The mention of financial planning just made some of you start sweating. It can be extremely stressful trying to create a plan and often requires quite a bit of work but is it really worth it? I hear this question asked almost daily, and to answer it, let’s look at some quick stats first.
- Only 39% of Americans have enough cash to cover a $1,000 emergency (Bankrate)
- 78% of Americans live paycheck to paycheck (CareerBuilder)
- 70% of Americans’ retirement plan is not to retire and keep working (Employee benefit Research Institute)
- 40% of Americans have saved less than $300 (GOBankingRates)
- 72% of Americans reported feeling stressed about money (APA)
- 70% of U.S. Households do not have a long-term financial plan (Gallup)
Ok, now the scary part is over. Take a deep breath. Everything is going to be ok.
As the stats above show, You are not alone if you feel stressed; you are actually in excellent company.
The good news, a sound financial plan can start solving all of those stats above. If having a financial plan can eliminate or even reduce stress in our lives, why wouldn’t we take action and start planning? To live a life that no one else is living, you need to do things no one else is doing. Planning is definitely not typical in our society; let’s get weird.
I believe that no one should live under the influence of financial stress. Stress eats away at your psyche and impacts everything you see and do. We have a way out. It’s called financial planning.
Not all financial plans are made equal. Let’s take a look at what you need to know about a financial plan that works for you today as well as in the future.
What is a financial plan?
When we hear the words “financial plan,” if we can get over the immediate stress that we feel at the thought of finances, we tend to think it is only for those with a lot of money. That couldn’t be further from the truth.
A great financial plan is not just a list of investment options for the rich but a living, breathing plan that grows and changes with you as you move through life. Think of it as a roadmap for navigating your financial journey.
A tremendous financial roadmap needs to be unique to you and reflect your goals, wants, individual situation, and specific needs that you have today while preparing you for your future. Every roadmap needs to have particular markers to compare where you are today to where you have been, note progress, and track how you are doing with your goals.
A genuinely great financial plan makes your finances personal and shows the options available to you. There is always a way forward, and this just lets you find it a little easier.
To have a complete holistic financial plan, you must have these categories in mind.
1) Financial Health — Time to get personal
The first step to any financial plan is to understand yourself, and you are not just the numbers that a spreadsheet can capture. When we diagnose our financial health, there are two categories of questions that need to be asked; personal and financial. Finances are 80% behavior and 20% knowledge, so any strategy that doesn’t first consider WHO you are is missing the mark. Your financial plan should start with a detailed understanding of these topics about you.
- Relationship to money
- Family make-up
- Interests and hobbies
- Fears and strengths
- What type of support system do you have in place
Once we have that foundation established, we can dive into your finances. We need to get a baseline of our financial situation, and the list below helps us develop that baseline.
- Income (Primary, side hustles)
- Cash Savings
- Assets (real estate, investments, business ownership)
- Debts
- Insurance
- Retirement (401k, IRA, 403b)
Once the baseline has been formed, we need to talk about your timeline. At the end of the day, financial planning is all about taking your dreams and turning them into a reality. To make your dreams a reality, we must take action.
Your goals and timeline will change as you move through your financial journey, but it is always important to have tangible goals to measure progress.
2) Financial Literacy
Knowledge is power. When we are talking about finances, that statement rings even more accurate. Part of your financial plan and the financial journey is to grow your understanding of finances.
The bottom line is most of us struggle with finances. We need to take ownership of the journey and start gaining knowledge. We do not need to be experts, but we must understand the financial concepts that affect our future.
Financial literacy includes things like managing money, credit vs. debits, retirement accounts, interest rates, debts, compounding interest, investment vehicles, and taxes. I know this can feel overwhelming, but it is well worth the time it takes to understand these things. Trust me. Your future self will thank you for the effort you put in.
This is where working with a financial planner, advisor, or wealth coach is extremely helpful for your growth. Life isn’t meant to be done alone, and finding someone you can trust to walk through your journey with you is so beneficial.
I know this journey might feel overwhelming, and check out this article here for more detailed information on Financial literacy 101.
