Ready to Start Financial Planning? Where to Begin?

Ready to Start Financial Planning? Where to Begin?

Many of the individuals and families I’ve helped with financial advice over the numerous years I’ve been a financial planner initially came to me with a specific issue or concern.  Sometimes it was the need to consolidate and rationalize an investment portfolio scattered across numerous accounts.  Occasionally it was what to do with the money from an inheritance or the sale of a business.  One time it was nothing more than a simple question about whether or not to roll over a 401(k) into an IRA.  Because financial planning encompasses a wide range of financial subjects, is there a logical place to start if you’ve never done any financial planning before?  I’ve come to the conclusion that the answer is ‘yes.’  The most effective starting point is the creation of a retirement plan.  Here’s why.

Suppose you inherit some money or receive a bonus at work.  What should you do with the cash?  Invest it?  Take a vacation?  Remodel the house?  A retirement plan creates a context in which you can take into account any future tradeoffs that may be required as a consequence of whatever decision you make.  Without it, the best you can do in making financial choices is to hope they don’t leave you in poverty when you’re too old to be able to do anything about it.

Here’s how it works.  First, you put down in writing all your future goals.  Goals may be basic (like your food preferences) or they may be big and expensive (like buying a plane and taking flying lessons).  You can assign costs to each goal and prioritize them.  Once you have completed such a plan, you can then use it to identify specific future tradeoffs every time you make a financial decision.  In our example above, suppose you decided that remodeling a bathroom right now was more important to you than taking ski trips after age 65.  You have just made a fully-informed choice.  How much more comfortable would that make you feel as compared to spending the money on the bathroom without knowing the future financial consequences?

A client of mine wanted to spend money on some expensive worldwide travel for herself and her family.  “I’m tired of scrimping.  I want to enjoy my money now!” she told me.  The fact that we had completed a retirement plan for her allowed her to choose what to give up during her retirement as a result.  Surprisingly it was travel in retirement that she chose to forego.  “I’ll probably be too tired then to do it anyway!” she joked during our meeting.  Having the retirement plan empowered her to make a tradeoff decision that she felt good about.  And when she takes her trip she won’t be worried about whether or not it was a good decision or whether or not she’ll still have enough for retirement afterwards.  It was a good decision because she made it with full knowledge of the ramifications.

Think about investing.  Most people invest their savings in something – the stock market, real estate, whatever – because they think they have to grow their savings or they won’t have enough money when they retire.  For most of us that’s absolutely true.  But have you ever thought about how much you actually need to grow your money?  When you invest, you are putting your savings at risk.  And when you invest in assets promising a higher return, it means you are taking on even more risk.  Maybe you don’t need to be growing your savings as much as you thought, and can consequently lower your investment risk.  The only way to find out is to complete a retirement plan first.

Of course, any plan dealing with the future is loaded with assumptions and goals that are likely to change as you move through your future.  Nonetheless, having a goal-based retirement plan puts you more in control of your financial future.  What better way to achieve financial peace of mind?


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