Financial planning is the process of organizing personal and financial information for the purpose of accomplishing a specific set of goals. These goals can be short-term, long-term, pragmatic and aspirational, and will likely evolve throughout your life. Creating space to meet your immediate needs while also progressing towards your target financial outcome requires a careful evaluation of resources matched with a personally tailored financial plan. While the purpose of a financial plan is to increase the likelihood of achieving financial and life goals, the value of setting and sticking to a financial plan can be far greater, including greater confidence in your decisions, the ability to weather uncertainty, and lower financial stress knowing you have a timeline for achieving your future financial goals.
Everyday decisions can impact your ability to live a confident, financially secure life. And with the accessibility of financial advice increasingly available on myriad platforms, consumers are often provided one-size-fits-all recommendations or misguided information on securing, growing and tapping into personal wealth. Without clear guidance that takes into account your personal goals, comfort with risk, family situation, health concerns, and anticipated life expenses - not to mention the ever-evolving regulatory investment and tax laws - the likelihood of missing your goals increases. Seeking the advice of a qualified financial professional, such as a Certified Financial Planner® Professional (CFP®), can improve your ability to meet your financial goals.
Working with a CFP® Professional is the ideal solution for many people because the designation comes with fiduciary responsibility, meaning CFP® Professionals are required to act in their client’s best interests at all times, regardless of any personal financial benefit. They also have to disclose how they are compensated and if there are any potential conflicts of interest. CFP® Professionals undergo a rigorous exam that requires a comprehensive application of financial planning, tax planning, investment planning, estate planning, retirement planning, insurance planning and ethical components, as well as 18 hours of Continuing Education credits annually.
While a CFP® Professional may help refine, execute and maintain your financial plan, depending upon the complexity of your financial situation, a CFP® Professional can also recommend or partner with additional qualified professionals, such as an estate or tax attorney, to further tailor your support and allow you to live your best financial life.
Getting Started
Whoever you engage to begin building your personal financial plan, the process should start by clarifying your goals, values and priorities. Remember, your financial plan will be unique to you (and your family). Many people intuitively aim for a few goals but fail to create a roadmap, and in skipping this important initial step, they forget vital factors or make uninformed decisions around saving, reducing debt, and investing for the future. They also miss opportunities to strategically enhance or protect their wealth along the way. Here are some questions we like to ask our clients:
- What are you trying to accomplish?
- When do you want to accomplish those goals?
- Of the goals you’ve listed, which are most important and therefore our highest planning priority?
The next step in the process is creating a full financial picture. Look at your monthly commitments, ongoing or upcoming expenses, and any anticipated changes to these expenses. Additionally, and especially for families, it’s essential to look at your emergency preparedness, including your ability to immediately cover unforeseen expenses via a liquid emergency fund, ensure end-of-life paperwork like wills and trusts are updated, and review any life insurance coverage to protect your children’s future.
Alongside this, consider your existing investments, including personal retirement accounts, employer-sponsored retirement accounts, health savings accounts, stock programs, personal or corporate insurance policies, and your savings vehicles. If you are an entrepreneur, business owner, or investor, your financial picture may look very different than that of the average consumer. All complexities aside, the goal is to understand where your money is going on a regular basis.
A thorough financial plan must also consider the following areas:
- Cash Flow
- Net Worth
- Risk
Cash Flow
This considers your monthly income (from salary, investment dividends, rental properties or business profits) and compares it with an aggregated list of your monthly expenditures (anything from daycare, gas, utilities, groceries, to payments on assets such as investments, business upkeep or monthly notes/bills).
Net Worth
This is the calculation between what you own (your assets) and what you owe (your debts or liabilities). Items commonly considered assets are your household, vehicles, additional investment properties or recreational vehicles, investment accounts, and savings. Typical liabilities are amounts owed to mortgages or vehicle loans, student loans, personal loans and credit card balances.
Risk
This refers to matching your risk to your assets. Meaning, your investment choices should fit your ability to tolerate the ups and downs of the asset, in accordance with your financial plan. An investor’s risk profile could be aggressive, tolerating high rates of change and temporary losses in the hope of longer-term gains, moderate, placing equal priority on lower risks and increasing rewards, or conservative, tolerating minimal loss and sticking with known, low-risk yet low-return options. An investor’s portfolio should mirror their risk tolerance, and should account for risk scenarios such as stock volatility, market swings, economic or political events, and regulatory or interest rate changes. It’s also essential for investors to balance their liquidity - the ability to access funds as needs arise - as their financial plan dictates. Financial advisors can provide support to investors in this area, ensuring that investment portfolios are structured alongside a consumer’s risk tolerance and liquidity needs while advancing their financial plan.
Foundations of a Financial Plan
Knowing where you’re starting from can inform the likelihood of achieving your goals within your ideal timeframe. Having outlined your status and priorities, your goals – and timelines – begin to take shape. Your Financial Professional will provide clear guidance on whether your goals are feasible within your preferred time frame and will then create a plan that increases the likelihood of accomplishing these goals.
With the groundwork done, a CFP® Professional will then apply their expertise and training to analyze and build your plan, including explaining and ensuring you understand your recommendations and options.
Your financial plan should be comprehensive and holistic, and include everything that can either have an impact on, or be impacted by, choices, values, or your economic situation. A comprehensive financial plan will typically include a portfolio and asset management plan, which is focused primarily on investments. While investment or asset management is vital to any overarching plan, it is not in and of itself a complete financial plan. There are still many elements within a financial plan that can impact your ability to achieve your goals.
Financial planning is both art and science. It requires extensive knowledge of financial solutions and opportunities, and it also requires a human relationship between the financial professional and you, the client. Knowing what is important to you, alongside the many obligations you may be balancing, is essential for building a plan that you can comfortably adhere to over your lifetime. Financial planning is an ongoing process that requires regular review and maintenance because life is also always changing. Ideally, a financial plan should be reviewed on a regular basis, at least annually, to ensure the current approach is the best one. It’s also important to connect with your financial planner whenever you experience a life event, such as a change in career or role, the addition of children, or an economic challenge. Planning for your financial future – through a comprehensive financial plan -- is the best way to ensure the likelihood of achieving your financial goals.