What is Involved in Financial Planning?
Long-term financial success requires forethought, strategy, and discipline. Financial planning shows where you want to be in the short- and long-term, and what the path to your destination is. It’s an essential and initial step in achieving the financial success that you seek.
What is Financial Planning?
Financial planning takes a comprehensive look at your financial situation, and strategies for how you can meet your future financial goals.
Sometimes financial planning is thought of as preparing for retirement, but that’s just one aspect of the process. It can include other long-term savings, short-term goals, estate planning, and more.
Additionally, financial planning isn’t a one-time event that you’re done with. Although you create an initial financial plan, the plan should be periodically reviewed. You’ll want to confirm that you’re making progress and staying on track. You might also need to adjust your financial plan when your life changes.
The goals of financial planning are multifaceted. It’s a means of showing you what your future could look like, maximizing your assets, growing and/or preserving wealth, and ultimately getting you where you want to be.
Developing an initial financial plan might be intimidating, but it’s empowering once you have a path and defined destination.
Financial Planning vs. Asset Management
Financial planning is different from asset management. Asset management involves actively deciding (and adjusting) how your investments and other assets are positioned. Financial planning shows you how to prepare for your financial future.
At DHJJ, we offer both financial planning and asset management services (among other services).
What is Involved in Financial Planning?
Financial planning can be thought of as drawing a map. You identify your current position and desired destination, and then figure out a path.
Identifying Your Current Position
Identifying your current position is a two-pronged task. You must assess assets and liabilities, and also track where your money goes.
Making a list of assets and liabilities is fairly straightforward. List each significant asset that you have, along with its estimated (or actual) value, and do the same for each liability you have. Your assets’ cumulative value less your liabilities’ cumulative value is your net worth. You can include a category for each asset/liabilities, as this makes checking diversity easy when managing assets.
Your money is most easily tracked through a budget. Hopefully, you already have a monthly budget that shows all income, expenses, investments, and other cashflow. You can use this to extrapolate an annual budget, which is easier to work with for long-term financial planning. The monthly budget can be used for short-term financial planning. If you don’t have a monthly budget, begin by tracking all income, spending, and investing. Use these numbers to forecast future months.
Once you have an accurate understanding of your current financial position, you’re ready for long-term financial planning. You might need some short-term financial planning, too. For more information, see the Short-Term vs. Long-Term Financial Plans section below.).
Setting Financial Goals
Determining your financial destination can be approached from two points, and the two must be balanced with one another.
Your current financial position and earning potential will dictate where you can ultimately end up. Many people are surprised just how far their assets and income can take them, especially when investments are compounded over time. Virtually everyone has some constrictions on how much they can save, though. Thus, you can view where you’re going from where you are now.
You can also begin with where you’d like to be. The more specific you are when discussing your desired destinations, the better. A “comfortable retirement” can mean many different things. Do you want to own a second home, perhaps in a specific location? Do you foresee spending time around a homestead, or would you like to travel the world? How much protection would you like against late-stage nursing home costs? Similar questions can be asked about children, grandchildren, charities, hobbies, and almost every other meaningful part of life.
You might not have entirely precise answers right now, but you will. As you become more precise with your vision, the financial goals needed to reach those life destinations will get more defined.
This point in the process is where the assistance of a financial planner is particularly helpful. A knowledgeable financial planner can help you forecast what your savings may grow to. They have expertise in savings rates, rates of return, risk management, and other factors that are necessary for accurate estimation. They also know what questions to ask so that you’re destinations and goals become more defined. Finally, a financial planner can balance the two different starting points so that you ultimately find financial goals that are both achievable and satisfactory.
Mapping a Path Toward Your Goals
As you go through this process, the path toward your desired financial future will begin to take shape. You’ll know how much to save, what conditions must be met to make major life changes (e.g. retiring early), and generally how to proceed.
Again, a financial planner will help you map the path forward. They’ll show you the stages along the way, and can help you track your progress en-route. You’ll undoubtedly have to make adjustments, and your financial planner will be there to help when those times come.
Short-Term vs. Long-Term Financial Plans
Financial planning is most often thought of in long-term time frames. Long-term financial planning is indeed essential, but don’t neglect short-term financial planning.
● Long-term planning encompassesthe major destinations that you want to reach: college tuition, retirement, assisted living, estate planning, etc. These are all things that ideally are planned a decade or more (preferably at least 5 years) in advance.
● Short-term financial planning might cover starting a business, taking a major family vacation, purchasing a summer home, paying imminent medical expenses, and other matters that take months to years.
A financial planner can assist with short-term and long-term financial planning. Even if you calculate how much is needed for a vacation or medical care, a financial planner may help you best strategize where to access the funds from. They can also help you check how the short-term will impact the long-term, and whether any long-term adjustments should be made.
Get Help With Your Financial Planning
If you need assistance with getting to your financial goals, contact us at DHJJ. We offer comprehensive financial advisory services, and have helped numerous clients get where they’d like to be. We’re ready to assist you too.
