As I prepped this week’s blog post, the market handed me a gift and caused me to do a re-write. It’s all good because the lesson is time-tested and a valuable one. As I write this post, April 2, 2018, the DOW dropped nearly 459 points by the closing bell. Sounds scary, but keep in mind it is only 1.9%. Some would protest, ‘only, what do you mean only’ but given the current market valuation that drop seems steep, but it’s not nearly in correction territory (which is a 10% drop). A sensible financial plan should be able to accommodate a 1.9% drop without causing you to lose sleep.
Set personal and specific goals with your adviser.
Keep in mind the three things you should do during market turmoil. First, ignore the hype. Second, do nothing (i.e., don’t panic sell, or buy). Third, call your adviser if you feel the need. If you don’t have a good adviser, get started asking for referrals or feel free to give me a call. The point is, you don’t want your financial plan to be swayed by the news headlines, nor do you want to make any rash decisions during a market episode. You do want to reach out and find a financial planner that can work with you to create a sensible financial plan and be a voice of reason during these times.
So, what is included in a sensible financial plan? The answer, of course, depends on your personal goals and resources. That said, there are some key components that your adviser should include in a comprehensive plan. Keep in mind that if you hire your adviser to do hourly work for a specific project, your adviser will limit the scope of their work to that request. In a comprehensive plan, at minimum, the key elements to be covered are: personal goals and objectives, cash flow, tax, insurance, retirement, investment, education, estate planning, and any pressing or immediate financial concerns. Let’s look at each in more detail.
Consider your personal timeline and resources.
Personal goals and objectives should be your starting point for a comprehensive plan. It is why you are creating a plan. Your goals and objectives should be personal and specific and you need to discuss realistic timelines and resources with your financial planner. No planner can help you if you are age 65, want to retire in one month with $1 million dollars, but you have only saved $10 your whole life. But let’s say you are in your fifties, have been saving during your career but you are not sure how much you will need to retire at your full retirement age of 67 (surprise, it’s not 65 for many folks). You also want to know if you can retire at age 67 and delay taking social security until age 70. These goals are personal and specific and importantly they have a realistic timeline for you and your planner to work with.
Cash flow is critical for any plan. Your cash flow should be examined to create an income statement, balance sheet and cash flow statement. It will also let you know if you are overspending each month. This is important when discussing budgeting, investing and multiple other key elements of your plan.
Tax is a very important area to review. Each of us needs to pay our fair share, but we don’t need to give Uncle Sam an interest free loan! Work with your adviser to make sure you are not overpaying tax, or worse, in a situation where you have not been properly withholding. Minimizing your tax burden should also be examined in relation to your income, investments and charitable giving.
Insurance addresses risk management. It’s not just about having life insurance, but rather are you properly insured all around. You need to know what exactly you need for auto, health, life, disability, long-term care, and casualty insurance.
Retirement and investment are sometimes linked, but not always. Many people consider that they go hand-in-hand but that may not be the case. Each person is different and whether planning for retirement through your employer and investing in a 401(k) or other plan type or investing in a taxable account outside of an employer relationship, you need to know what you own, why and how much you can contribute. You also need to know if your investments match your risk tolerance and are they coordinated to your current stage in life.
Your child can borrow for education, you cannot borrow for retirement.
Education planning for your children can give them a huge leg-up in life. But keep in mind that you need to cover your own retirement first. Your children can borrow for college tuition, but you cannot borrow to cover the cost of retirement.
Estate planning is not always pleasant to think about. It is however, a vital part of financial planning. Even for those well under the estate tax threshold, there are many items to consider. Do you have an advanced health care directive or proxy, a power of attorney in place, a last will, a living trust? Who will make your funeral arrangements and how will it be paid for? Don’t leave this up to a relative that you think knows your wishes. Get it on paper and be clear about your final wishes. Figuring out what you wanted done can leave loved ones in a very painful and awkward situation.
Finally, consider pressing financial needs. Is there a particular situation that you need to deal with immediately? If so, let your adviser know up front and give them as much detailed information as you can about what the current situation is and why it is causing stress.
Hire a pro! Hire a CFP® professional to help you. We get professional help in most areas of our life so why not hire a professional to help you with your finances! Just as we hire doctors and lawyers, we should seek out professional help for our financial lives. As an independent CERTIFIED FINANCIAL PLANNER™, I can help you. Contact me and let’s get started. #talktometuesday #getstarted #newplan #financialplan #goals #newyou #future #plan #CFPPro