Financial planning provides a road map for your financial life. It can make the journey less stressful, more fun, and more successful. And, you can start right now – even if only a few steps at a time.
In today’s uncertain economy, financial planning has become increasingly important. With an overwhelming number of options for saving and investing, managing your finances can be difficult. Creating a financial plan helps you see the big picture and set long and short-term life goals, a crucial step in mapping out your financial future. When you have a strategy anad a financial plan, it’s easier to make financial decisions and stay on track to meet your goals. Working with a CFP CM professional can secure your financial well being and give you peace of mind and help you reach financial planning success.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”(Warren Buffet)
Some people decide to do their own financial planning, but you may want to seek help from a Certified Financial Planner CM professional if you:
Want to better manage your finances, but aren’t sure where to start.
Don’t have time to do your own financial planning.
Want a professional opinion about the plan you’ve developed.
Don’t have sufficient expertise in certain areas such as investments, insurance, taxes or retirement planning.
Have an immediate need or unexpected life event.
Destination: Setting Goals
Financial planning starts with setting goals. After all, you need to know where you want to go before you can decide how to get there. Your goals can be short-term – for example, paying a credit card debt in six months; medium-term – such as saving for a down payment on a house in two years; or long-term – such as sending your kids to college in 15 years or your retirement. Write your goals on paper, including rupee terms and dates. Keep the list in sight so you can refer to it for motivation as you keep working toward your goals.
Starting Point: Where Are You Now?
Next, get a realistic picture of where you are financially. List everything you owe (liabilities) and the value of everything you own (assets). Also, track your monthly income and expenses in a notebook or on a budget form. Even if it’s not a pretty picture now, that’s OK. You’ve faced your financial situation, and financial planning will help you improve the picture.
Avoiding Potholes: Insurance, Debt, Job Loss, Taxes and Estate Planning
Financial potholes will inevitably come your way – stock market downturns, recessions, losing a job, wrecking the car, paying for an illness. You may not be able to avoid these potholes, but you can minimize their financial impact. Here are a few suggestions:
• Have adequate insurance. Insurance prevents financial catastrophes, so don’t put off getting it. Insure what you cannot comfortably afford to replace. For most people, that means having the following insurance: auto, renters or homeowners, liability, health, disability and life insurance (if someone depends on you financially). Take advantage of insurance offered to you at your job and supplements it with insurance you buy on your own. Shop for the best price, but make sure you buy from a reputable, financially sound insurance company.
• Control debt. Having a lot of debt puts you at financial risk. If you’re spending more than you earn, start using a budget to plug spending leaks, and make paying off your credit cards a top priority.
• Job loss. You can’t control the economy or a company layoff, but you can control how much time you invest in keeping your skills sharp and in meeting people who may help you find a job in the future.
• Taxes. Computer software can help you find deductions on your tax return. However, if your financial situation is complex, you may benefit from working with a tax or financial professional who can suggest tax strategies and make sure you are getting all of the credits and deductions due to you.
• Estate planning. Every adult should have these four basic documents: will, general durable power of attorney, medical power of attorney and a living will (also called a medical directive). A financial planner can guide you and refer you to an estate planning attorney to draft these documents.
Why you should do financial planning
Many people today lack a financial framework or system. When it comes to expenses, the core of financial planning, we often enter a fantasy world. Even if families can give a reasonably accurate set of current financial statements (assets, liabilities, income, expenditure and estate), they are rarely able to project what those statements will look like ten years, or even five years into the future.
Financial planners will usually tell you that clients come to them for these reasons:
- ‘We are not fully in control of our finances’
- ‘I don’t understand money; all I feel around money is fear and anxiety’
- ‘We don’t know where we are now or where we will be in the future’
- ‘We seem unable to live the lifestyle we aspire to’
When families do achieve clarity it usually provides great relief, even if the picture does not look good. They at least know where they stand and can take appropriate action.
