How do you know if you need a financial plan?
I have received a recent onslaught of financial planning questions from friends and clients. Perhaps it’s the logical next step after taxes are filed? Or maybe the economic upheaval resulting from the pandemic has people looking more closely at their financial position.
For starters, let’s define what a financial plan is:
This is a broad definition, and financial plans can span a wide swath of details.
I personally believe that a financial plan is any strategy (even minute) intended to manage and take control of one’s finances. Focus is key. Documenting it makes the plan more concrete and easier to commit to.
My first and inadvertent financial plan
My first strategy around money was to get my student loans paid off after I’d graduated from college and had begun working. The plan was only this: get my debt paid off as quickly as possible. I don’t recall ever writing anything down for this plan, but I do recall consulting my ten-key calculator (I’m an accountant…nerd alert) any time it crossed my mind and calculating how much longer it would take to become free of these loans if I paid $ or $$. This non-specific and undocumented plan did this for me…
…it put and kept my eye on the ball.
We’ve heard it said that “where you look is where you go.” This was true for me. I was obsessed with paying off my student loans – even to the detriment of retirement savings during my first couple years of work (blog coming soon about this). Nonetheless, my plan worked because I was focused and committed to it.
As a result of this plan, I got $40,000 of loans paid off in just three years. Yeehaw, that felt good!
My second (and still inadvertent) financial plan
Once I had my student loans behind me, I became obsessed with saving.
I didn’t document this one at all – no target, no end goal. Instead, I had a beginning goal to put away as much as I could in tax-advantaged savings accounts. With that, I eventually maximized my 401(k) contributions each year (that maximum was a lot lower then at $10,000). I also maxed out Roth IRA and HSA contributions each year. My focus with this plan was simply to put as much away as possible in tax-advantaged accounts to avoid being broke later in life (like my parents had, see https://buckthebudget.com/womens-wealth-not-my-mommas-money/).
Finally, my first official financial plan
My first official full and documented financial plan came along in a meeting with an investment advisor. This advisor worked for a well-known insurance and investment firm and came recommended by a colleague of mine.
In this plan, he detailed all of my assets, my future income assumptions and goals, and outlined projections with likelihood of success via a monte carlo analysis (which runs through outcomes resulting from 500+ simulations of market returns). The entire plan was nearly 50 pages long and placed into a three-ring binder. It was a full global view of my finances both now, and later (as best we could guess).
This plan was critical for me. It identified how much wealth I would need to stop working and when that might be. This plan also revealed that I needed to change strategies with future investments, focusing more on Roth IRA and taxable investments which I could access before age 59.5 without penalty.
Again with keeping my eye on the ball.
How much does a financial plan cost?
In my case, this plan was free until I signed up for life insurance and an investment account through the investment advisor’s firm. There was an annual asset fee of 1.5% on the investment account – this was expensive.
For an objective financial plan with no purchases or strings attached, one might expect to pay between $1,000-$3,000. This one-time fee will also leave you without on-going advising and support afterwards.
What about free planning?
There is a plethora of DIY information and resources out there. The challenge is sifting through to find what works for you.
For those who are Excel or spreadsheet saavy (fellow nerds), you can whip up your own plans and forecasts on your own. The beauty of this solution is that it is custom for you and completely in your control.
What is covered in a financial plan?
Common areas of focus in a financial plan include:
- Cash flow analysis – income vs. expenses
- Income projections
- Savings plans
- Retirement planning and goal setting
- Debt paydown
- Identifying expenses
- Determining your wealth target
- Investment diversification
- Risk assessment and insurance needs
- Creating a spending plan
- Distribution planning in retirement
- College funding
- …and yes, budgeting (no thanks)
If any of the above topics resonate with you, it would behoove you to do some planning.
How to make your financial plan:
- Identify what questions you have or topics need to be addressed.
- Evaluate your resources. Can you find the information and expertise you need around you and online?
- How much time are you willing to spend making your plan? Will DIY require too much of you?
- How much money are you willing to invest in a plan? Is it worth it to you to hire an investment advisor or independent financial advisor?
- Document it. Put pen to paper or fingers to keyboard and get it down.
- Revisit regularly and revise accordingly.
Want to get in the game and even knock it out of the park? Start your financial plan. Get (and keep) your eye on the ball.
For additional DIY and help with creating your financial plan, visit www.buckthebudget.com.