Many people are under the impression that if they invest in a 401(k) or Roth IRA then they have a “financial plan.” But do they? While saving a portion of each paycheck is one step in the right direction, simply putting money into a retirement account does not constitute a financial plan.
So, what is a financial plan? A financial plan is a roadmap. It’s designed to ensure specific financial desired outcomes in your life are planned for appropriately to help you create your optimal future while protecting you from unexpected life circumstances. Not only does a financial plan set you up for financial success, but it allows you to have confidence along the way.
Let’s breakdown each aspect of a financial plan:
Goal Setting: Before diving into the details about how to create and implement a financial plan, it is very important to understand what you wish to achieve now, in the short-term, and in the long-term, both financially and personally. If you do not have goals or the drive to better your financial situation, then it will be challenging to create a financial plan. Common questions to consider are, “When would you like to retire? How much money do you want to have in retirement? Do you want to buy a house? Do you wish to leave a legacy for your family? Do you wish to be debt-free? What is your dream vacation? Would you like to reduce any tax liabilities if possible?” All of these are goal-oriented questions that help create a financial plan. Once you know your answers to these sorts of questions, then you can begin developing a financial plan that’s relevant to your unique situation.
Cash Flow Planning: The first step in creating a financial plan is analyzing your cash flow, or how much money is coming in and how much is going out each month in your household. Monthly income includes salaries, rental income, Social Security, pensions, disability, and any other income you generate. To determine monthly outflow, you should review your past three months of bank statements and categorize what you spend money on. Once your monthly income and spending is nailed down, then the process begins of planning where your disposable income will be placed, or how to budget more effectively to create disposable income that you can use toward your goals.
Debt Management: One focus area in a financial plan is debt. When developing a financial plan, it is important to understand the liabilities you hold and how to manage your disposable funds in order to effectively eliminate it. The types of debt analyzed in a financial plan include auto loans, student loans, credit card debt, and any other debt an individual has. Mortgages are another topic, but they are typically classified as good debt and are not a concern unless the mortgage payment is a financial burden or a constraint on your financial plan, or you want to go into retirement without a mortgage. Once your overall debt is calculated, a consolidation strategy can be created to effectively eliminate the debt based on your specific debt goals. Questions to consider are, “How quickly do you want to pay off your debt? Do you want to allocate all your disposable income to debt or would you also like to save money along the way? What debt consolidation strategy do you want to pursue, for example, paying down the lowest amount first or targeting the debt with the highest interest rate? Are there ways for your student loans to be forgiven? Do you need to refinance certain debts? Do you want your house paid off before you retire?” Once questions like these are answered, then a financial plan can be developed to help you become debt-free.
Investment Planning: The way to fund your future lifestyle is to put a portion of your disposable income aside to grow for the future. But remember, the investments you choose are important and can impact results. Determining how and what to invest in depends on your goals, time horizon to retirement, risk tolerance, and investable amount. There are thousands of different investments and accounts for you to utilize, but a financial planner can help you narrow down your best options. Whether you are retired, a Monday through Friday 8:00 to 5:00 employee, a real estate enthusiast, or a business owner, a financial planner can help determine whether your investments are allocated properly to reasonably meet your financial goals while ensuring your investments match your personal tolerance for risk. Often people believe investments should be “set it and forget it,” but that doesn’t mean they should not be rebalanced or changed as your life changes. A person who is in their 20’s should not have the same investment portfolio as person who is in their 60’s. Changes will need to be made to your investments as life progresses, and a financial planner can assist you.
Risk Management: While planning for future goals is exciting, it is just as crucial to plan ahead for the unexpected because adverse life events can completely derail your financial plan. Financial planners utilize risk management to mitigate financial risks, such as you or your spouse passing away or becoming disabled, a tornado hitting your personal or rental property, you or your spouse transitioning to an assisted living facility, and many other eventualities. Leveraging insurance to shift financial risk away from you and move it over to insurance companies can make good financial sense. Risk management often focuses on making sure you have proper insurance coverage which includes property and casualty insurance, life insurance, health insurance, long-term care insurance, disability insurance, and more. Insurance has its place for specific life stages so if you need help on which insurance products are right for you or simply want an insurance assessment, then a financial planner can assist you in evaluating your current situation. A financial planner will help make sure you have the correct type of coverage, amount of coverage, and pay a reasonable cost for the product.
Tax Planning: One of the biggest pillars in a financial plan is taxes. Paying taxes is part of life, but it can be planned for and future taxes potentially reduced utilizing specific strategies that a financial planner can bring to the table in conjunction with your tax professional. As with every other part of your financial plan, the sooner you start your tax plan the more effective it can be over time. Tax planning strategies can include but are not limited to, pre-tax or Roth contributions to 401(k)s or IRAs, tax-loss harvesting strategies, Roth conversions, opportunity zone investments, charitable giving, alternative tax-deferred and tax-free financial vehicles, stock liquidation strategies with low-cost basis and substantial appreciation, and sales of businesses. Tax planning can be highly effective, but it is crucial to have a CPA or tax professional by your side to help with making sure you are making the right tax moves.
Estate Planning: Individuals spend most of their life building their wealth. Whether you plan on leaving a legacy for your future generations to come, leaving everything to charity, or both, proper estate planning is an important part of a financial plan. Estate planning not only helps ensure that your wishes will be followed, but can allow your legacy and wealth to transfer without going through probate if done properly. Estate planning plays a key role in critical life events such as long-term care and how to protect and manage assets during such circumstances. Individuals often think estate planning should be done when people are near the end of their life, but that is far from the truth. Estate planning is important for young working families, middle age pre-retirees, and retirees. While a financial planner brings their own focus, experience, and financial tools to the estate plan, a knowledgeable estate attorney is also key in determining proper legal actions and documents that need to be executed to fulfill your estate goals and wishes.
Do you have a true financial plan? Are you confident in your financial plan? Have you re-evaluated your financial plan recently? If the answer to any of those questions is no, then it is time to take action so that you have a current and workable financial plan or blueprint that will drive future decisions when emotions cannot. A financial plan is not a retirement account, and it’s not a “set it and forget it” investment pie chart. It is a written roadmap that can give you an advantage when life does not go the way you expected.
If you do not know where to start, please reach out to us so we can deliver you a financial plan that can help you achieve your life’s ambitions. Contact PCIA of the Ozarks by clicking here or calling 417.720.4255.
Prime Capital Investment Advisors, LLC (“PCIA”) and its associates do not render any legal, tax, or accounting advice nor prepare any legal documents. Client understands that his (her) personal attorney shall be solely responsible for the rendering and/or preparation of the following: (i) All legal advice, (ii) All legal opinions and determinations, and (iii) All legal documents. Client understands that his (her) personal accountant shall be solely responsible for the rendering and/or preparation of the following: (i) All accounting advice, (ii) All accounting opinions and determinations (iii) All accounting documents.