What is Financial Planning?
A financial plan refers to a review of your current financial situation. Financial planning also looks at what it may take in terms of income and savings, investment returns, and risk management to get you to a particular goal. Therefore, a financial planner puts systems and strategies in place to help an individual, FAMILY, or company reach their short and long-term goals.
It’s important to note that financial planning is NOT solely about what you invest in; financial planners construct personalized savings, spending, and even tax strategies and take a holistic approach to your financial goals. We’ll also calculate your net worth and available cash flow, as these can influence your next steps.
Reasons for Financial Planning
There are a number of reasons why someone might want to hire a financial planner. Here are some of the most common:
Getting Organized
The first logical step that most financial planners will take is to audit your current situation. This includes evaluating your income, net worth and savings, current investments, lifestyle, budget, and more. A financial planner will help you gain a true understanding of your financial state and checkpoint different stages of your life.
They might determine your cash flow and calculate your assets and liabilities, for example. The trick here is not to get overwhelmed by the jargon: a good financial planner will help you to make sense of it all.
Even better, once you understand your priorities, you can get organized with every aspect of your lifestyle. Financial planning might highlight what’s important to you and what might still require some work to achieve.
Short and Long Term Benefits
Since financial planning evaluates your current situation, it can help you determine some short term goals and targets. For example, a short term goal might be saving for a vacation within the next year.
Creating a financial plan means that you can look ahead to the next 5, 10 or 20 years! Your focus could be on building a retirement account to a certain value or investing in rental properties to create a secondary income stream. One of the greatest parts of financial planning is that it is never “done,” you can always check in, adjust your goals, and work on growing your net worth and wealth.
Setting Family up for the Future
Finally, some might choose to create a financial plan to aid their family and friends. The future is full of uncertainties and the economic outlook changes all the time. Creating a nest egg for your family can be one of the greatest gifts you can give.
Using a financial plan to set up your family might mean opening a 529 College Savings account for each child, for example. Alternatively, you might use financial planning to pay your children a salary into their own Roth IRA accounts. Or, you might want to protect your spouse in the decumulation phase of retirement- there is no one set plan.
Examples of Financial Planning
It’s a fact that financial planners do not solely focus on investments. Instead, they snapshot all aspects of your financial life in order to make your money more efficient and to give you the long term benefits. Here are just a few of the financial moves you can make:
Tax planning
Taxes can be super complicated, especially if you don’t know what applies to your situation. A financial planner can work with your CPA to identify all of the relevant taxes for your position. Together, they can determine what percentages you might owe, how to save on taxes, and more.
Retirement planning
A financial planner can help in emergency situations, too. For example, there were a number of surprise layoffs during the beginning of 2020, where some faced early retirement. While this might be overwhelming to deal with alone, having a trusted planner alongside you is useful for seeing the bigger picture. For example, they can help inform your decision to begin receiving social security benefits or to wait.
In non-emergency situations, a financial plan can be a great way to prepare for retirement. For example, a financial planner can aid you in deciding whether a Roth IRA or traditional IRA is better-suited to your situation. There are 3 habits in successful savers that I’ve noticed and inform all clients on such as tackling debt.
Insurance planning
You might think that buying your annual insurance plans is a personal cost that just can’t be helped. But your CFP can actually work with you to identify some insurance policies that you might need, and which ones might not be worthwhile.
Common insurance policies that you might need include:
homeowners insurance
auto insurance
umbrella insurance
renters insurance
life insurance
disability insurance
Professional financial planner vs DIY
Of course, all of these financial plans are things that individuals can complete themselves. However, working with a professional may allow you access to specific products and expertise that you wouldn’t otherwise know about.
Money and finances do not have to be stressful- working with a certified planner might just be the next step for your financial future. Get in touch with me here to schedule a call about your situation and begin creating a financial plan. Let’s work together to hit those goals!
Disclosure: Consider the investment objectives, risks, charges and expenses before investing in a 529 College Savings Plan. Investments in a 529 plan are neither insured nor guaranteed and there is the risk of investment loss. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Insurance and annuities are products of the insurance industry. Guarantees are subject to the claims-paying ability of the insurance company and surrender charges may apply if money is withdrawn before the end of the contract. Investors should be aware that investing based upon a strategy or strategies does not assure a profit or guarantee against loss.