Financial planning may seem like an obscure term to some and often even those that have an idea of what it is don’t fully know what it means.
The basic function of a financial plan is to reduce your stress about money, support your current needs, and build a nest egg for retirement. Essentially, it’s to provide peace of mind for you and the people you care about. Another definition would be that it’s a process to check your current finances against your long-term goals. You need to know how much money you have, how much you’ll need to meet your goals, and then the best steps to get there.
Here are six basic steps:
- Identify your goals: Think about and set your goals along with what you need financially to achieve them. For those who are retired or nearing retirement, these may include considering if and how much you would like to travel. If golf is your thing, would you like to go every day? Do you want to leave money to your children? Or maybe you want your last check to bounce.
The point is to spend some time thinking about your goals but realize a plan is dynamic and always evolving so don’t get too hung up.
- Gather all your financial data: What’s your net worth? What is the value of your cash, investments and other assets versus your debts? What are your cash inflows and outflows?
- Analyze to see how your goals align with your finances: during our planning process, we aim to answer three main questions:
- Are you on track to meet your long-term goals?
- Can your tax bill be reduced?
- Can your portfolio be improved?
- Develop the plan: Layout or list exactly what you need to do to achieve your financial goals, including the answers to the three questions mentioned above.
- Some example suggestions:
- Consolidate and rebalance your investment accounts into lower-cost investments.
- Purchase some LTC to provide peace of mind.
- Convert some funds from a traditional IRA to a Roth IRA in low- or no-income years.
- There are obviously many more recommendations that could be proposed, it just depends on each households’ specific goals and situation.
- Plan implementation: Make an action list to help you move through and check-off items in order to help you get to where you want to be financially. Work with professionals to achieve said goals.
- Last but not least, monitor and adjust because life happens, and plans change. This is a dynamic/changing process and you may need to adjust, depending on how you’re progressing.
Here is a brief and general list of things almost everyone can do to get started:
1. Pay attention to where your money goes. Try to cut-out items that aren't essential to your goals.
2. Get that employer match! Automatically doubling your investment right away is tough to beat. If your company offers a 3% match, take it!
3. Make sure you have an emergency fund. This should be 3-6 months of expenses depending on your situation.
4. Get rid of bad debt. Credit card debt is bad debt. If you are paying interest on your credit card, you aren’t ready to invest. At 20% or higher, you won’t make enough in investment income to compensate for what you’re paying to the credit card companies.
5. Invest - start a traditional IRA or a Roth IRA depending on your situation.
6. Create a “margin of safety” to protect and grow your financial situation.
Following this list alone could make a huge difference in your financials over the long-term. And, that’s why we’re here, to play the long game.
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We help our clients through this process and we would be happy to assist you!