When most people hear I am a financial planner they automatically assume my focus is on managing investments. Then they often slowly slink away trying to avoid the sell job they think may be forthcoming. (I try not to take that too personally.) In fact when I was first looking for financial help for my husband and I, I didn’t even know the term financial planner. When I saw it I was thrilled until I realized many so-called planners are just stockbrokers with a more user-friendly title.
The reality is real financial planning encompasses much more than just looking at your investments. Real financial planning takes a look at your entire financial well-being to make sure you are in a good place today and prepared for the future. Here are the 5 components that should be in every financial plan. Without one of these components the whole plan can become worthless. For instance if you have a great investment strategy to save for retirement, but then you are injured and have no disability insurance your plan just feel apart and fast. Who cares about a great investing plan when you no longer have any income?
Without knowing what your goals are your plan is really not tied to your life. If I don’t know what your dream life looks like how can I help you plan for it? I have some clients who want to retire at 55, be debt free and travel on multiple long trips per year. I have another client who has 3 young children that she wants to put through college, and potentially graduate school. Those are drastically different goals and will require much different financial plans. When you begin working with a planner make sure they are asking you about your goals – and those goals should go well beyond retirement age and lifestyle. We all want to retire, but a good financial plan should not just focus on retirement.
This is the area of financial planning that many people want to skip. I get it – insurance is never going to be the most exciting topic. Until you need it. Insurance can make or break your plan. If you don’t have adequate liability insurance and you get sued – there goes your plan. If you purchased the wrong type of health insurance and have a costly illness – there goes your plan. Same goes for a car accident where you injure someone else. A good financial planner will read through your insurance plans to make sure you are properly protected. They will make sure your insurance is tailored to protect your goals, not the generic “You are 35 so you should have this insurance according to my little table.”
Another thrilling topic, but another one that matters. A good financial planner should run reports to show the tax impact of their recommendations. In the Bay Area stock options have a huge impact on your taxes. When you plan to use your options to pay for some of your goals we need to analyze how to sell those options in a way that does’t bury you in unnecessary taxes. Financial planners are not accountants, but your planner should ask to work closely with your accountant.
Here we are at the area most people think about when they see a financial planner. The first step a planner should take is to understand your risk tolerance. All this industry term means is – how much risk can you take and still sleep at night. Some women are comfortable with the possibility that to grow 10% on her portfolio she needs to risk losing 35%. She can sleep at night knowing her portfolio may go down 35% over a short period of time. Other women would never sleep again if we invested her money this way. She’s fine with aiming for a lower return in exchange for the fact that her portfolio will likely go down by less if the market’s turn. Make sure your financial planner is not just running numbers. You want them to really pay attention to how much risk YOU are comfortable with – not just someone your age or someone with your income.
Estate Planning is a term I rarely hear anyone use outside of finance. Most people know they need a will as part of their “estate plan”, but there are other components a financial plan should address. Your planner should make sure you have a Will, Durable Power of Attorney, Living Will, Healthcare Power of Attorney and potentially a Revocable Living Trust. For more details on each of these items check out my article Why you need more than a will. A financial planner cannot create these documents for you, but they should read the ones you have and point out which ones you need. Often financial planners can recommend a good estate planning attorney for you to work with as well.
Now you know the 5 essential parts of a financial plan. When you hire a financial planner make sure he or she is going to cover each of these components.
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