How does one become part of the 1 percent or even just move a little further up the ladder? A 2012 Certified Financial Planner Board of Standards study found that across all income and socioeconomic levels, when financial planning is done, the better you will fare.
Good financial planning takes some work, especially in the beginning, but as with most things in life, the potential for success requires effort. Serving the local communities of Hollister, Gilroy and Morgan Hill one of the most common questions I receive is, “What is financial planning anyway?”
Simply put, financial planning is the process of reviewing all areas of your personal finance; from housing costs to monthly budgets, from retirement savings to estate planning. A good review considers seven primary areas.
1. Cash flow management: includes a review of income and expenses, debt management, emergency funds and a balance sheet, i.e. your net worth.
2. Education planning: includes a review of different vehicles used to save for educational expenses, i.e. 529 College Savings Plans, trust accounts and savings bonds. A plan assesses the amount needed for educational goals and helps develop a savings plan to work toward the goal.
3. Retirement planning: a review of retirement income sources such as pensions, Social Security, work plans (i.e. 401k’s) and personal plans (i.e. IRA’s). An assessment is completed, looking at the amount needed to cover expenses in retirement versus what income sources are currently in place, with development of a savings plan that seeks to fill any gaps.
4. Investment planning: the process of reviewing time horizons and risk tolerance levels for specific investment goals. Different types of investment options are considered (i.e. stocks, bonds, mutual funds, annuities and real estate investment trusts). Once options are determined, how much to place in each is decided, and finally specific investments are chosen (i.e. a specific stock, bond or mutual fund).
5. Risk management and insurance planning: a review of potential liabilities and the most effective way to potentially protect yourself in the event of an unforeseen financial crisis (i.e. loss of work or life, a catastrophic illness or a car accident).
6. Tax planning: are all tax savings opportunities being utilized? For example do you have Alternative Minimum Tax exposure, and if so are there any steps you can take to potentially minimize this; or, would you be better suited to tax advantaged investments such as tax-free bonds, qualified retirement accounts or annuities.
7. Estate planning: simply put, are your affairs in order? Have you had a legal review to ensure trusts, wills, etc. are in place and are up to date. Does anyone know how to take over your bills in the event you are unable to manage them, etc.
Sound complicated? Perhaps that is why so many Americans don’t have a plan in place. Financial planning is not a luxury for the rich but a necessity for all; remember the old adage, “failing to plan is planning to fail.”
A little more food for thought from the results of The Financial Planning Survey:
• Only 35 percent of people have a plan to save for emergencies and only 29 percent have more than six months of expenses set aside for emergencies.
• Of those with a plan, 34 percent making $25,000 to $49,999 a year are saving 10 percent or more of their income versus 13 percent of those without a plan.
• Of those with a financial plan, 46 percent who make $25,000 to $49,999 a year say they usually pay their credit card bill in full every month, versus 26 percent of those without a plan.
No matter your income or your wealth, financial planning significantly increases your successes in terms of your financial health. If it feels a little daunting, you’re not alone.
• 55 percent of people say “It’s hard for me to know who to trust for financial advice.”
• 52 percent say “To me, investing seems complicated.”
• 43 percent say “I prefer not to think about money.”
Yet, those who are financially successful generally do think about money and they tend to make smart, efficient financial decisions. Seeking the advice of professionals such as Certified Financial Planners, Financial Advisors, tax and legal professionals can help you take advantage of specialized knowledge and professional experience.
Financial planning is not just for the 1 percent, but it is one of the tools some of the 1 percent use. It doesn’t take much to maintain and monitor once you have a plan in place, and there’s a possibility the results can be dramatic.
You work hard for your money. You want your money to work hard for you. As one of my Gilroy clients put it: “The confidence I had by completing my financial plan was worth far more than the dollars it represented.”
Kristi Ellington is a registered representative with and securities and advisory services offered through LPL financial, a registered investment advisor. Member FINRA/SIPC.
