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What is a "Financial Plan"?

A Comprehensive Evaluation

A financial plan is a comprehensive evaluation of an investor's current and future financial state by using currently known variables to seek to anticipate future cash flows, asset values and withdrawal plans. Most individuals work in conjunction with a financial planner and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans. These metrics are used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what corrective steps need to be taken to pursue those goals.

Steps of Financial Planning

  • Establish Client and Planner Relationship – the purpose of establishing your plan and our relationship is to form the foundation or purpose of planning itself and to begin the financial journey with the clarification of a goal(s). Too many people save and invest money with no specific goal in mind.

  • Gather Relevant Data – this step is where we gather the information required to make recommendations for the appropriate strategies to reach your goals. For example, what is your time horizon? Do you want to accomplish this goal in 5, 10 years, 20 years? What is your risk tolerance? Are you willing to accept a high market risk to pursue your investment goals or will a conservative portfolio be a better option for you? How far along are you in your goals? Do you have any money saved yet? Do you have life insurance? Do you have a will? Do you have children? If so, what are their ages. We review your assets and liabilities, dollar values, ownership information, contractual agreements, explore your values, attitudes, expectations and time horizons.

  • Analyze and Evaluate Client Financial Status – we prepare financial ratio analysis, evaluate you continuing current course of action, review current emergency fund, your level of debt, and insurable risks. We then prepare capital needs analysis for the plan goals.

  • Develop and Present the Financial Plan – we review alternatives and advantages and disadvantages to the plan, discuss who should implement/when should it be implemented/why should it be implemented. Financial planning requires devising alternative solutions that are achievable for each individual. With so many different variables to consider, your plan needs to develop, to evolve with your needs but remain within your capabilities and risk tolerance.

  • Implement the Financial Plan – we agree on implementation, discuss conflicts of interest, select/purchase/invest in agreed upon products. Although you have the plan developed, it takes discipline and desire to put it into action. Saving $200 or $300 per month may be difficult. You may at times wonder what may happen if you fail. This is any inaction grows into procrastination. Successful investors will often tell you that just getting started can be the most important aspect of success.

  • Monitor the Financial Plan - it's called financial planning for a reason. Your plan will evolve and change just like life. Once we create your plan, it's a piece of history. This is why your plan needs to be monitored and tweaked from time to time. Think of what can change in your life, such as marriage, birth of children, career changes and more. Now think of financial changes beyond your control, such as tax law, interest rates, inflation rates, stock market fluctuations and economic recessions. These are all reasons why we reviews at least annually with investment results communicated at least every 6 months and monthly during periods of extreme volatility.

Elements of a Financial Plan

Financial goals
A financial plan is based on an individual's or a family's clearly defined financial goals, including funding a college education for the children, buying a larger home, starting a business, retiring on time or leaving a legacy. Financial goals should be quantified and set to milestones for tracking.

Personal net worth statement
A snapshot of assets and liabilities serves as a benchmark for measuring progress towards financial goals.

Cash flow analysis
An income and spending plan determines how much can be set aside for debt repayment, savings and investing each month.

Retirement strategy
The plan should include a strategy for striving for retirement independent of other financial priorities. The plan should include a strategy for accumulating the required retirement capital and its planned lifetime distribution.

Comprehensive risk management plan
Identify all risk exposures and provide the necessary coverage to protect the family and its assets against financial loss. The risk management plan includes a full review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.

Long-term investment plan
Include a customized asset allocation strategy based on specific investment objectives and a risk profile. This investment plan sets guidelines for selecting, buying and selling investments and establishing benchmarks for performance review.

Tax mitigation strategy
Identify ways to potentially minimize taxes to the extent permissible by the tax code. The strategy should include identification of tax-favored investment vehicles that can reduce taxation of investment income.

Estate plan strategies
Create arrangements for the preservation and distribution of assets with attention to settlement costs and taxes. Review and update estate panning instruments, such as wills, inter-vivos trusts, power of attorney, medical directives, and marital trusts with client's attorney.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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