What Exactly Is Financial Planning?
Financial planning is all about making a plan for your money to help you reach your financial goals. It’s a process where you take a deep look at your current financial situation, set goals or at least a general vision for the future, and create a financial plan or set of near-term action items that would help you move in that direction. The topics that are covered in the financial planning process often include examining your approach to your net worth, budgeting & saving, investing, retirement planning, tax planning, estate planning, and insurance planning. Hiring a professional who offers financial planning services is a common and popular way of aligning your money with what matters most to you.
What Is a Financial Plan?
Creating a financial plan can look like building a roadmap for your money. On the other hand, a financial plan can also just look like a list of action items that are needed to be taken in the near term to better align your money with your financial goals. A solid financial plan should show you where you are now, help you articulate where you want to go, and make recommendations on how to best get there.
Why Is Financial Planning Important?
Financial planning is important because it helps you take control of your money. By creating awareness, planning lets you make smart decisions about spending, saving, investing, and protecting your loved ones. A strong financial plan can provide peace of mind knowing that you’ve been intentional with your money and that you’ve planned for both what you want in the future and what to do when things go wrong.
Key Components of Financial Planning
Budgeting and Saving
Budgeting and saving are foundational topics of any financial plan. Budgeting means making a plan for how you’d prefer to spend and allocate your money each week/month/year. The process of building a budget and sticking to it can be eye opening, but important to make sure you have money set aside for your financial goals. Savings goals in a financial plan often include building a healthy cash reserve or emergency fund to protect yourself for unexpected expenses or loss of income, achieving short-term goals such as buying a new car, a new home, or taking a vacation, and securing your long-term financial future by having enough resources to draw in for income in retirement. In the financial world, proper budgeting and saving is also referred to as cash flow planning.
Investment Strategies
Investment strategies are the different ways of putting your money to work for you by investing in assets including stocks, bonds, mutual funds, and exchange traded funds. A strong investment portfolio should match your risk tolerance (your mental comfort with taking risk) and your risk capacity (how much risk you can and should take to reach your financial goals). Diversifying your investments according to your risk tolerance and risk capacity can help you potentially reduce risk and increase the likelihood that your investment returns will be in line with what you need over time to achieve your planning goals. It’s always important to remember that investing involves risk, so plan carefully and be sure to speak with an expert about your particular situation.
Retirement Planning
Retirement planning includes elements of Budgeting & Saving, Investment Strategies, Tax Planning, Insurance Planning, and Estate Planning. The process of retirement planning usually begins by estimating your retirement expenses to determine if your current savings and investment strategies will work for achieving your ideal retirement. Your retirement income needs will often determine adjustments that need to be made to your investment retirement savings and the timing of drawing pension and social security benefits.
Tax Planning
Tax planning involves making decisions that can minimize the amount of taxes you pay either on a year to year basis or over the course of your life. Common tax planning strategies include choosing tax-efficient investments and withdrawal plans, timing income and expenses to reduce your yearly tax liability, determining if your financial situation is improved by making pre-tax or roth contributions to tax deferred accounts, evaluating if you could lower your lifetime tax liability by converting your pre-tax investments to roth investments, and more.
Estate Planning
Estate planning helps ensure that your assets go to the people you want after you’re gone and in the way that you’d like them to receive the assets. It involves making or updating your will, naming or updating beneficiaries on accounts that bypass your will, potentially setting up trusts to control the timing and method of your estate plan delivery, and establishing or updating your durable and medical power of attorney documents and living will directives. For individuals and families with large estates or high incomes, estate planning can also help minimize potential estate taxes.
Insurance Planning
Insurance planning focuses on getting the right insurance coverages and policy types to protect yourself and your family from financial losses that could derail your financial plan. Insurance planning usually includes evaluating your life insurance, health insurance, disability insurance, and property & casualty insurance. Having adequate insurance coverage can provide you with peace of mind knowing your family is protected against unexpected life events.
What Are the Steps in Financial Planning?
Understanding Your Personal & Financial Circumstances
The first step in financial planning is to get a clear picture of your financial situation today by creating a few foundational documents such as a thorough balance sheet and statement of cash flow. The initial planning process also usually includes documenting all of your current investment strategies, insurance policies, and estate planning documents.
