For many people, even sophisticated investors, the concept of financial planning is intimidating. It may seem unnecessary for those with fewer assets, but it's essential for everyone, no matter the size of your portfolio. A successful financial plan is not a static document but is flexible and subject to change as your goals and circumstances change.
One reason that financial planning is fundamentally necessary is that it reflects not just your financial situation but your values and aspirations as well. Your financial plan is a tool to progress toward whom you want to be and where you want to be. Goals are a core component of that overall picture.
What are the critical elements of a financial plan?
- Financial inventory. What are your current assets and liabilities?
- Budget. What do you have coming in and going out, and how can you change both sides of that equation if you want to?
- Goals. What do you want to achieve, financially and personally?
- Strategy. How will you achieve those goals?
Overall, your financial plan is an outline of your goals (short, medium, and long-term) and the strategy that you will use to achieve those goals. Your goals are up to you. Typically, people want to buy a home, save for retirement, pay off or avoid debt, enjoy travel and other leisure activities, and share wealth with others. Your goals might be similar or not. For example, suppose you want to leave a bequest to a particular philanthropic organization or contribute extensively to one while you are living. In that case, those are unique financial goals that you will want to work into your financial plan.
Can I handle financial planning on my own?
Maybe, but most people will be better off if they employ the services of a financial planner or another advisor. According to Forbes, the National Financial Education Council reports that a lack of financial knowledge costs the average American over $1,200 annually.
A good financial advisor can help you craft your strategy but should also help you refine the goals that the plan is designed to achieve. Finding the right financial planner for your circumstances is crucial for satisfaction and success. Forbes points out that there is no federal regulation regarding who can call themselves a financial advisor and that not everyone with that title on their business card or website is qualified to guide you. Although the Securities and Exchange Commission (SEC) is working to limit the use of “advisor” to those who follow a fiduciary standard, that is not currently required.
What is a fiduciary?
A fiduciary is a professional who takes an oath to make financial decisions in the best interest of their clients. Some advisors are expected to uphold this standard, including Certified Financial Planners, while others follow a less-stringent standard of suitability. Suitability means that the advisor or planner should suggest options for you that match your financial circumstances. Registered Investment Advisors also should uphold the fiduciary standard, and you pay them a percentage of your assets as a fee rather than a transaction-based commission. Another option is to engage the services of a fee-based advisor, whom you would pay hourly no matter the content of their advice.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
