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Financial Planning

In this topic, we cover:

  • What financial planning involves.
  • Factors you should consider when making short, medium, and long-term financial plans.
  • The services provided by financial planners.


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Financial planning is the process of preparing for your financial future. If you've ever prepared a monthly budget, you have created a short-term financial plan. Long-term planning would include saving for a home or a comfortable retirement. A solid financial plan accomplishes two main objectives - it helps you reach your financial goals and it helps to minimize financial risks.

While each of us may have different financial goals, it's safe to say that we would all prefer to live a comfortable life, provide for our children, and not be destitute in old age. Financial planning is not only about helping make your financial dreams come true; it's also about living your life in a financially responsible way.

While financial planners are helpful in mapping out your financial goals, there are things you can do to create your own strategy for financial responsibility. A financial planner is a person who is trained in helping individuals reach long-term financial goals by analyzing risks, providing estate planning advice, and helping to create an appropriate strategy for investing wealth. Unless you have just inherited a large sum of money, you may feel intimidated by the rates that some financial planners charge for a consultation. With that in mind, there are some things you can do now to help lay the groundwork for realizing your financial goals.

The Basics
To reach more advanced financial goals, you need to take control of your day-to-day spending while plugging unnecessary spending leaks. Here are some steps to cover when setting up a basic financial plan:

  • Review Your Monthly Budget - Developing a monthly budget is a great way to make sure you are spending money on what matters to you. First, review every single item you spend money on - from debt payments, to utilities, to car insurance - to find potential savings you could get by changing vendors or your spending behavior. Most people find ways to save by eliminating a portion of discretionary spending - creating savings that can be used to fund additional parts of their financial plan. Even changes that add up to only a few dollars here and there can add up in ways you may not expect. You can review our Budgeting and Spending resources for tips on monthly budgets.
  • Minimize Debt - For most people, some debt is unavoidable. Student loans, for example, help millions of people prepare for careers that require a college or advanced degree. But too many of us carry high interest, high fee debt from credit cards and other sources. Money saved from your budget review should first be used to reduce and eliminate high interest debt, starting with your highest interest rate loan. Reducing high interest debt should be a top priority for anyone planning for the future - interest and fees are a cost like any other, and reducing the costs from interest payments will put more cash in your pocket.
  • Set Up an Emergency Fund - Unplanned expenses, from a car repair to a dental bill, can surprise anyone. Using an emergency fund rather than borrowing on credit cards to pay such bills offers a cushion against the unexpected and helps to keep you out of debt. A $1,000 dental bill financed by a high interest credit card, for example, could ultimately cost substantially more if paid over time with a credit card. Start by trying to save one month's living expenses in a savings account and build over time to six months or more. Anyone with an emergency fund and no credit card debt is better prepared to pursue longer-term goals.
  • Minimize Major Purchases of Personal Property - Cars, furniture, home entertainment systems, clothing, or similar items all share a very important trait – they decrease in value. A new car may cost hundreds of dollars per month in depreciation in addition to a car payment. A high end television loses much of its resale value as soon as you bring it home. What's the resale value on clothes? Minimizing these purchases can give you more resources to build true wealth, not just the appearance of affluence.

Intermediate Financial Planning
As you may have noticed, basic financial planning is typically focused on controlling spending and minimizing financial losses in the forms of interest, fees, and depreciation. The next level of financial planning focuses on building assets that increase in value over time, such as a home, an investment portfolio, or a higher education.

Worthwhile assets that may increase in value include:

  • Continuing Education - While not without risk, seeking education opens the doors to professions that tend to pay more than others. Studies have shown that those with a four-year degree will earn up much more over their lifetimes than those with only a high school diploma. Those with advanced degrees tend to earn even more. But education is expensive and careful consideration should be given to whether the future salary and job satisfaction will be worth not only the debt incurred from tuition, fees, and expenses, but also the lack of earnings during school. The risk of borrowing for school and then not completing the degree should also be considered, as should the risk of getting a degree and not being able to find a related job.
  • Buying a Home - Although also not without risk, when planned correctly, owning your own home can be a case of the proverbial having your cake and eating it too. A home provides not only a place to live; it may increase in value over time. While home prices can vary from year to year, over the long term, housing has been a reliable way to preserve and grow wealth. Please review our buying a home module to learn more about when you should consider owning your own home.
  • Saving for Retirement - Most people today understand that Social Security is unlikely to provide the same benefits for future retirees as it does for current ones - it is a system funded by current workers and not past contributions. And the company pension plans that may have sustained your parents' or grandparents' generations in retirement are not there for most workers (and at risk for others). The solution for those working today is to fully fund a balanced portfolio of long-term investments, making sure to take advantage of tax breaks, employer matching, and low-fee investment vehicles.

Advanced Planning
Once you have gained control of your budget and laid the groundwork for a secure future by considering whether continuing education is right for you, deciding whether to buy a home or not, and starting to save for retirement, it's time to plan for larger challenges like a college education for your kids and passing your estate to future generations.

  • Kids and College - While not everyone chooses to have kids, kids are a financial responsibility that go far beyond diapers and baby clothes. For example, if you and your spouse work, the cost of daycare alone can easily cost $10,000 or more in many states. And the cost of providing a higher education is likely to be in the hundreds of thousands of dollars for babies born today.
  • Estate Planning - Similar to financial planning, estate planning concerns what happens to your assets once you die. Estate planning also encompasses issues surrounding the mental and physical incapacitation that may accompany the end of life. Please see our estate planning topic for more information on wills and related issues.

Regardless of whether you are just learning about financial planning or have been doing it already, please keep in mind that your financial plan needs to be evaluated and adjusted continually. In the same way that exercise offers a wide variety of benefits, maintaining a financial plan will pay far more than just financial dividends. Financial planning helps you feel more secure about your future, ensures that your spending is aligned with your financial goals, and even reduces financial stress. No matter what your assets are right now, it's never too early to develop a personal financial plan.