Still don’t have a financial plan?

This blog post is a reprint and revision of an article originally posted in 2011. The current pandemic underscores that many people, including many of my small business owner clients, do not have access to any type of financial planning document to serve as a basis of strategy, communication and decision-making. I’ve recently decided to make having some type of financial planning document a requirement for all long term client engagements now moving forward. We will incorporate the development and review of the financial plan into ordinary ongoing work.

Most of us understand the concept and intended purpose of a financial planning. We would generally agree that having a personal financial plan is a good idea. Yet relatively few people have actually taken action to develop a formal financial plan for themselves. Why the gap between what should be and what is? There may be many reasons: procrastination, concerns about time involved, lack of information on the steps or details required, cost, or a belief that they can “wing it” without actually putting anything in writing.

I suspect that many people do not realize that a highly effective financial plan could be developed in as little as a few hours. It is possible to do it on your own at virtually no cost. Recruiting the help of an accountant/adviser will make it go more smoothly. Perhaps more people would actually get involved in the process if they were offered a little help with the mechanical aspects of developing a personal financial plan.

Whether you tackle this alone or with professional help, a good financial plan needs to be no more than 2-3 pages in length. From conception to working draft, this process is typically substantially complete in a few hours (although you will likely want to fine-tune it as you move forward).

The purpose is to map out a direction that makes since and can be used to stabilize your reactions to life’s surprises over the long term. The plan should always cover certain crucial items. This article is meant to provide a mechanical framework for building a simple but effective personal financial plan.

The mechanics of a financial plan

Start by drafting an outline with at least a few thoughts; I’ll call it a paragraph; on each of these topics:

1. Statement of Objective – If you operate a businesses then start your financial planning by reviewing and referring to your mission statement. If you can’t summarize a mission statement then now is the best time to do that. If you rely primarily on salary or other income, then state what you want to do with this income. The same principle applies to personal planning. Start with a broad statement of what you want to accomplish, where you want to be, and when all this should happen.

2. Cash Flow and Budgeting – This is a matter of acknowledging reality as compared to the ideal. It tends to be the most common source of stress. Most of us need to get to a point where our living expenses total less than 70% of our total income before we can consider themselves financially successful and without financial stress. Try to allocate 70% of your income toward expenses, 10% to reducing debt, 10% for savings, and give away 10%. Most of us find that this is difficult or impossible at first but get easier over time. If you are using a computerized accounting system, budgeting is easy. Simply refer to that part of your bookkeeping system. If not, maybe this is a good time to start.  Today’s online tools make it simple. As you get closer to retirement, make the cash flow projection extend for your full expected lifetime just to force long term thinking. Today’s widely available retirement planning software makes that easy.

3. Financial Statement – This is a snapshot of your current and sometime expected future financial position. This is required in some format by any personal or business lender. It is also required by the IRS as part of a tax settlement process. Again, if you use any type of online bookkeeping this part is easy. Recently popularized free or low cost services are great for individuals. Just incorporate these statements into your financial plan by reference.

4. Income – The purpose is usually to identify opportunities for increasing income.

5. Expenses – The purpose is usually to identify opportunities for lowering expenses.

6. Health care – Consideration of health, opportunities to improve health and contingencies to manage health care threats must be considered at the core of our financial planning.

7. Debt Reduction Strategy – You need an “exit strategy” or way to get away from consumer debt. Include an acknowledgement of strategy for investment or business debt.

8. Credit – Acknowledge the importance of a good credit rating and include a plan to manage and improve upon your credit score. Credit score now affects everything from cost of housing and insurance to the jobs and contract opportunities that are available.

9. Risks – What are your greatest financial risks and how do you cover them? This is better know as the insurance section. Yet managing risks is not always best accomplished through insurance. I’ve gained professional attention over the in the use of non-insurance risk management tools. Management our risks tends to become the most important part of the financial plan as we grow older and build wealth.

10. Taxes – Incorporate strategies to minimize taxes for the long term. Be aware of your marginal tax rate and the significant taxes that can be manages as well as acknowledging those that cannot be reduced. When approached systematically over the long term, tax savings becomes one of the easiest and most reliable sources of additional wealth.

11. Investment – A personal investment policy statement should be incorporated or attached to the financial plan. It should be build around the dollar amount of investments and your time objective. Unfortunately, the financial industry places too much emphasis on this aspect and under weighs the importance of other aspects of financial planning.

12. Marriage – Incorporate by reference a pre-nuptial or post-nuptial agreement. Don’ t have one? That leads to considerations beyond the scope of this article. For now, simply acknowledge the scope and amounts of contingent liabilities that arise from family law in your state which may include the necessity to fund for #12 below.

13. Education – A reasonable plan to get the kids through college without breaking the backbone of the rest of your plan.

14. Estate – Incorporate by reference the three key items everyone needs: 1) will, 2) durable power of attorney, and 3) advance health care directive. It is also important to list the titling and beneficiary designations of all assets. If some of these are incomplete or out-of-date, have them updated.

Pulling it all together

After the sections above are outlined, two other sections should be added. These last two are actually the most important.

First a Summary Paragraph should be developed to force the author and the reader, if applicable, to focus on the most important issues. This can be placed at the beginning or the end, it does not matter. I prefer to place it at the beginning in bold type.

Finally an Action Checklist should be extrapolated from the other sections and added to the end of the plan. This is the result of the planning that now becomes the focus of attention for you (and your spouse if applicable) and your advisers.

The point of this blog post is that a good financial plan does not need to be complicated. A paragraph on each topic attached to a few key documents or spreadsheets is a great start. Of course, more detail and professional input into certain areas will likely improve results. But the important thing is to get started, get it on paper, and then go forward from that point.

I look forward to helping make your financial plan an in integral part of our work together and I promise: it won’t be difficult.


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