Why have a plan? A plan helps you and your spouse avoid significant financial mistakes, by allowing you to budget and prioritize your financial decisions. Furthermore, having a plan can prevent you from making emotional decisions that may arise from various factors, making it easier to say 'NO' when something is not in the plan. Essentially, a plan connects your financial decisions, showing how one choice can impact others and helping you see the bigger picture.
Creating a plan can evoke a range of emotions in individuals and couples. In my opinion, this might be why only 30% of people have one. Initially, emotions such as uncertainty, anxiety, fear, and anger may surface, but as couples work through these challenges, the emotions will likely shift to clarity, confidence, unity, and discipline. Developing a plan requires teamwork, effective communication, a mindset focused on delayed gratification, and a temperament that may need refining and growth.
Almost all financial decisions begin with an active choice. Examples include asset allocation, purchasing insurance, investing in a retirement plan, and paying off debt. Even when adopting a passive approach, such as buying a stock and then forgetting about it, the initial decision is active. A crucial step in achieving and maintaining wealth is creating a financial plan. This plan represents an active decision that triggers multiple other active financial decisions.
A good financial plan is not just a 30-page document you put in a drawer; it should serve as a roadmap for your financial journey, with flexibility built into it. The plan identifies your goals and outlines a path to achieve them, including your investment strategy, prioritizing current and future needs, and preparing for unforeseen financial challenges.
The Here-There Strategy
The essence of having a plan is captured in the Here-There Strategy. This process begins by assessing your current financial position—'Here.' It involves evaluating your income, assets, liabilities, and identifying any potential risks and opportunities. The next step is to envision where you want to be—'There.' The journey from 'Here' to 'There' is facilitated by the PlanAssist® process, helping you prioritize and identify the steps you should consider and in what order you might do them to reach your financial goals.
A financial plan also serves as an emotional anchor, helping you navigate through market volatility and unexpected financial windfalls with a level head. It sets predetermined boundaries and objectives for spending, saving, and investing, acting as a guardrail for financial decisions. This is akin to an athlete visualizing their strategy or a pilot preparing for turbulence; a financial roadmap equips you to manage your wealth with confidence and intentionality.
The Pillars of Having a Plan
A financial plan is anchored in clearly defined principles that reflect your risk tolerance, time horizon, and overarching family goals. It serves as your guide through major financial decisions and life transitions. Here are five pillars of a plan that PlanAssist® is built on:
Accumulation of Assets: Building a financial foundation begins with accumulating assets. This involves living within your means, saving aggressively, and investing wisely to grow your net worth over time. Key tasks include:
Developing a budget to manage income and expenses effectively.
Setting up automatic savings to ensure consistent asset growth.
Regularly contributing to retirement accounts for future security.
Prioritizing debt repayment to free up more resources for investment.
Retirement Planning: A secure retirement is characterized by having enough funds to support your desired lifestyle. Strategies should focus on being on the same page when it comes to making financial decisions as your spouse, understanding your financial needs and goals, diversifying income sources, and planning for healthcare costs. Tasks involve:
Calculating the required retirement savings and adjusting contributions accordingly.
Exploring various retirement accounts to maximize tax benefits.
Incorporating healthcare strategies into your retirement planning.
Developing an Income Plan with Guardrails, making adjustments to income and expenses as needed.
Estate Planning: Ensuring your assets are distributed according to your wishes involves planning. This includes:
Drafting wills and updating beneficiaries.
Potentially setting up trusts.
Communicating your estate plan to prevent conflicts and misunderstandings.
Reviewing account titles, keeping beneficiaries on retirement and life insurance up to date, updating Will and/or Trust periodically, and having a transition plan in place with accessible information.
Protecting Lifestyles: Insurance and an emergency fund is crucial for safeguarding against unforeseen events. Key components include:
Life and disability insurance to protect your income and family.
An emergency fund to cover unexpected expenses.
Regular reviews of your insurance coverage to ensure comprehensive protection.
Considering Property and Casualty (P&C) with an Umbrella Policy.
Tax Efficiency: Effective tax planning can significantly enhance your financial health through:
Leveraging tax-advantaged accounts and strategic withdrawals to reduce tax liabilities.
Considering a distribution strategy from tax-deferred accounts.
Leveraging Roth IRAs, if it makes sense and is possible.
Utilizing Health Savings Accounts (HSAs), Flexible Spending Accounts (Flex) for year-round tax savings.
