A strong financial plan takes a lot of preparation. Since 1907, “Be Prepared” has been the motto for millions of Boy and Girl Scouts around the world. The expression represents the constant readiness and willingness in both mind and body to do the right thing at the right moment. But what goes unspoken is “What exactly are we preparing for?” That is a great question, but you do not have to be a Scout to understand the motto applies to all of us. After all, life has a way of throwing us curves and the only way we navigate these treacherous waters is to be prepared. This is why you’ll want to follow these steps to learn how to put together a financial plan.
So if we all agree that having a plan is the best way to prepare for life’s unexpected twists and turns, how come more people have not addressed this important issue in their own lives? Various studies on the topic indicate that approximately only 30% of Americans have some semblance of a financial plan. A recent CNBC article references a study in which 34% of respondents have done no planning whatsoever.
2016 is one-month old and already it has given us unexpected changes. On the economic front, the stock market produced the worst first week performance…ever! If a headline like that does not grab your attention, perhaps nothing will. The ability to keep calm in the midst of economic/market uncertainty takes concerted effort and planning.
If you have not engaged on the financial planning front, it’s never too late. Now is a good time to review some of the key components that make up a good financial plan and become more prepared.
Here are 5 components of a strong financial plan:
1. DEFINE GOALS
The importance of defining your goals is to provide a target in which to orient your plan. After all, you don’t hop into the car and just start driving without knowing where you are heading (okay sometimes that does happen).
Creating goals can be daunting. Keep it simple and understandable. You are not re-drafting the Constitution. This is about you and what you want from life. Your plan starts and ends with your needs and interests.
Take some time and capture your thoughts on paper. Once you have a list then organize your goals in a way that chronologically makes sense. Next, prioritize and place focus on what matters the most to you. Center your financial plan objectives on achieving those desired results.
These objectives change over time, so visit your plan frequently to make sure it keeps pace with the changes in your life. Sounds simple, but this is vitally important.
2. CASH FLOW PROJECTIONS
While no one can predict the future with accuracy, it is very helpful to “test” your plan, its assumptions, and ability to withstand unexpected events. This is done through the development of cash flow projections.
Cash flow projections analyze the various “What if…?” questions that arise. For example, What if I retire at a certain age? What if I spend this much during retirement? Is my investment strategy consistent with my spending needs? Can I afford long-term care coverage if I need it?
What you discover through this process is that the various components of your plan are interrelated. For example, your investment strategy can be directly impacted by your income needs or time horizon.
3. RISK ASSESSMENT
Risks come in many shapes and sizes. For example, Will your money last? How can you pay for college and save for retirement without selling a kidney? How will long-term care costs be covered?
Some risks can be addressed through various forms of insurance. Others can be addressed as part of your plan through savings, investment strategies, and basic planning techniques. While the events we worry about may not come to pass, it is important to incorporate risk management as part of your plan.
4. INVESTMENT STRATEGY
Your investment strategy is important. In many ways it is the embodiment of your financial plan. A good investment strategy reflects the Goals you are trying to achieve. It is consistent with the withdraw needs and time horizon outlined in your Cash Flow Projection. Lastly, it balances the Risks you are willing to accept as an investor with the return you need.
5. REVIEW & REFINE
Remember that financial planning is a never ending process. It changes as your life changes.
During times of heightened volatility in the markets, it is helpful to remember that you have built a sound foundation through planning. Continue to follow these time tested principals and you too will have survival skills good enough to brag about around the campfire.
And as always, our team at Carnegie Investment Counsel is prepared to assist you in developing a strong financial plan aimed at achieving your life goals. Contact us to speak with an experienced Financial Planner.
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*This video will be sent to your email shortly after the presentation on Wednesday, February 10, 2016.