Unfortunately, we live in an era where wealth is frequently generated for its own sake, rather than as the means to live a fulfilled life. Money is used to make more money – it becomes a proxy for the ego, and financial decisions are often made to protect or massage our egos, not to support the achievement of our deepest life goals.
Life and money are deeply intertwined. Identification of clear life goals is essential to provide direction, and enables sound financial decisions to be made. So when asked to comment on an investment someone is considering, I always pose another question: “Will investing in this product enable you to achieve your goals more quickly and efficiently?” Very often the answer is that it won’t.
The impact of increasing longevity on family finances is profoundly important. The keys to addressing this are the Three Drivers of Financial Freedom: savings, compound interest and asset allocation. While saving implies a reduction in spending, and potentially the hijacking of those important and immediate life goals, financial life planning can help to resolve these difficult conflicts between the short and long term.
Dealing with the unexpected
Life will have kicked you in the teeth in the past and it will do so again in the future. Accept it, and plan for it. Life can throw a huge range of fastballs at us, from the irritating yet not too serious car breakdown to the death of a close family member. Put in place contingency plans centered around a Security Fund and insurance. No one likes insurance (though I have yet to meet a widow who complained her husband was over insured).
What you are really going to achieve from well-formulated goals and a structured, considered life and financial plan to achieve those goals can be clearly expressed in one word – freedom.
Freedom is a central theme of my work, so what exactly is it? True freedom comes from defining and setting boundaries and living a life dedicated to achieving your goals within those boundaries. Greater freedom comes from personal growth, the means by which we can expand our boundaries.
Lianne’s story illustrates this perfectly. A mother of two on a modest salary, Lianne had gone through a difficult divorce and when she first came to me for help, she was consoling herself with a compulsive spending habit.
However, her goals were to love, support and educate her children and to be a really good mother to them to compensate for the breakdown of the marriage. I worked with her to plan her boundaries. We established her life goals, tackled her spending and developed an annual spending plan.
One Monday morning she called me to talk about her weekend. She had taken the girls to London to see a concert and had done so without any feelings of guilt or anxiety over money. It had been in her plan. She had achieved her goal of bringing happiness and fun to her children. Within her boundaries she had achieved real freedom, to be there in the moment with her children, simply to be.
It’s the process that matters
Plans rarely survive contact with reality, to misquote Moltke. Reality for many of us can cause a change of direction. However, the process of planning is as much a benefit as the plan itself, often more so.
This process is a six-stage process for called FUTURE:
- Foundation: a full inventory and analysis of your life, including assumptions and an analysis of your risk profile
- Utopia: establishing what you want to have, to do, to be
- Transformation: identifying and dealing with the obstructions on the road to utopia
- Utilisation of resources: establishing the best option for your existing resources
- Roadmap: creating the plan to get you from where you are now to where you want to be
- Execution: implementing and living the plan
Having developed a plan it is important that you continue to monitor and renew the plan each year. Planning is dynamic, a habit, not just a couple of sheets of paper to be drawn up then relegated to the bottom draw and forgotten.
The fruits of the process
We all in the financial community trust our processes, because we know they bring results, results that are more than just a written plan.
Initially you will develop a personal inventory of your life. This will include a detailed set of accurate financial statements comprising a schedule of assets, liabilities, income and expenditure, as well as data about yourself and the environments you inhabit.
Self-understanding builds on this base and by the time you are well into the process you should be able to articulate your deepest and most profound goals. In doing so, you will find yourself energised, focused and far sighted.
Finally, you will learn about money. If you are working with a coach or adviser you will have a raft of financial principles and products explained to you. If you are alone on this journey you will need to educate yourself, and there are plenty of resources out there to help.
What is the alternative to planning? Well, you can wing it; with a good deal of chutzpah, a hefty dose of confidence, a wing and a prayer and a bit of carpe diem you might well achieve great things, and get a real thrill and sense of achievement when you do. However, I do believe in the importance of living in the moment. The present is where we can really ‘be’. Crucially, financial life planning will actually help you to achieve this state by removing regrets for the past and fears of the future.