Developing A Comprehensive Financial Plan
A financial plan is a “guiding” document that lays out at the present time how you expect that your financial life might unfold over the short, medium and long-term horizons in support of your real life. We begin with a broad view and take a holistic approach to planning. We see one’s life as a collection of important ecologies— the family ecology, work & professional ecology, investment ecology and so on. We lay these out as best we can to see how they all interact with each other. We use them to build assumptions that extend out into the future. We see this as the starting point, as the guiding light needed to build the financial plan.
Things that We Consider
We will ask our clients about their plans in life. What do they want their their money to do for them? Where does it go? Where does it come from? Do they have all the money they need in life and are mostly concerned with protecting it, or are they looking to earn more?
We ask about the family life. Are they healthy? Do they have dependents? Are their parents living? If so, are they in need of support or might they eventually leave you an inheritance? Do they have a special needs child?
The more we know about the needs and desires of a client the better prepared we are to build a financial plan in support of those needs and desires.
Getting More Specific
Once we have a good understanding of our client’s life plans, we can get more specific. We’ll then discuss the family balance sheet—assets and liabilities. We’ll ask what you own and what you owe and why. We’ll ask about current income and expenses. We’ll want to know about the types of insurance coverage the client has or may want— life, health, disability, long-term care, property, etc. This allows us to see what it is today and what they would like it to be in the future.
From the more specific data, we can begin to outline the framework of a reasonable plan with reasonable expectations that align in support of the client’s plans for life. It can be thought of as a financial forecast for the rest of client’s life, including what passes on to the heirs.
What is Risk Mitigation and Why is it Important?
As you put together a financial plan there is risk that some of the elements of that plan may not be achieved. Risk mitigation is another way of describing “insurance”. Life insurance, for example, mitigates the risk that you don’t live as long as you planned to accomplish your goals of building enough wealth to provide for your family and heirs.
These goals may have been to pay off the mortgage, to fund your children’s education, to provide for your spouse’s retirement, etc. There are also types of insurance to cover the event that you live too long, thus creating the risk that what you saved for retirement is no longer enough.
Health and disability insurance are other ways to mitigate the risk associated with other elements of the financial plan, such as an illness or injury that prevents someone from working. Property insurance mitigates the risk of loss due to theft or fire in the home, for example.
The key is to neither over-insure (spending unnecessarily), or under-insure (accepting too much risk). Our expertise is applied to striking that balance to find the appropriate amount of risk mitigation in the financial planning process.
Cash Flow Planning
When you’re putting together a financial plan and talking about how it might unfold, you must look at the timing of income and expenses. It might not all be coming today. Some might be coming in the future. It’s critical to consider the timing of cash flow to match the timing of income and expenses in the financial plan.
The reverse of investing is borrowing, and that can be done intelligently as well. Though we aren’t in the “lending” business, we understand very well how debt functions. Our approach is to see that you efficiently manage your debt so as to maximize the amount of money you have for saving and investment.
Estate Planning addresses the question, “what happens to you and your ‘stuff’ when you die?” There are legal ramifications, tax ramifications, and they should be planned for prior to death. Put simply, when you die a certain amount of your remaining wealth above an established threshold will be taxed. Advanced estate planning maximizes the amount of money that remains with the family while reducing the amount of money that is paid in taxes.
Additionally, estate planning encompasses other issues, such as who makes the important medical decisions when you can’t. This is referred to as the medical directive. A durable power-of-attorney directs who makes other important decisions in the event that you are incapacitated. The creation of a Will, outlining what to do with assets upon death, is part of the estate planning process.
It can be reassuring to have an estate plan, knowing that process will be easier on your heirs.
Retirement Planning is a subset of financial planning. It is the component that answers the questions, how much do I save, how do I invest my savings, and how do I design it so that it supports me for the rest of my life after I retire? The retirement plan exists in the ecology of the other components that make up the financial plan. For example, while saving for retirement someone might also be saving for the cost of educating a child, and these must both be accounted for within the broader scope of the overall financial plan.
The income level of an individual at the end of the tax year determines their tax rate for each additional dollar earned. This could be 30%, 40%, 50% and so on. At that point, each tax dollar saved through good tax planning is a dollar that is available for savings and investments.
People are often very focused on the yields of their investments, looking for a certain percentage of annual growth. They often neglect the benefit that can be achieved with proper tax planning. We love to identify these opportunities as early as possible. If you wait until the end of the year, or even after the end of the year, to consider these issues, some excellent opportunities to reduce tax obligations may have already been lost.
When is a Financial Planner or Financial Advisor Necessary?
Once a person begins to save and invest they can benefit from financial planning and investment management services. The benefits from (and the need for) an advisor continue to grow as life becomes more complex. Adding complication is that one’s life becomes very busy and there’s little time to spend studying the complexities of the economy, the financial markets, insurance needs and so on.
A financial advisor is there to be the “quarterback”; to create and then monitor an appropriate financial plan. The advisor will make sure that all the necessary work gets done by staying apprised of the unfolding of the important events in your life, then adapting the plan and carry out the necessary actions as needed. They bring a great deal of expertise when critical expertise is needed and often lacking.
This is our approach to financial planning: to play the important role of financial expert and trusted advisor. To teach when necessary, to take action when necessary, and to build a lasting, beneficial relationship with our clients. In doing so, our clients are free to enjoy their lives with less worry about the complexities of financial management.