How to Know Your Financial Plan Will Be Effective
We believe it’s an enormous act of faith to engage with a financial planner.
In addition to revealing your most personal financial information to a near-stranger, you’re trusting them to help create a tailored financial plan, which comes with no guarantees. It can feel like you have only one chance to get this right, particularly if you’ve waited a little too long to start thinking about it. The plan you make today can potentially set the course of your financial future.
So, how can you know if your work with a financial planner will be effective?
The answer is this: an effective financial planning process is one that is both complete and continuous, meaning it covers all relevant areas of your financial life and is ongoing to adapt to changes over time.
Developing a Complete Financial Plan
Since effective financial planning involves looking at your complete financial picture, a complete financial planning process methodically addresses each area of your financial life. The goal is to make sure that all areas are in good shape. While this is not an exhaustive list, the major areas include the following:
- Your financial statements (net worth and cash flow)
- Cash flow management and spending strategies
- Retirement needs analysis, as well as retirement income and distribution strategies
- Education savings and funding
- Tax planning and tax reduction techniques
- Investment strategies and portfolio development
- Risk assessment and insurance coverages for health care, disability, life, and property
- Estate planning, charitable planning, and gifting
If you work in the technology industry, equity compensation planning (e.g., stock options, RSUs, and ESPP) is also required.
To create this comprehensive plan, you’ll typically want to work with a financial planner or financial advisor, both of whom offer their services in a variety of ways.
Financial planning may be offered on a stand-alone basis or may be bundled with other services, such as investment management or brokerage services. Either way is fine, as long as it covers all areas of your financial life to help ensure nothing important is overlooked.
The tools financial planners use range from simple on-screen calculators in call centers to high-level, goals-based, financial planning software used in many brokerage and investment firms to more detailed, cash flow-based modeling software favored by many financial planning-focused advisors. The capability of the tools your advisor uses should fit the complexity of your situation.
To create your complete financial plan, your advisor will collect information from you about your current situation, including current income, expenses, assets, and liabilities. To be complete, this inventory should include all of your accounts, not just some of them. In addition, your advisor will ask you about the future. To start: When would you like to reach “work optional”? What major financial goals do you have (for example, college for kids, a wedding, a home remodel)? How will your income change over your working career? Will you scale back expenses at some point? How often do you buy new cars? What do vacations look like for you?
From there, it’s useful to create and review different scenarios to find the boundaries of what’s possible. Financial planners often use Monte Carlo analysis to stress test scenarios, which can help you assess whether a particular scenario may meet your needs for your whole life.
Scenario analysis such as this allows you to change different aspects of your financial plan to see the results.
For example, how much do you need to reduce expenses to retire two years earlier? This type of planning forecasts future outcomes and can help you make choices and prioritize what’s most important to you. It allows you to align your resources, both money and time, with your most important goals. It’s a way to help resolve the financial constraints we all live with.
Continuous Implementation
Once you complete your initial financial plan, there will be a list of action items required to implement the plan. For example, you may need to change your investments, adjust your savings, exercise stock options, contribute more to your employer’s 401(k) plan, and so on. New kitchens don’t appear magically from an architect’s blueprint, and business strategic plans never succeed if they’re not executed. It’s the same with family financial planning. A financial plan can’t work if it’s not implemented. Taking care of the items on the initial task list gets your financial house in order and starts you moving in the right direction.
But things don’t remain static, do they? Your priorities shift. Your family changes. Your career evolves. The economy goes from boom to recession and back again. Markets go up and down. Tax laws change constantly.
What this means is that you will need to adjust your financial plan along the way to help ensure it continues working. You need a continuous feedback loop. You need to regularly compare your current situation to where you are trying to go and adjust as needed. There will never be one perfect initial financial plan that, without exception, forecasts what will happen in the future.
What’s important is getting started moving in the right direction, setting that course, and then making adjustments along the way to keep moving toward your goals. Updating your financial plan periodically (once a year is a good rhythm) can help you do that. It can help you realign your money and time resources with your goals and reprioritize or confirm what’s important to you. A periodic update can also help you expose potential money conflicts creeping into your financial plan and resolve them early before they become harder to manage.
Many people think of financial planning as a one-time event, and you can buy financial planning services on a one-time basis for an hourly fee or as a project. However, while running through the financial process at a single point can be useful, it’s better to think of financial planning as a continuous process.
Don’t wait and hope for a good outcome in your financial life. Use a complete and continuous financial planning process to help you get on track and stay on track, with the goal of building the future you want to live in.
Savant Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you’d like to explore a complete and continuous financial planning process to help you assess whether you’re on track for your financial goals, schedule a complimentary consultation.
Bruce R. Barton
Managing Partner / Financial Advisor
CFP®, CFA®, MBA