Financial Planning
Whether you’re saving for a goal such as retirement, a wedding, or buying a home, adjusting your budget to downsize as you move into retirement, or planning to streamline your finances to resolve debts, financial planning can be powerful tool. A financial plan consists of your finances, goals, and strategies to achieve those goals as laid out by either yourself or a financial planner. A good financial plan will help you understand cash flow and how to set and achieve your goals. This means incorporating every aspect of your finances, including savings, debts, investments, income streams, volatility, etc., to create a single, comprehensive strategy.
What is Financial Planning
Financial planning typically involves several stages of assessment, setting goals, and strategy. Your financial advisor will help you at each stage, offering advice on how to make the most of your assets to meet your goals with minimum risk and minimum discomfort to yourself.
Financial Analysis
The first step to deciding where you want to be is to understand where you are now. Your financial advisor will examine cashflow to understand debts, investments, earnings, and what you normally spend so they can guide you towards realistic and achievable goals.
Setting Goals
You may already have goals in mind, you may have a vague idea of “save money” for no reason at all. Your financial advisor will help you to align your goals with your cashflow and finances. For example, if your goal is too low to meet your needs at that time (e.g., if you want to save 7% of your earnings for retirement, but that won’t allow you to retire at the age you want), so that you can consistently meet savings goals (aiming to high will generally set you back further than aiming too low) and ensuring that you have emergency funds and room to enjoy yourself while saving. Importantly, you can have more than one goal at once. E.g., it’s possible to start saving to build good saving habits and then move into a strategy when you are financially secure enough to do so. Financial planning is valuable at every stage of your life, because it helps you make the most of what you have now.
Building a Strategy
Financial planning almost always includes a long-term strategy, usually designed around short-term needs, with plans to reassess and redesign the strategy as your situation and financial needs change. This can include:
- Allocating a portion of income to annuities based on cashflow and debts
- Refinancing and consolidating debt to reduce high-interest across multiple payments
- Focusing on and paying off high-interest debt
- Planning savings accounts and programs for assets. E.g., if you’re saving for retirement, you have numerous account options such as traditional or Roth IRAs, 401(k), 403(b), etc. If you’re saving for a college education, you also have choices. Your financial advisor will help.
- Choosing and participating in programs to help you save, such as employee-sponsored 401(k), IRA tax deductions, etc.
- Setting a budget (this can include percentages, like the 50/30/20 rule – 50% towards cost of living, 30% towards luxury/wants, 20% towards savings) or an actual payment as determined by your financial advisor
- Emergency planning and saving
- Portfolio management, including investment, balancing, and management strategies. These will heavily depend on your goals. For example, if you’re saving for the short term, you want to avoid high-volatile stocks. If you’re investing for the long-term, higher volatility but higher return investments have more to offer.
- Tax planning to ensure that you minimize what you owe now and in the future, making the right choices to protect your earnings. For example, if your income is high now and will be low in retirement, you likely want a traditional IRA. If income will remain high in retirement, a ROTH may be a better choice.
Eventually, your financial strategy should be highly tailored to your personal needs and situation.
Your financial advisor will review those needs and build your strategy around you. For example, your financial strategy will be completely different if your goal is to build a retirement savings and save for your daughter’s college education over 20 years, versus setting aside money to buy a home over the course of a few years. That plan would, again, be vastly different, if your goal were to instead pay off a high-interest debt or to become debt free.
Long-Term Management
Your long-term financial planning should include management, review, and updates. Financial planning must change with your situation and needs.
You can schedule reviews to change financial planning on a yearly basis, or make plans to do so at key points, such as when changing jobs or getting a promotion, or when other key factors, such as paying off a debt, having a child, buying a car, etc., might impact your existing strategy. The key point is that your financial plan must adapt with you to remain relevant and to ensure you meet your goals.
This might include:
- Increasing retirement account contributions as your salary grows
- Shifting payments to a debt to a savings account or to another debt when that debt is paid off
- Investing in insurance to ensure financial stability n case of a job loss or loss of life.
- Shifting payments from a college account to an investment account after meeting savings goals
- Changing your investment strategy as you move from mid-term goals (saving for child’s tuition) to a long-term goal (saving for retirement and your child’s inheritance)
Good financial planning includes portfolio management and ongoing advice. This doesn’t have to be regular advice, but it should ensure that your strategy adapts with your financial situation. Financial planning is not free, but it will help you to utilize your assets to meet goals, make the most of what you have, and save for your future.
If you want to learn more, contact Tangent Retirement today.