A comprehensive financial plan starts with your individual goals in life. How do you want to live and what do you want to do with your life? Do you want to retire early? Do you want to donate time and money to charities? Do you want to travel now or in retirement? Do you want to buy a boat, RV, or vacation home? Are you prepared to help your children with college tuition, weddings, or other major expenses? There are so many financial needs in an average American’s lifetime, no wonder most people do not even have an emergency fund. And the only thing that is certain is the fact that your financial needs will change unexpectedly during your lifetime. The only way to prepare for all of these is through Comprehensive Financial Planning.
Before we even start to discuss finances, we start with understanding your goals and desires in life, both short-term and long-term. Once we clearly define them, we then can start to build a financial picture. This starts with identifying your current net worth. This is where we list out all your assets (home, investments, etc.) and liabilities (mortgage, credit cards, loans, etc.). Most people have debts and a basic requirement for any sound financial plan is developing a strategy on how and when those debts will be paid off. Then we start to review all aspects of your cash flow. Getting a realistic handle on one’s expenses can be very difficult for people that have never created a budget or tracked their expenses. As we onboard clients at Islands East Advisors (IEA) one of the first things we recommend is to set up an expense tracking app either through your bank or a 3rd party app that can link to all your accounts. You cannot build an effective budget if you do not know where your money goes. And if you have never budgeted before, I am certain this process will reveal surprises to you.
These initial steps give us a baseline to see your current financial state if nothing else changes. From there, we go back and pull in the goals we discussed earlier. We need to prioritize those goals and develop a plan to achieve them. The economic assumption that resources are scarce comes into play here. With unlimited resources one would be able to achieve all their goals in a relatively short period of time. This is unrealistic for the overwhelming majority of people. A sound plan will help you understand the opportunity costs of achieving each goal with respect to the other goals. Within these objectives, our plan will include a review of each of the following areas to maximize the use of your financial resources while minimizing your risks.
1) Taxes – one of the first things people think about in a financial plan is how to minimize taxes. We develop strategies to help you reduce your tax expenses, so you keep more of your money working for you. We will work with your tax accountant to ensure those strategies are implemented properly. Are you aware of the tax codes and how the decisions you make today could affect your taxes in future years?
2) Retirement – retirement is one of the main goals of most financial plans. Typically, the timing and costs of retirement are part of the goals you have already identified. We need to outline what your retirement looks like and how much income you will need to have a successful and worry-free retirement. This includes a complete social security analysis to identify when you should file for benefits. There are also reviews of your pensions and other forms of retirement income. We then build strategies to fund any estimated gap in your retirement income. Are you certain you will have a successful retirement and not out-live your money?
3) Investment management – in order to meet all of your objectives, there needs to be savings and investments in both tax deferred and taxable accounts. We help you identify how much you need to save, and in which accounts you need to add funds. We research investments, develop strategies, and manage the accounts for you. Do you have enough time and expertise to manage a lifetime of investments?
4) Employee benefits – whether you are a small business owner or you work for another company, we look at your full benefits options to ensure you are making the most of your choices. Part of this assessment has to do with managing risks. For example, do you have disability protection? Are you prepared for unexpected events that could keep you out of work for an extended period of time?
5) Insurance – we will review all your insurance needs. From auto and homeowner’s insurance to life insurance. We network with insurance professionals that can get you the protection you need. Have you assessed your family’s financial security if something happens to you or your spouse?
6) Estate planning – if you want to leave your home, vacation home, or investments to family members or charity, planning for this upfront can significantly reduce the amount of taxes you and your family will pay for this transfer of assets. We will work with your estate attorney to develop a plan and implement it. Are you aware that if you do not have a documented plan or will, the courts will decide how to distribute your assets?
7) Long-term care – will you have to take care of your aging parents, or will you need to plan for a nursing home for yourself at some point? This is not an inexpensive endeavor and can consume your life savings if not planned for properly. An independent financial advisor can assist you with these questions through their expertise and network of professional. Have you researched and are you aware of the costs of nursing homes, assisted living, and long-term care?
As your life changes, your financial plan will need to change as well. You cannot expect to build a new plan every time something major in your life changes. The most effective way to manage these evolving objectives is to have a comprehensive plan that is reviewed on an ongoing basis and can be adjusted, rather than rebuilt, for your changing needs. The benefits of financial planning are numerous. First and foremost is that it takes a lot of time and expertise to assess all these areas while also managing investments and reviewing progress. Financial Advisors should help you build a plan will also help you reduce risks. There have been many examples where one accident or mistake have ruined a person’s finances for their entire life. Having a documented plan with clear long-term and short-term goals and actions ensures that when things start going off-track, they can be corrected before it’s too late. It will also help alleviate worry and stress by clearly identifying your odds of achieving your plan. We do the work of reviewing progress and keeping you on track. It will improve your understanding of your financial circumstances and the results of certain decisions on your finances over a long period of time. Having an objective advisor review your finances allows you to remove your bias and concerns and relies more on facts and tangible goals and actions. Clarifying your goals and establishing all the steps required to meet them is an eye opening and rewarding process. Just like any large project at your job requires a project manager, having a goal to retire with a certain income and standard of living 30 or more years from now without a detailed action plan significantly reduces your chances of achieving this goal.
Everyone needs a financial plan and yet the majority of people do not have one, nor do they fully understand what it entails. The earlier you start the more achievable your life dreams will become. Contact Islands East Advisors for a complimentary consultation and help us Chart Your Course.
About the Author
Kevin Caldwell provides fee-only financial planning, investment management, and retirement plan advisory services through Islands East Advisors (IEA) and fractional CFO / business consulting services through Islands East Financial Solutions (IEFS). IEA and IEFS are both based on Kent Island, MD and serve clients throughout the United States. IEA serves clients as a fiduciary and never earns a commission of any kind.