

If you need a hint, the answer is in your checkbook (or more likely, your online bank statement). Here are three key steps to understanding your current financial position:

• Income Analysis: Write down all sources of income, including salary, dividends, and passive income.
• Expense Tracking: Write down fixed and variable expenses, including debt payments, living costs, and discretionary spending.
• Savings Goals: Allocate funds toward short-term and long-term savings objectives.

Cash flow management is simply knowing where your money comes from and where it goes, and effective budgeting is living within your means while setting aside money for savings, investments, and future goals. Both of these are vital for creating a plan that reflects your current lifestyle and your long-term goals.

2. Debt Management

Some debt is good and some debt is bad; it can either be a tool for financial growth or a burden that limits your financial freedom. Understanding the balance between good debt (such as a mortgage or student loans) and bad debt (particularly, high-interest consumer debt, such as credit card balances) is essential. A sound financial plan should include strategies for managing and reducing debt.

Key Steps to Strategic Debt Management:

• Debt Assessment: Write down all debts, including their interest rates, monthly payments, and end dates.
• Debt Repayment Strategy: Prioritize repaying high-interest debts or consider consolidation options.
• Avoiding Future Debt: Establish habits that prevent unnecessary borrowing.

3. Investment Planning

Investing is key to building wealth over time. Your financial plan should outline an investment strategy that aligns with your risk tolerance, time horizon, and financial goals. It’s also important to learn about the different kinds of investments, how they work, and their features and benefits.

To start, memorize the rule of 72: Divide 72 by your rate of return, and you get the number of years it will take for your investment to double in value. For example, at 8% growth, your investment will double in 9 years.

Key Steps to Strategic Investment Planning:

• Risk Tolerance Assessment: Determine your level of comfort with risk and volatility.
• Portfolio Allocation: Decide on a mix of investments that suits your unique goals.
• Periodic Review: Adjust your investments as your financial situation or market conditions change.

4. Retirement Planning

One of the most significant long-term goals for many people is a comfortable retirement. Retirement planning involves estimating future needs and implementing a subsequent savings strategy that accounts for inflation, life expectancy, and changes in your lifestyle. Fixed income sources like Social Security benefits and pensions will affect the amount of personal savings you’ll need.

Keys to Smart Retirement Planning:

• Retirement Goals: Start with today’s lifestyle. (Remember the cash-flow management system from before?) Then, estimate how much you need to save based on your desired retirement age and lifestyle. (Something to remember: Some expenses increase each year due to inflation, but some—like a mortgage payment—don’t. And while some expenses, like food and transportation, never go away, they will change when kids move out of the house.)
• Using the rule of 72: If inflation increases by an average of 3%, your expenses will double in 24 years.
• Retirement Accounts: Maximize contributions to tax-advantaged accounts like 401(k)s, IRAs, and Roth IRAs.
• Withdrawal Strategy: Develop a plan for how and when to use your savings during retirement. Ideally, you would live off the return from your investments and preserve the principle.

5. Insurance Planning

Have you ever asked yourself any of the following questions?

“What if I get sick?”

“What if I get sick and die?”

“What if I get really sick and don’t die?”

They’re not very fun questions, I know, but they’re worth answering. An important part of financial planning is dealing with these what-ifs—and that’s where insurance comes in.

Insurance is a fundamental aspect of a financial plan because it protects against financial risks. Life, health, disability, long-term-care, and property insurance help protect you and your family in the event of unexpected loss or hardship. It’s important to know what types of insurance you might need and the appropriate levels of coverage to maintain your financial security.

Here are some ways insurance can protect your long-term financial goals:

• Life Insurance: Supports dependents in the event of death
• Health Insurance: Protects against medical expenses
• Disability Insurance: Provides income in the case of illness or injury
• Long-term-care insurance: Coverage for daily living assistance or extended care needs due to illness, aging, or disability
• Property Insurance: Protects assets such as your home, car, or business.

6. Tax Planning

Effective tax planning minimizes the impact of taxes on your income and investments, allowing you to keep more of what you earn. An effective financial plan should include strategies for maximizing tax deductions, utilizing tax-advantaged accounts, and tax-efficient retirement withdrawals.

Keys to Strategic Tax Planning:

• Tax Efficiency: As you save, be aware of how the account will be taxed.  Allocate funds accordingly, non-qualified accounts are “tax me as we go”, 401(k) accounts are “tax me later”, and Roth accounts are “tax me never again”.
• Retirement Accounts: Consider using accounts like 401(k)s, 403(B)s, Roth IRAs, or traditional IRAs to reduce taxable income in retirement.
• Tax Knowledge: Not all money is taxed equally (see capital gains vs. ordinary income), and it’s important to understand how each of your income streams will be affected.

7. Estate Planning

Estate planning ensures your assets are managed correctly (i.e., according to your wishes) prior to and following your death. It can reduce legal fees and provide for the care of dependents. Key estate planning tools include wills, trusts, power of attorney, and healthcare directives.

Keys to Effective Estate Planning:

• Your Will: Draft a legal document that specifies asset distribution.
• Trusts: Establish trusts to manage wealth transfer and avoid probate.
• Healthcare Directives: Create living wills and assign durable power of attorney for medical decisions.
• Getting It Done

Comprehensive financial planning allows you to have a healthy, intentional relationship with your money. It provides a practical system to help you pursue your goals—and with a system that addresses all key areas, you can have peace of mind knowing you’re set up for financial security. An effective plan is also a flexible one—ensuring that as your life and goals change, your financial strategies can, too.

So how do you accomplish all this? I’ve condensed the process into simple steps, but carrying it out takes time, resources, and specialized knowledge.

There are three ways you can create your financial plan:

• You can work on your own.
• You can work with your current financial advisor.
• Or you can find a financial advisor.

If you’re searching for a financial advisor…

Beware of the financial product salesperson who calls themself an advisor. These people are not in the advice business; they are selling what they have access to sell, whether you need it or not.  

Instead, look for someone you know, like, and trust who has the mind of a capitalist and the heart of a social worker. Look for someone who can teach you, not just advise you; someone who makes complicated things easy to understand. After all, you’re planning for your life, and you deserve to make decisions with full knowledge and confidence.

If you’d like help creating your custom financial plan, we would love to have a conversation with you.  

Connect with us for a complimentary consultation.