How to Create a Financial Plan

By Mark Wernig on April 27, 2021

When learning how to create a financial plan, it’s important to know that it’s not just about investing. Building your portfolio is certainly a crucial part of the puzzle, but it’s just one piece. Instead, think about your finances holistically so that you have a well-rounded approach in growing and protecting your wealth. If you are wondering, what is financial planning or want to learn more about why financial planning is important, check out our blog.

Follow this nine-step financial planning checklist to ensure you’re prepared for both the ups and downs in life. Most importantly, if you need help navigating the process, remember to enlist a Certified Financial Planner™ to help you make decisions that are in your best interest.

Identify Goals

One of the best financial planning tips you can implement is to identify your goals for the near term and long term. Think about when you want to retire and what you’d like to do once that time arrives. Also consider your family situation and what needs might arise in the coming years, whether it’s long-term care for aging parents or college tuition for your kids. Things like vacations and real estate purchases should also be part of this goal-setting session.

Starting off with a list allows you to prioritize your savings and later helps you determine the best type of accounts to use, whether they’re tax-advantaged retirement accounts or low-risk investment accounts with a short time horizon. It’s also very common for  goals to continually change, so don’t worry that you only have one chance to work on this. As you’ll see, your targets will evolve with a holistic financial planning strategy.

Assess Your Savings

Next, assess your current savings. Be sure to have at least three to six months’ worth of expenses in a risk-free account that’s easy to access and spread out across FDIC-insured accounts. Each financial institution typically limits the insured amount to just $250,000. Check to make sure you don’t have over-saturated accounts with ineligible funds.

Based on your goals and associated timelines, you can then start prioritizing how much to save in order to reach those deadlines. Your financial advisor can help you figure out if you’re putting enough towards retirement or if you should save more aggressively in order to retire by your ideal age. You’ll also be able to figure out how much to put elsewhere in order to meet short-term goals for instance paying for a vacation or long-term goals such as funding your children’s college tuition.

Review Current Debt

When figuring out how to make a financial plan, you also need to analyze your debt. It’s common to be unsure of how to accurately weigh the pros and cons of carrying certain types of debt. By getting financial planning advice from an advisor, you rely on experienced professionals to conduct an analysis of your current rates and terms among other ways you could utilize those funds. That way, you can decide whether it’s worth keeping low-cost debt (like a house) or creating a pay off plan for high-interest debt (like credit cards or lines of credit).

Just as you need a plan on how to spend and save, you also need a proactive approach to your debt. Plus, in many cases, debt can be an effective tool in helping you achieve your financial goals. For example, bridge financing allows you to buy one property before you sell your current piece of real estate.

Check Employer Benefits

A smart financial plan makes sure you’re maximizing all of the resources at your disposal, including employer benefits. Look at both compensation and tax savings incentives. For instance, check for any type of company match for retirement contributions and max out your employer’s plan so you don’t miss out on free money.

Also analyze the pros and cons of a deferred compensation plan, if applicable. Tap into your financial advisor’s expertise to determine the best contribution and payout strategies. While deferred compensation plans are usually intended to be distributed at the time of retirement, some plans allow you to tap into the funds for other life events, like purchasing a house. Your financial plan should also review the implications of any equity-based compensation, like Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock Units, and Employee Stock Purchase Plans. These can come with complex features, so it’s usually a good idea to get professional advice.

Create an Investment Strategy

Once you have your goals and current financial situation figured out, it’s time to create an investment strategy. It’s entirely possible to take a “DIY” approach, but it takes a lot of time and energy to do it well. Plus, completely managing your own portfolio comes with the risks of blind spots and making emotional decisions in times of economic turbulence.

Opting to work with an advisory firm like Dowling & Yahnke gives you access to a financial planning team who listens to your goals and financial concerns. Armed with that information, they’ll craft a recommended portfolio with appropriate time horizons and asset allocation. Diversification is extremely important in order to hedge unnecessary risk while also maximizing returns as much as possible. A D&Y advisor also analyzes the expense ratios, trading costs, and the potential tax consequence associated with changes in your portfolio to make sure you’re not needlessly lowering your returns.

Review Portfolio for Rebalancing Opportunities

No financial plan is set in stone and you must continually monitor and rebalance your assets to make sure everything is balanced. If you’re working with a financial advisor, your team will do this on your behalf. At D&Y, we monitor clients’ portfolios regularly so you don’t have to worry about missed opportunities to rebalance your portfolio.

One of the biggest advantages of including a financial advisor as part of your financial planning strategy is that they remove the risk of making emotional decisions with your portfolio. Every stock purchase and sale is in accordance with your asset allocation goals rather than falling prey to buying a “hot” stock too high or selling at the wrong time.

Minimize Taxes

Taxes are another important component of creating a financial plan. Evaluate the availability of tax-advantaged retirement accounts like IRAs as a way to lower your taxable income, either now or in the future. Your financial advisor can analyze each type of account you have (or are eligible for) in order to optimize your tax savings.

Tax loss harvesting is a strategy to consider as a layer of your financial plan. Through daily portfolio monitoring, your investment management team can sell certain securities to take advantage of capital losses. Then they’re replaced with comparable securities to keep your portfolio balanced. There are IRS restrictions on tax loss harvesting, which is why it’s smart to avoid trying it on your own.

Your tax planning may also include a charitable giving strategy. Many people wish to financially support organizations that align with their values, and your advisor can give you financial planning tips to determine which assets can provide philanthropic impact while also minimizing your own tax burden.

Define Insurance Needs

As your financial plan becomes more sophisticated, it’s time to analyze your insurance coverage and take care of any gaps so that your wealth is fully protected. Check more common policies like home and auto insurance, especially when you purchase a new property or vehicle. Also review your personal liability umbrella coverage or take out this type of policy if you don’t already have one. Unfortunately, as you grow your wealth, you increasingly become a target for litigation or other unforeseen events. A comprehensive liability insurance plan protects your assets if you’re found at fault for some type of event that causes property damage or injury.  It’s important to seek professional guidance from your attorney on your legal liabilities and a licensed insurance professional about what coverage is right for you.

Start Estate Planning

No matter what stage of life you’re in, an estate plan is an essential part of your overall financial plan. Work with both an estate attorney and your financial advisor to draw up the proper documents, assign account beneficiaries, and explore the countless options for transferring your wealth to your heirs. Making these decisions well in advance offers many benefits. For one, you’ll provide total clarity on your intentions, saving time by avoiding the probate process. You can also use different types of trusts and other accounts to minimize estate taxes for your heirs. Without a solid estate plan, the fruits of your financial plan could be completely undone the moment you pass away.

The Bottom Line

Getting started is the greatest step in creating a financial plan. Dowling & Yahnke Wealth Advisors offers guidance and expertise every step of the way, so you never have to wonder if you’re missing something important or making the wrong decision.

Ready for the best professional planning advice in San Diego? Contact D&Y today.


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