Identify & Set Goals
The next step in financial planning is to help you identify and set clear financial goals. These should be specific, measurable, achievable, relevant, and time-bound (SMART). Client goals often include saving for retirement, buying a new house, paying off high interest debts including credit cards, building healthy cash reserves such as building an emergency fund, lowering your tax liability, etc
Analyze Potential Recommendations & Courses of Action
Analysis is an essential part of the financial planning process, allowing your financial advisor to test your financial goals against your current financial strategies. Your advisor will be trying to determine what adjustments need to be made to help move you closer to your ideal financial situation.
Developing Financial Planning Recommendations
Creating a financial plan can involve finalizing recommendations for you in only certain topic areas or creating a comprehensive financial plan that provides recommendations in all of the key areas of your financial life. Experienced advisors know that things will change over the course of your life so recommendations are usually focused on near term actions that will help you move closer to where you want to be and will be flexible enough to account for future changes that will inevitably be needed.
Presenting the Financial Planning Recommendations
Once the recommendations are developed, your financial advisor will present your financial plan or collaborate with you on finalizing your next action steps. Some advisors prefer to pre-determine your planning recommendations and provide them as a set of deliverables, while other advisors prefer to provide clients options and collaborate on final recommendations live in the client delivery meeting.
Implement the Financial Plan
Putting your financial plan into action is the most important part of the process and often means taking steps like opening or updating your investment accounts, purchasing needed insurances, and adjusting your spending & savings habits, establishing or updating your estate documents, etc.
Monitor and Adjust
Financial planning is an ongoing process instead of a single set of recommendations that never change. Reviewing and adjusting your financial plan regularly ensures it stays relevant and effective. Your financial situation and goals will likely change over time, so it’s important to update your plan to reflect these changes.
Why Is It Worth It to Have a Professional Financial Planner?
A professional financial planner provides expertise and personalized advice to help you reach your financial goals. As an outsider looking into your life, they can offer objective guidance and help you navigate complex financial matters like tax planning, estate planning, and investment management. A CERTIFIED FINANCIAL PLANNER™ professional is committed to acting in your best interest, helping you make informed decisions and avoid common financial pitfalls.
Types of Financial Planning Help
Fee-Only Advisors
Fee-only financial planning is a financial advisory service where the advisor is compensated solely by the client, without receiving commissions or incentives from financial product sales. The fee-only compensation model aims to minimize conflicts of interest and increase the likelihood that the advisor’s recommendations are aligned with the client’s best interests. Fee-only financial planners typically charge an hourly rate, a flat fee or retainer, or a percentage of assets under management (AUM) deducted from investment accounts being managed by that advisor. Fee-only financial advisors often offer both financial planning and investment management services.
Fee-Based Advisors
Fee-based advisors charge a mix of fees for financial planning and also have the ability to receive commissions from selling financial products that they recommend. Because fee-based financial advisors can charge direct planning fees and get paid by selling you products, you should pay attention to situations where the planning advice recommends the purchase of large insurance policies or products that the advisor can sell. It’s very possible that these recommendations are legitimate, but be sure to ask lots of questions to understand the assumptions used in developing the advice.
Commission-Based Advisors
Commission-based advisors earn money exclusively from the financial products they sell, including insurance policies, investment products, and loan products. The client does not pay the advisor directly. The advisor is entirely paid by the companies whose products they sell. This often means the client is paying internal product fees that indirectly compensate the advisor.
Learn More about Financial Planning (and Why It’s Worth It for You) by Contacting Us Today
At Stage Ready Financial Planning, we specialize in fee-only financial planning for individuals and couples over age 50 in Dayton & Southwest, Ohio create a clear and easy to understand plan so that our clients can retire with confidence and afford their dream lifestyle. Schedule your intro call today!
FAQs
What is the main purpose of financial planning?
The main purpose of financial planning is to help you organize and align your financial life with what matters most to you so that you can make informed decisions about your money. Financial planning puts you in the driver’s seat instead of the passenger’s seat.
What exactly does a financial planner do?
A financial planner helps you create a customized financial plan to achieve your financial goals. They offer advice on budgeting, spending & saving, investing, goal planning including retirement, tax planning, and managing insurance & estate planning risks.