What is Financial Planning?

By Erik H. Nelson on November 17, 2020

Everyone can benefit from a financial plan, from the ultra-wealthy to those living from paycheck to paycheck. Financial planning gives you insights into your current situation as well as providing action items to help you achieve your financial goals. You’ll dive deep into your earnings, savings, debt, investments, insurance, and other details that are fundamental to your financial well-being.

Creating a financial road map isn’t a one-and-done task. As your circumstances change, you can alter your financial plan to account for those changes. Anything from selling a business to adopting a child can have a major impact on your personal finances. Financial planning helps you prepare for the unexpected while also helping you to accomplish the goals you’re truly passionate about. So, you might be wondering, “Do I need a financial advisor?” The answer may depend on the complexity of your financial life.

Financial Planning Definition

Financial planning creates a roadmap for your money. You can tackle the process on your own or tap into the resources provided by your financial advisor. Your financial plan can change over time, especially as you accumulate wealth and you experience different life events, like marriage, children, or retirement.

The process takes time, and it can be costly to take shortcuts. Start by reviewing the core components of financial planning and identify the areas that are most relevant to you:

  • Budgeting and debt reduction: No matter how much you earn, creating a solid budget for your personal finances helps you better allocate your money to adjust as needed to reach your goals. Reviewing your levels of debt ensures you’re not overburdened by balances and that your current financing and interest rates are competitive. It may also shed light on how much debt you can take on in the future for things like buying a second home.
  • Retirement planning: Thinking about retirement during financial planning is one of the most important components of the entire process. A financial plan evaluates whether you’re saving enough to maintain your desired retirement lifestyle and whether your investments are in line with your risk profile and financial goals. There are plenty of retirement calculators available to get a general idea of where to start, but a thorough retirement plan provides a much more applicable and customizable evaluation of your progress towards your individual goals.
  • Investment allocation: Investment accounts go beyond just retirement accounts and can also include college savings plans and taxable accounts. It’s important to understand the benefits of different types of accounts and allocate your investment assets accordingly and based on the specific time horizon you have for each of your goals.
  • Tax planning: As your income grows, so may your tax burden, but there are many ways to mitigate how much you owe each year. A financial advisor can help to provide guidance so your investments are tax-efficient – so that you pay what you’re required and not more than you need to pay. A tax advisor, or an accountant, can also evaluate your financial situation to ensure you aren’t missing out on any deductions or other ways to reduce the tax you pay.
  • Estate planning: Being proactive about your estate plan allows you to leave behind your assets in a way that matches your intent. Legal documents like a will and advanced health directives are important to have in place at any phase of life. These can be updated over the years to reflect any changes you wish to make. There are also different instruments you can use to help reduce, or possibly avoid, estate taxes as well as make things easier for your beneficiaries by avoiding probate. It’s important to consult an estate planning attorney to design your estate plan and draft your documents.

You may want to utilize the expertise of different financial service professionals to get the knowledge you need for a truly comprehensive plan, such as a financial advisor, a tax accountant, an estate planning attorney, and an insurance agent.

How to Create a Financial Plan

It takes multiple steps to create a financial plan, especially when you need to address some or all of the topics described above. Here are some ideas of how to get started, whether you intend to work through the process on your own or with a financial advisor.

#1:  Determine Your Goals

The first part of financial planning is determining your goals – for the year, for the decade, and for the years beyond. Consider where you want to live in the coming years, any career changes, and advancements you expect. Also, think about when you want to retire and what kind of lifestyle you’d like once you stop working. Do you plan on downsizing your home? Do you want to travel extensively? All of these goals should be a part of what defines your financial planning process.

#2:  Create a Budget Based on Those Goals

Once you’ve figured out your short-term, mid-term, and long-term goals, break down your budget accordingly. A financial advisor is well-equipped to help with this task. They’ll have a realistic understanding of how much you should save towards your retirement goals and how to determine what is needed to better reach anything else you want to achieve. Overall, a financial professional can help guide you while making strategic financial planning decisions.

#3:  Determine How and Where to Invest for Those Goals

Just as important as knowing how much to save is how to save. When investing your money for the long-term, consider tax-deferred accounts, such as a traditional or Roth IRA. These accounts do come with contribution and income limits, so check with your advisor to make sure you qualify. You can also contribute to your employer’s 401(k) if one is available to you. If you receive an employer match, be sure to contribute the maximum amount to receive the full match. It’s never too late to start saving for your retirement and starting now will help to bring you one step closer to your financial goals.

#4:  Revisit Your Plan Regularly

Check in with your financial plan on an annual basis or as your life events dictate. Your financial advisor will monitor your investments to make sure your assets remain appropriate for your risk profile and financial goals.

It’s also important to revisit your goals consistently; after all, what you want in life may change. Perhaps you’ve had a baby and need to add a college savings plan. Maybe you’re going through a divorce and need help adjusting your financial plan. Whatever the case may be, financial planning is an ever-evolving process – just like life.

What a Financial Planner Does

You can certainly start the financial planning process on your own. But it becomes much more complicated as you earn more and accumulate assets. A CERTIFIED FINANCIAL PLANNERTM (also known a CFP® practitioner) meets stringent requirements to ensure they have the knowledge and experience to help clients with their finances.

A financial planner is equipped to handle many of the steps involved. However, a reputable CERTIFIED FINANCIAL PLANNERTM also knows when to collaborate with other financial and legal professionals, like working with an attorney to nail down your estate planning needs or with your accountant to identify a truly holistic tax strategy.

Also, make sure your financial planner is well-versed in your specific needs. For instance, Dowling & Yahnke Wealth Advisors’ team can help high earners navigate more complex financial planning and have experience with less common events such as sudden wealth and executive compensation.

No matter what your financial situation may be, choose a financial planner whose expertise aligns with your needs. As a registered investment adviser Dowling & Yahnke Wealth Advisors can provide you with financial planning and investment advice as a fiduciary financial advisor. If you want to learn more about fiduciary financial advisors read our article “What is a Fiduciary Financial Advisor?” on our blog.

When to Get Professional Help

Enlisting the help of a professional gives you a neutral opinion about the best way to reach your goals. It can also help you prioritize and collaborate on multiple goals, especially if you’re working with a spouse or partner who may have different ideas. It’s also important to make sure you’re not missing any glaring red flags that you simply don’t know about or how to approach and adjust during life’s tougher moments. Using a financial planner can help you with the increasing complexities of your financial life wealth management. Dowling & Yahnke Wealth Advisors, for example, can help executives and entrepreneurs manage stock options and other less common scenarios. We also have experience in liquidity events and sudden wealth, so that you steward your new funds in the best way possible.

Bottom Line

Life can be unpredictable and that’s why financial planning should be something that everyone does on a regular basis. When life throws you a curveball, you’ll be much better prepared if you already have a financial plan in place. You’ll know exactly how much you have, what resources are available to you, and how to adjust when your what priorities shift.

Need a financial planning service in San Diego? Reach out to Dowling & Yahnke Wealth Advisors today.


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