What is Financial Planning

Financial planning is the process of assessing your current financial situation, establishing future financial objectives, estimating current and future needs, and developing a plan to meet them. Financial planning often involves a combination of budgeting, investing, asset allocation, risk assessment, retirement planning, and tax planning. Financial planning is definitely not just for the wealthy. It’s especially important for middle class families to plan for their financial future to ensure that they are on track to meet important financial goals and responsibilities.

Financial planning can mean different things to different people at different stages of life. For a young couple planning to get married, financial planning can involve establishing a budget and planning for expenses like a wedding, a house purchase, and the birth of children. By establishing good habits early in life, they will set themselves up for future success. For those in middle-age, financial planning can focus on establishing retirement goals and making sure that investment plans are on track. Business owners use financial planning to establish succession plans for their business as well as ensure that business planning includes their personal financial goals. Retirees who are beginning to think about their estate planning can use financial planning to set up trusts and hand over property in such a way as to reduce the tax burden on their heirs.

While some people choose to meet with a professional financial planner who can help guide discussion and give specific financial, tax, and investment advice, financial planning begins at home. In order to get the best out of meetings with financial planners, it’s important for families to gather information about their current finances (receipts and bank statements can help), be clear about their future financial goals, and discuss what they hope to accomplish with a planner.While it can help to have a disinterested professional mediate discussion, many families choose to do all their financial planning themselves.

Financial planners can offer fee-only services, meaning they are paid by the hour much like attorneys. Other financial planners operate on a fee-based model, meaning that they are paid a percentage of total investment account value (usually between 0.2%-2.0%) each year, or are paid through commission and load fees. Each model has its strengths and weaknesses, many of which we discuss in our article on Fee Only Financial Planners. Whichever approach you prefer, be sure to have a clear understanding – preferably in writing – of how your financial planner is paid, and how that structure affects financial and investment advice.

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Why Financial Planning is Critical to Your Future

Although we might enjoy floating through life paying for things as they come and only saving for short term purchases, financial planning is critical to ensuring that families are living within their means and can meet future financial goals.

Establishing Good Financial Habits

For many people, meeting with a financial planner can serve as an important wake-up call that their current financial habits are not moving them towards their financial goals. For those early in their career, establishing budgets and good savings habits is critical to ensuring future expenses can be met. For those looking towards retirement while balancing family expectations, financial planning can help ensure that savings and investments are on track, develop a plan to address shortfalls, and adjust investment strategies.

Good financial discipline can be reinforced through regular review and audits of expenses. It is very important that all adult members of a family be on board with a budget or financial plan to ensure that everyone is moving towards the same goals. It is very easy to stray from a budget when some family members are not supportive or fail to understand how the budget serves their needs.

Saving for Retirement

Along with having children and buying a house, retirement is one of the top three financial goals of most American families according to Kiplinger. While Social Security income can provide some help, most workers must save and invest a significant amount of money to ensure enough income through retirement. Financial planning can help families ensure that their savings and investments are on track to meet their expected retirement needs. Forecasting post-retirement expenses can be difficult but with the help of websites, online calculators, and professional advice, couples can develop good estimates of how much income they will need to sustain themselves through retirement.

Protecting Against Unforeseen Expenses/Loss of Income

No one expects the roof to cave in or for a spouse to lose a job. However, these things happen when we least expect them. These days it’s not uncommon for people to be laid off or forced to take a reduction in pay. Unexpected large financial expenses due to medical procedures, expensive home repairs, or legal bills can put terrible pressure on the household budget. Proper financial planning includes developing a savings cushion to help the family out of a financial emergency without relying on credit or enduring financial hardship. Having enough liquid assets to cover expenses during a period without work or pay for an unexpected bill can mean the difference between keeping your family afloat and declaring bankruptcy.

Planning for Major Life Events

Major financial events in life include: getting married, buying a house, buying a car, having kids, paying for college, retiring, and passing on. Through financial planning, you can develop a strategy for having enough money on hand to cover these planned expenses without going into debt. By saving money and properly investing it in savings accounts, short-term bonds or CDs, or money market accounts, you always know you have the money on hand to cover these expenses. Whenever possible, it’s best to pay for large expenses out of current income and savings rather than taking out loans.

While mortgages are exceptions to this rule, it is still best to make a down payment large enough to qualify for a fixed-rate mortgage. Many people take on adjustable-rate mortgages because they don’t have enough saved up to make the down payment on a traditional 80/20 mortgage. As we found during the mortgage crisis, many people were unable to refinance and became responsible for increasingly high mortgage payments.

Don't Put It Off, Jumpstart Your Retirement Plan Today

A comfortable retirement can only be secured with prudent planning, aggressive saving, and disciplined investing. Online research is a good start, but consider the benefits of discussing your options with a qualified financial advisor. The alternative could mean lost opportunities, higher fees, and lack of discipline. Request a free, no-obligation consultation today.

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