It wasn’t that long ago that the primary focus of financial advisors was on managing your investment portfolio.  As investing became easier to implement, that focus shifted to comprehensive financial planning.  

You may be surprised to learn that portfolio management is currently a relatively small part of the services provided by financial advisors.

What is financial planning, and how can you benefit from it?

What is financial planning?

Financial planning is the result of a comprehensive overview of your financial situation.  It is a holistic approach to assessing your cash flow, assets, budget, debt, and more.

The right financial plan will identify your goals and chart a course for achieving them.

The elements of a financial plan

A well-constructed financial plan includes: 

1. Your net worth and current cash flow

2. A customized investment strategy

3. Budget and cash flow plan

4. Debt management

5. Tax planning

6. Insurance planning

7. Education funding planning

8. Retirement planning

9. Estate planning

10. Philanthropic planning

A financial plan is not a collection of boilerplate recommendations.  It should be customized for your unique situation.

The benefits of financial planning

Financial planning, when done right, has a number of meaningful benefits.  Here are some of the most significant ones.

Setting goals

We all have goals, ranging from financial independence to early retirement.  With the right plan and clearly defined goals, you can calculate the funds required to achieve your goals and start implementing a savings plan so those funds will be available when you need them.

Emergency funds

If the pandemic taught us anything, it’s that having an emergency fund is more important than ever.  

A surprising study found that 56% of Americans are unable to fund $1000 in emergency funds.

Another study found that the median emergency fund of those employed was only $5000.  More disturbing is that 25% of Americans have no retirement savings at all.

The Navy Federal Credit Union recommends setting aside $11,400 for emergencies.  Other experts recommend having three to six months of living expenses in an FDIC-insured savings account.

Having a suitable fund for emergencies is part of a financial plan.  Your plan avoids surprises by assuming that emergencies will arise and preparing for them.

Financial clarity

A financial plan will give you clarity.  You will know where and how your money is invested, your net worth, and other key financial metrics.

If a business opportunity arises, you can quickly determine if you have the funds to take advantage of it or if doing so will impede your other goals.

Intelligent and responsible investing

A financial plan should include intelligently and responsibly investing your money.  There’s a wealth of information on the benefits of low-cost, index-based investing, global diversification, and an appropriate allocation of your assets between stocks, bonds, and cash.

Conversely, the data is clear that stock picking and market timing are not strategies likely to increase your expected returns.

A financial plan clarifies these issues and sets you on an investment course supported by strong academic data.

Motivation and commitment

It’s difficult to be motivated – much less committed – when you don’t have clearly defined goals and a plan to achieve them.

When you understand the impact of changes on your financial life, you’re much more motivated to implement them.  Here are some examples:

Would you be willing to increase your savings rate modestly if you knew it might permit you to retire earlier?

If you could lower your debt-to-income ratio, would you consider paying off high-interest debt?

If you knew you could purchase term insurance at an affordable cost, would you do so to provide adequate coverage for your family?

Your financial plan removes uncertainty from your financial life.  It will set forth savings goals you can track.  You will know whether or not you are on course and will be motivated to implement your plan.

Reduce anxiety and improve mental health

The pandemic exacerbated deeply-held feelings of anxiety and stress that Americans have about money.  Even before the pandemic, one study found that 60% of adults aged 21-62 said that just thinking about their finances made them anxious and 50% said discussing their finances was “stressful.”

Factors that contributed to stress included lack of assets, high levels of debt, and “money management challenges.”

Having a financial plan has been found to alleviate this stress and improve mental health.  According to another survey, as discussed here, 83% of those with a financial plan felt better about their finances after only one year.

Less stress contributes to better overall health, which is a little-appreciated but significant benefit of having a financial plan in place.

How to get started

You’re probably familiar with this Chinese proverb:  A journey of a thousand miles begins with a single step.

Your first step should be to find a competent, professional financial planner.

Start by looking for a registered investment advisor (RIA) in your area.  These professionals are required by law to always place your interests above their own.

RIAs charge based on assets under management or fixed fees.  They aren’t commission-based, which makes them more objective.

RIAs are required to file comprehensive disclosure forms with the Securities and Exchange Commission or state regulatory agencies.  These disclosures are publicly available and must be provided to you by the RIA.  Read them carefully to understand fees charged by the RIA and any disciplinary issues related to the firm.

Look for credentials indicating advanced study and expertise.  The most common ones are CFP® (Certified Financial Planner) and CFA® (Certified Financial Analyst).

The commentary presented herein contains the opinions of Daner Wealth Management, LLC (“DWM”), a Securities and Exchange Commission Registered Investment Advisor.   This information should not be relied upon for tax purposes and is based on sources believed to be reliable.  No guarantee is made to the completeness or accuracy of this information.  DWM shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses, or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes, and therefore are not an offer to buy or sell a security.  Investments in securities are subject to investment risk, including possible loss of principal.  Prices of securities may fluctuate from time to time and may even become valueless.  This information has not been tailored to suit any individual. 

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