There’s a lot of misinformation out there about what the financial planning process is all about. Some believe financial planners just do “investments” or “stock picking.” Some people believe financial planning is only for people who are getting ready to retire.
The reality is people at any age both want and need financial advice on a whole array of life choices and decisions such as buying a home, changing jobs, getting a second degree, having a family or planning for a sabbatical.
These are all things your financial planner can help you with. It’s still rare, however, for consumers to be able to name all the areas in which the financial planning process can help them.
So I wanted to set the record straight. REAL financial planning is something anyone can benefit from. The vast majority of Americans have had zero formal training in personal finance. Even people who have MBAs and doctorates struggle with this kind of stuff!
It’s actually a source of shame for many who feel that they should know more about how to handle their household finances. I’m here to tell you, it’s normal and everyone can benefit first from having an extra pair of ears to listen to your circumstances and help be a sounding board for you.
Keep this in mind: you have a specialization already in what you do for work. As CERTIFIED FINANCIAL PLANNERSTM in Washington, D.C. we have a specialization in what we do and we are committed to ongoing financial education which keeps us up to date with the latest laws, scenarios, and options.
What is Financial Planning?
So let’s get to it. Here are some things you can expect to tackle when working through the financial planning process with a CFP® — it’s more wide-ranging than you might think.
Getting organized: one of the most helpful processes you’ll go through when working with a financial planner is figuring out where all your accounts, policies and paperwork is to be able to give your financial life a full review. When my clients go through this process they look back on it as one of the most important parts. We don’t always take the time to do this kind of review for ourselves. Many people have an aversion to looking at financial stuff in the first place. This is a way to do work with someone else helping you along in a judgement-free space.
Reflection: Aside from getting your accounts and information organized, you will work with your financial advisor to explore what’s most important in life. What are your goals? Big decisions or changes on the horizon? Where do you feel you’ve already made progress and where do you want to make progress now? Most CFPs® will also ask you questions about your values and the things you might like to achieve in your life long-term. You may also have some specific questions. Make sure to share your specific questions with your advisor too. Take advantage of this time to really explore and envision what your life is like now and what you’d like it to be like.
Cash Flow: One of the first things you’ll look at with your advisor is at money coming in and going out on a monthly basis. You’ll typically review all your income sources as well as fixed expenses and variable monthly expenses. You’ll review where you are currently saving money. Your advisor will help you decide whether your saving is adequate or if changes should be made. Often we look at scenarios with clients such as should I pay off this debt or save for this goal? Should I focus on retirement savings or education savings for my child? Your advisor will help you determine not only how much you should be saving, but in what types of accounts.
Emergency Buffer and Cash Savings: Most people know they should have some sort of emergency cushion, but few can say with confidence whether they have enough (or too much) of an emergency buffer. Traditional advice found on google searches provides a generic answer that you should have 3-6 months worth of expenses covered for emergencies. But how do you know if it should be closer to 3 or 6? What if you have extenuating circumstances? Your financial advisor will help you determine the target amount of cash you need based on your family situation, housing situation, debts, and goals. As you can imagine, someone with a house built in the 40’s with two kids and one working parent will have much different emergency fund needs, for instance, than a single person renting an apartment downtown.
Debt Management: Some financial advisors and most financial coaches will work with you to look at your various debts like credit cards, personal loans, real estate debts, student loan, debts and help you decide how best to pay off your debts. Some debts, often those which back an appreciating asset (like home) are often viewed as “good” while others, like revolving credit debts are viewed as “bad.” A financial advisor will help you look at your debts from a more nuanced perspective that reflects your personal situation and help you prioritize repayment in a way that makes the most sense for you. Student loan debt planning is an area that can get very complicated based on law changes, so it’s a great idea to find someone who is an expert to help.
Investments Review: A CFP® will often ask questions about how you’ve made investment decisions in the past and learn more about the experiences you’ve had in various market conditions. What did you do the last time the markets went down for a while? Did you make changes to your 401k? There are no wrong answers, it’s just about getting perspective. A CFP® will also review your investment portfolios (retirement and non-retirement) and provide pros and cons of your current strategy. Then you will discuss investing strategies that give you the best chance for long-term success and provide investment recommendations that are in your best interest. You will typically receive a written action plan that shows investment recommendations and techniques that make the most sense for you.
Retirement Projections: For most people in their 30s and 40s retirement can seem like a far way off, but it’s still important to try to guide your ship in the right direction. Your advisor will likely run some projections and give you insight into what your retirement might look like if you save as you are now, or increase/decrease your contributions. You may also discuss how life or career changes could impact your retirement age. Many of my clients, for instance, are planning to take sabbaticals, walk back working to part time prior to retirement or plan to do some consulting during retirement to add to their spending capacity. You can discuss any and all of these scenarios (and more) with your advisor.
Tax Planning: Tax planning isn’t something that should be discussed once per year. A financial planner is uniquely suited to provide a look forward at taxation trends in the future and help you understand how your choices, your investments, and your behaviors will impact your tax rate. Good financial and investment planning is not always about maximizing returns — you need to review how taxes could help or hinder your financial plan as well. Investments should always be looked at in a tax-adjusted way.
Insurance Planning: Your advisor will review your insurance coverages (home, health, life, and property) and make sure you’re neither under-covered nor overpaying for your insurance. This includes a review of benefits you’re being offered at work. Open enrollment can be a great time to engage a planner. The great thing about working with a fee-only advisor is they don’t sell these products, so you know any recommendations you get will be in your best interest.
Estate Planning: You will also begin to have conversations over time with your advisor about estate planning. Who do you wish to inherit your nest egg? How do you want your affairs to be handled? For many, working with an advisor this is the first time you might have thought about such things. An advisor will also be able to review any documents you currently have, help you learn more about which estate planning documents you need and may be able to put you in touch with a lawyer to help create those documents.
Whew, that’s a lot of stuff. I bet you didn’t know your advisor — and the financial planning process he or she uses — could help you with all sorts of decisions and scenarios you may experience during life.
What else do you work on with your financial advisor?