Start with a solid plan
You’ve got the best of intentions. You know it’s important to get your financial house in order. But maybe you find financial topics a bit confusing or intimidating. Perhaps you’re nervous about what a close examination of your personal finances might uncover. Or you might just feel like you don’t have time right now to devote to planning.
You probably have one or two specific goals you’re saving for. But do you have a comprehensive plan that pulls all your family’s needs together? According to a recent survey conducted by Gallup, fewer than one in three Americans (30%) have a comprehensive long-term financial plan. And nearly 4 in 10 (39%) aren’t saving anything for retirement because their expenses don’t allow it.1
“Some people avoid planning because of time constraints, while some underestimate the complexity of the planning that’s needed. Others put it off because it’s a difficult issue to discuss with family or friends, while some are overconfident. But if you wait too long to think seriously about it, it’s too late.”
—Swarn Chatterjee, Associate Professor, University of Georgia’s Financial Planning Program
Additionally, a 2019 report from the Federal Reserve indicates just how financially vulnerable and uncertain many people are feeling—with 39% of adults indicating that they wouldn’t be able to cover a $400 emergency expense without selling something or borrowing the funds.2
Of course, every financial reality reflects a series of choices and circumstances which led up to that point. For many across the affluent spectrum (according to the CFP Board of Standards), those who are best positioned for the future follows a holistic financial plan that provides the structure to achieve goals and the flexibility to meet tomorrow’s unknowns.
Different life stages: different priorities
Just starting out
- Core budgeting
- Building an emergency fund
- Whittling away student/credit card/other debt
- Initial retirement savings
Growing a family
- Securing adequate life/disability insurance
- Financing a home
- Meeting rising day-to-day expenses
- Saving for education
- Saving for retirement
Maximum earning years
- Saving for retirement
- Saving for education
- Covering heightened day-to-day family expenses
- Monitoring investments
- Creating an estate plan to provide for spouse and dependent(s)
- Financing retirement goals
- Allowing for health-related expenses—present and future
- Modifying your estate plan for family legacy
- Achieving philanthropic goals
“Without a plan, you're just guessing—you don't really know if you're on track to achieve your goals,” explains Jennifer Ritorto, CFP®, a financial advisor with Truist Investment Services. “A financial plan helps you define what’s most important, and then it gives you specific actionable steps to accomplish those goals. Every year, you can reevaluate, asking yourself, ‘Have I stayed on course? And if I haven't, what changes do I need to be making so that I continue on the right track?’"
The winding road to retirement
Given all the uncertainties around life expectancy, future health demands, the stability of Social Security and many other factors, the largest financial planning need for most Americans is to better prepare for life beyond your working years. This is especially true if you’ve been putting off saving for retirement or saving less than you know you’ll eventually need. According to the Society of Actuaries, planning horizons are consistently inadequate to cover most periods of retirement because people make decisions based solely on what they’re currently spending and the income they expect to receive.3
Many pieces to the retirement puzzle
Reviewing quarterly brokerage statements and investment performance don’t qualify as having a financial plan. These documents offer good insight into your financial foundation, but your portfolio is just one piece of the much larger puzzle that a comprehensive financial plan encompasses.
“You may not consult a map for a trip to the store across town, but you will probably want directions, or a plan, for a spring break trip to California.”
—Creating a Personal Financial Plan, Missouri State University
“A plan should be individualized, and it’s not just an investment document—it has to cover everything,” cautions Tom L. Potts, Ph.D, CFP®, a professor of Finance at Baylor University. “There are different degrees of complexity, depending on the individual, but a good plan will tie together all the different elements of financial planning.”
What elements should your financial plan include? Swarn Chatterjee, an associate professor in the University of Georgia’s Financial Planning Program identifies six core components:
- Cash flow analysis: a robust look at your month-to-month income and expense levels, balanced against your debts and assets.
- Risk management: a realistic survey of potential risks to your cash flow and an understanding about the types of insurance—including life, health, liability, and disability—that could help to address those risks.
- Investment management: an examination of your portfolio through the lens of your goals and when you hope to accomplish them.
- Retirement planning: a savings plan mapped to achieve your goals for when you want to retire, and aligned to the lifestyle you want to lead.
- Tax planning: your tax-advantaged options for saving—especially for retirement or a child’s college education—and tax-smart ways to navigate your other financial objectives.
- Estate planning: the basics include a will and directives about your healthcare and representation if you become incapacitated. Beyond that, gifts to family members and philanthropic efforts should be strategized to ensure your legacy.
“A good financial plan will efficiently lead you through life, while reducing costs you might otherwise incur,” Chatterjee says. “Sometimes those costs are tangible and can be expressed in values, such as portfolio returns. Sometimes it’s little things that you can’t assign a monetary value to. For example, a good tax plan, estate plan, or adequate insurance offers protection against life’s unknowns.”
“If a plan was drawn as a wheel, the different elements of the plans would be the spokes connected to a hub, which is the plan itself.”
—Tom L. Potts, Ph.D, CFP®, professor of Finance, Baylor University
How do I define my goals?
Stuck in first gear and struggling to define your goals? Not sure if your dreams are too conservative or too ambitious? According to the CFP Board of Standards, the most effective goals:4
- Are simultaneously motivational and realistic
- Cover both short- and long-term time frames
- Reflect priorities
- Allow for the impact of time
- Will be flexible enough to endure life’s changes
“Simply being formalized is so important because while everyone has goals and objectives, they frequently don’t articulate them well,” Potts says. “When you go through the planning process, you determine specifics around those goals and objectives. The planner should tie the rest of the plan and all future discussions back to those.”
Care and feeding of your plan is important, too
A comprehensive financial plan is designed to be dynamic. It will evolve as your circumstances—personal, financial, and emotional—ebb, flow, and mature. After all, consider how the needs and priorities of a 26-year-old single professional contrast with those of a 50-year-old married father of three or a 67-year-old recently widowed retiree.
To ensure the ongoing relevance and value of your financial plan, experts recommend a thorough review at least once a year. Furthermore, a refresh is helpful whenever your life changes significantly, boosted or buffeted by events such as:
- A new job or the loss of a job
- A birth or death in the family
- Sudden, unexpected medical expenses
- A major change in financial markets
Potts likens the review process to a regular dental exam: If all looks good, keep plugging away. If something surfaces that needs attention, drill down into it, within the context of the broader plan. But don’t give in to the temptation to check in much more frequently—especially with regard to the value of your portfolio holdings. Since these will rise and fall alongside the vagaries of the broader financial markets, Chatterjee cautions against putting too much stock in short-term fluctuations.
“With long-term goals, it’s important to remember that you shouldn’t expect the short-term discrepancies to make a lot of difference over the long-term,” he warns. “Unless you have a specific short-term goal, which shouldn’t be linked to potentially volatile investments anyway, looking over your portfolio every quarter and re-balancing annually should be fine.”
The basic steps to creating and maintaining a financial plan:
- Determine your current financial situation
- Define and quantify your financial goals
- Identify all potential courses of action
- Evaluate each alternative
- Create and implement your financial action plan
- Review and revise the plan periodically