October is National Financial Planning Month

“Financial Planning Month is a great opportunity to get your finances and budgets in order before life gets too busy.”

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October is National Financial Planning Month—an ideal time to plan your financial health and future. Research from the Brookings Institution shows that just one-third of Americans are truly financially healthy. Half are just coping, while nearly one in five are financially vulnerable, acdording to The U.S. Financial Health Pulse 2020 Trends Report. Financial health at a minimum addresses the ability of individuals and families to meet their current obligations and needs, absorb and recover from financial shocks, secure their future, and improve their financial situation over time. And, financial planning can be an essential tool in improving an individual and family’s financial health.

As of August 2020, 33% of people in America were Financially Healthy, 50% were Financially Coping, and 17% were Financially Vulnerable U.S. Financial Health Pulse 2020 Trend Report, Financial Health Network

Many individuals think financial planning is only needed for wealthy investors with complex financial asset portfolios, but the reality is a financial plan is something that can help everyone — not just the wealthy. Financial planning simply means having a well-thought-out strategy that helps you achieve longer-term financial goals and build wealth while meeting near-term money needs.

You should have a financial plan in order to increase your likihood of reaching your financial goals and maintaining your lifestyle. Financial planning includes budgeting, emergency planning, investing, tax planning, retirement planning, and basically other ways to get your finances in order and create mindful budgets to ensure a safe and secure future.

Financial planning applies to everyone, whether you’re just starting out or are a wealthy investor.
A financial plan answers real questions to help you make better day-to-day decisions and reach your financial goals—and it doesn’t have to be expensive or complicated.

With a plan, you can set short-term and long-term financial goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can also get a good look at your present financial situation—where you stand in terms of your net worth and cash flow, which will thehelp you understand the distance between where you are financially and where you would like to be in the future.

Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk, manage and eliminate bad personal debt, and defer or reduce taxes. A good financial plan addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives.

Having a savings account is a good start, but money in a savings account simply won’t produce the total returns and dividends that are needed for long-term financial success and very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time.

Investing your money and capital in assets is essential to achieve financial freedom. In fact, most Americans retire with the money that they earned from investing, not the money they set aside in their savings account.

Last year, a Gallup poll found that just 38% of investors had a written financial plan. Gallup asked those with no written financial strategy why they lacked one. The top two reasons? They just hadn’t taken the time (29%), or they simply hadn’t thought about it (27%).

Paying down debt is also an integral part of a financial plan. Many people get overwhelmed when thinking about debt and developing a strategy to pay it down. Debt, not including your mortgage, should consume less than 20% of your income. With your mortgage, debt should equal 40% or less. Paying the debt with the highest interest first will reduce the amount of interest you pay and saves more money; however, paying the smallest balances first allows you to see progress quicker.

Financial planning is the key to getting on the road to financial success and freedom.

A financial plan simply means knowing where you want to go financially and figuring out how best to harness your resources to get you there. And it’s not just about money. It’s about your “why” (purpose, cause or belief that drives you), your aspirations, your priorities for you and your family, and how to protect yourself both now and in the future.

To get started mapping out your financial future, it’s essential that you understand why you’re doing what you’re doing. Knowing your why is the single most important question you can ask with respect to your financial future.

Failure to ask and answer the question “why” can be the single greatest oversight you can make when it comes to your quest for financial freedom. Those who do have a strong sense of why they are “saving and investing” are more likely to reach their financial goals.

After determining your why, here are 10 Steps you can follow to prepare a do it yourself (DIY) Financial Plan, according to Charles Schwab:

Write down your goals—The first thing you should ask yourself are what are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
Create a net worth statement—Achieving your goals requires understanding where you stand today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year.
Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Examining your expenses helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on lines up with what is most important to you.
Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA.
Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
Know your income tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. And that caught a lot of people by surprise as they filed last year’s taxes. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes.
Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare.

“Saving is a great start, but planning to reach your financial goals is even better.”

A financial plan can be especially important if you don’t have a lot of money because it can help you get on the path to greater financial strength and health. Think of it like a roadmap. Specifically, if you want to enjoy your senior years to the fullest, taking the time to financially plan for retirement is a smart bet to enhancing your financial health. Financial health at a minimum should address the ability of individuals and families to meet their current financial obligations and needs, absorb and recover from financial shocks, secure their future, and improve their financial situation and build wealth over the long term.

Successful investing starts with knowing your purpose why and with financial planning. Investors who stick to a financial plan have an average total net worth that’s 2.5 times greater than those who don’t follow one, according to Charles Schwab research. Financial planning helps you understand where you are today. It also creates a roadmap to get you where you want to be.

References:

From Gratitude to Greatness: Brownlee Global's Path to a Purposeful Life

Guide and Educate Individuals How to Build Long-Term Wealth, Better Manage Their Money, and Achieve Financial Freedom

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