Financial Planning Tools
It's crucial to utilize an electronic financial planning tool to connect the dots. With many interconnected parts in a financial plan, not using a software tool can lead to oversight. For example, if you withdraw funds from your Roth IRA first, what are the long-term tax benefits or disadvantages? While planning software may not be perfect, it offers a more comprehensive view of how each decision affects others. It also allows you to run 'what-if' scenarios to see the outcomes of different decisions, such as taking Social Security at 62 versus 65 or choosing to retire at 67. These tools, readily available online or through your financial advisor, integrate all aspects of your finances, providing a clear picture of how individual decisions impact your overall financial health. This holistic view is essential for making informed and strategic choices.
Be Proactive
Take proactive steps towards creating a financial plan. Exercise patience and understanding with everyone involved as you develop the habit of using it to help make financial decisions. And remember, the plan is the steps and what you control, while strategy is focused on the outcome, such as not running out of money. It starts with a plan though, and as life happens, make necessary adjustments to achieve your financial goals.
Transitioning to utilizing a plan as your roadmap, especially when involving a spouse, is not instantaneous. Over time, you'll find yourself in a different place emotionally, with increased buy-in and confidence in the plan. Be patient and persistent. Many couples experience an 'aha' moment, after which they wonder why they hadn't started planning sooner. It's unlikely that you'll address all aspects covered in the plan in just one or two sessions. This process can unfold over months or even years. Begin by gathering and entering your data, then move on to implementing strategies that address two or three pressing issues, identified either by you alone or with your advisor's help. In subsequent meetings, tackle another set of issues. Over time, you will have made significant progress across various areas of your plan.
Summary
A financial plan is much more than a collection of numbers; it's a tool that enables you and your spouse to spend within your means and make prioritized financial decisions. While the initial steps may seem challenging, the momentum you gain will make the process rewarding. A plan does not and should not be some complicated series of steps. It is a roadmap that provides a simple way to stay on the same financial page with your spouse, provides a list of decisions that likely need to be made over some period of time, and helps with prioritization of when we need to make financial decisions. It should be very simple. Once you trust its effectiveness—it allows you to tune out the noise from those offering unsolicited financial advice without a real understanding of your needs.
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Frequently Asked Question(FAQ)
1. What is the primary benefit of having a financial plan?
- Having a financial plan helps you and your spouse avoid significant financial mistakes by allowing you to budget, prioritize financial decisions, and prevent emotional decision-making, providing a clear path to achieving your financial goals.
2. Why do emotions play a significant role in financial planning?
- Emotions such as uncertainty, anxiety, fear, and anger may initially surface during planning. However, as individuals and couples work through these emotions and challenges, they often find clarity, confidence, unity, and discipline crucial for successful financial planning.
3. What percentage of people currently have a financial plan, and why might this number be below?
- Only about 30% of people have a financial plan. This might be due to the range of emotions involved in creating a plan, including fear and uncertainty, which can deter individuals from starting the planning process.
4. What is an active financial decision, and why is it important?
- An active financial decision involves making a conscious choice that initiates further financial actions, such as asset allocation, purchasing insurance, or investing in a retirement plan. It's crucial because it represents the beginning of a journey toward achieving and maintaining wealth through deliberate planning.
5. How does a financial plan differ from a simple financial document?
- A sound financial plan is not just a document to be stored away. Still, it serves as a flexible roadmap for your financial journey. It outlines your goals, investment strategy, and plans for current and future needs, including preparing for unforeseen financial challenges.
6. Can you explain the Here-There Strategy in financial planning?
- The Here-There Strategy involves assessing your current financial position ('Here') by evaluating income, assets, liabilities, and potential risks. The next step is envisioning where you want to be financially ('There') and using the PlanAssist® process to prioritize and identify steps to reach your financial goals.
7. According to the article, What are the five pillars of a successful financial plan?
- The five pillars are accumulating assets, retirement planning, estate planning, protecting lifestyles, and tax efficiency. These pillars guide major financial decisions and life transitions, reflecting your risk tolerance, time horizon, and family goals.
8. How does a financial plan serve as an emotional anchor?
- A financial plan acts as an emotional anchor by helping you navigate through market volatility and unexpected financial events with a level head, setting predetermined boundaries and objectives for spending, saving, and investing.
9. Why is using financial planning software recommended in the article?
- Financial planning software is recommended because it helps connect various parts of your financial plan, preventing oversight. It allows running 'what-if' scenarios to see the outcomes of different decisions, providing a comprehensive view of how each decision impacts others.
10. What steps should one take to begin creating a financial plan?
- To start creating a financial plan, be proactive in gathering and entering your financial data, implement strategies to address pressing issues, and gradually tackle more aspects of your plan over time. Patience, understanding, and persistence are essential, as well as utilizing planning tools and seeking advice when needed.
DISCLOSURE - All written content on this article is for information purposes only. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.