3) Investing — You have options (pun intended)
Much like who you are, there is no cookie-cutter investment or portfolio that works for everyone in every situation. There are so many investment vehicles for you to participate in, but your investments should always reflect the overall goals laid in your financial plan. Where there is no vision, there is no future.
There are a few criteria that you should evaluate before investing any of your hard-earned money.
- Does the Risk vs. Reward make sense with my goals?
- What is the exit strategy?
- Do I understand the investment strategy and who executes it?
- Are there any fees associated with the investment?
- What is the timeline for the investment?
- What are the capital requirements? (How much money does it take to invest)
A financial planner or advisor can run your money through simulations to ensure that your investments are “on track.” They call this process stress-testing, and it is a great way to ensure your investment strategy makes sense.
Nothing is certain when it comes to investing, but here are a few general thoughts to keep in mind:
- Every investment has a unique language associated with it, don’t let that scare you off from learning more. Once you understand the language, the investment becomes more enjoyable, and you will no doubt be more successful.
- If it seems too good to be true, it probably is.
- Investing generates money, and gambling loses it. Get rich quick schemes are precisely that; schemes.
- “Compounding Interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t pays it.” Make compounding interest work for you, not against you.
- Risk vs. Reward, the more risk an investment has, the more potential reward. The goal should be to minimize risk while maximizing reward.
Take advantage of the experience of others and never stop educating yourself. Investing in you is the best investment you will ever make!.
4) Insurance
One thing is 100% certainty regarding your financial future. Life happens. Insurance protects you from the unexpected, so it does not throw you off your course when life throws a curveball your way.
There are several coverages available to you, such as life, disability, and long-term care, that all help protect your financial future and ensure your family is protected.
Unfortunately, it is extremely easy to overpay on insurance. Thankfully there are tools like Policy Genius that can help cut through the mess of selecting an insurance provider by allowing you to shop rates to ensure you get a good deal. My wife and I utilize policy genius, and we love it! It has saved us hundreds of dollars every month.
5) Taxes
There are few things worse than getting a letter from the IRS asking for more money. Not a place that is fun to be, for sure. Taxes take a significant portion of our earned income anyway we slice it, so shouldn’t we attempt to reduce the burden of taxes each year? I think so, but so often, it is overlooked.
When we think of taxes, we often view them as an unavoidable burden and are frustrated with the amount we pay out to Uncle Sam unless we are lucky enough to generate a refund. (Which isn’t really ideal either – we will talk about this later in another post.)
A financial plan should consider your tax burden so you can maximize how much of your money you get to keep today and in the future. There are many tax-advantaged strategies to minimize your tax burden, such as charitable donations to offset taxable income and maximize contributions to your IRA accounts.
Let’s take a retirement account, for example. Should you choose a traditional or Roth IRA? They both have excellent benefits for you and are great retirement options, but one primary way they defer is how they affect your taxes.
With a Roth IRA, whatever you deposit today is taxed today, but the money inside of the IRA goes tax-free as long as you are withdrawing after age 59½.
With a Traditional IRA, you receive a tax write-off today for whatever you invest, and then as your IRA grows, the money is taxed as you take it out.
So the decision is, do you want a tax break now with a Traditional IRA or a tax break later with a Roth IRA? You can also do conversions between the two to lower your taxable income drastically.
Ultimately your taxes should not dictate your financial plan, but they very much should be weighed and considered when choosing investments, retirement accounts and how they affect your overall goals.
Remember, tax evasion is illegal; tax is avoidance is smart.
6) Progress Monitoring
Your financial plan needs to have regular check-up periods for you to adjust as life changes or goals shift. Your financial plan is a living, breathing document with the sole purpose of maximizing your probability of achieving your goals.
By looking at this document regularly and having accountability built into your plan, you are will be able to assess what is working, what needs to be adjusted, and what steps need to be taken.
I know this is a lot but remember, no step is more important than the next one! You got this!
Disclosure:
This material has been prepared for informational purposes only and should not be used as investment, tax, legal, or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.
