Core Elements Of A Sound Financial Plan

BY: Daniel M. Savage

“If you don’t know exactly where you’re going, how will you know when you get there?” That’s a very good question, posed by author and behavioral science academic, Steve Maraboli.

It resonates with financial planners who work to develop sound plans that help ensure long-term financial security for clients and their families. Financial decisions nearly always involve trade-offs – proverbial forks in the road, if you will. Absent a well-crafted plan, one is behaving as if it doesn’t matter which road is taken. Nothing could be further from the truth!

Financial plans are different for everyone; however, they generally have several core elements in common. Let’s examine six.

1. Retirement Planning. Retirement is a life stage fraught with uncertainty that will likely last for 20 to 30 years; therefore, it is critical to begin preparing as soon as possible. A good plan anticipates your “burn rate,” or the after-tax amount of money you expect to spend.

Your burn rate creates a benchmark that addresses questions about how much to save, necessary rates of return, and whether or not you’re on track for a successful retirement. In short, your plan reveals how adequately Social Security, required minimum distributions, investments, and other income sources will meet your after-tax retirement needs.

2. Cash-Flow Management. Cash-flow management is simply about the efficient use of your money, otherwise known as putting those dollars to their best (highest) use. Consider these questions:
  • Do you follow a budget or prefer to spend freely?
  • Do you know where your dollars are spent?
  • Are your assets and liabilities properly structured?
  • In light of the above, how can you optimize cash flow?
The answers to these and other questions will help determine how much more you can save and how you can better allocate “discretionary capital,” in order to accumulate wealth and meet other financial needs like college funding, vacations … and … retirement.

3. Risk Management. In financial terms, risk management is the practice of recognizing possible risks, analyzing and quantifying their potential impact, and taking precautionary steps to either eliminate them or reduce their effect.

Most people fail to realize that their greatest asset is their ability to earn income. So, what happens if you can no longer work due to a long-term disability? What happens to your family if you prematurely die in your 30s, 40s, or 50s? How will a long-term care event affect your investment portfolio?

Risk management is the core element that proactively identifies a path to income protection, survivors’ benefits, and funds to offset future medical expenses.

4. Investment Management. At some level, investment management relates to all other elements of your financial plan. Sound investment management begins with developing a clear understanding of your tolerance for investment risk. Next comes establishing an appropriate asset allocation that, in turn, identifies a comfortable glide path for building wealth over time. Investment management also entails having the right mix of qualified and non-qualified investments for portfolio efficiency and other reasons.

This manifests itself in the form of a written investment policy that serves both as a contract between you and your Wealth Manager, as well as a benchmark to evaluate performance and progress.

5. Estate Planning. For many people, estate planning is like a trip to the dentist: something to be avoided at all costs. Nevertheless, it’s important for a variety of reasons, including, but not limited to, ensuring that your assets transfer according to your wishes, financial security for family members, estate tax minimization, nomination of a guardian for minor children, identification of who will care for you should you become disabled, and much more.

At minimum, everyone should have a will, financial power of attorney, and healthcare power of attorney.

6. Tax Planning. Last but not least, it’s important to consider our favorite partner, Uncle Sam. Most people cannot entirely escape taxation, but they can avail themselves of powerful minimization strategies such as using 401(k)s, IRAs, Roth IRAs, and other qualified plans that allow for tax deferral and/or more tax-friendly withdrawals upon retirement. A good plan also leverages the benefits of compounding and offers smart capital gains strategies as appropriate.

The ultimate goal is to minimize tax-related headwinds in order to help maximize long-term wealth accumulation and income production.

Conclusion. Developing and implementing a financial plan now, one that addresses these six core elements, is the best way to ensure your and your family’s financial well-being. Working with a seasoned Certified Financial Planner may be one of the best decisions you’ll ever make.

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