The Components of Professional Financial Planning

We know we must plan for retirement. But what are the other components of professional financial planning?

Hosted by Kevin J. Zywna, CFP®

What Are The Components Of Professional Financial Planning?

Tonight, I am going to talk about something that’s probably long overdue, the components of comprehensive financial planning. Of course in every show, we talk about aspects of financial planning and segments of financial planning. But I don’t know if we’ve ever really delved deep into what the real components that make up a true detailed analytical financial plan are, or financial planning. And I should say, a financial plan, in and of itself, by itself, is of limited value, because life does not follow a plan, typically. And so as soon as the ink is dry, on the first draft of the financial plan, we find that life has gotten in the way and changes need to be made. So a financial plan is really a financial planning process. It needs to be an ongoing process if it’s going to be successful. Life is ever evolving, ever changing and the best laid plans of mice and men often go awry, as we’ve learned many long years ago from William Shakespeare. So financial planning needs to be dynamic, evolving, and move with the participants in the plan.

Kevin Zywna, Wealthway Financial Advisors: That’s what we do at Wealthway Financial Advisors – ongoing analytical financial planning advice with our clients over their lifetime. We don’t just do a plan for anybody. We do financial planning for our clients. And it’s my contention that financial planning is a service that everyone needs. Nearly everyone needs it, but they don’t know they need it. It’s the next evolution of financial advice. Most people know that they need to sort of save and invest over time to have some money at a future date. Those that do invest, and by the way, only a little bit more than half of the people in the United States have any exposure to traditional forms of investments – main street investments like stocks, bonds, mutual funds, ETFs, that type of thing. Only a little bit more than half the population has exposure to those. Usually most of those do their company sponsored retirement plan. But those that do invest, they’re investing for a purpose, and a reason to have more money at a future date. To eventually be able to do more things or have more options or more opportunities or accomplish certain life goals and objectives. So most people know about investing, and the importance of investing. But all we get from investments is the rate of return. You get that, depending on your brokerage statements, you get that from your custodian. But all we get from good investment management is the rate of return. The rate of return doesn’t tell us if we are saving enough. At what age can we retire? Do we have enough for our kids’ college? When can we buy the vacation house? Are we on track for retirement? How much can we spend in retirement without fear of running out of money? None of those questions get answered to investment management. They get answered through detailed analytical, ongoing financial planning analysis. So tonight, I want to talk about what goes into good financial planning analysis.

Identify Your Financial Goals

Kevin Zywna, Wealthway Financial Advisors: First off, it typically starts with goals. What are we trying to accomplish? It’s hard to make a plan until you know what you’re trying to accomplish with your money. So whether you’re doing it yourself or working with a professional, your plan generally should start with a list of your goals. Big goals, aspirational goals, small goals, aren’t enough to save up to buy a car. But once you get an idea of what your goals are, then you can develop the plan from there. And then you organize those goals, somewhat by how soon you need the money. So short term, medium term, and long term. Now, I will say this, from a professional perspective, it is rare that a person that we sign on as a new client knows specifically what their goals and objectives are with their money. Most people do not. And that’s okay. And that shouldn’t preclude you from starting the financial planning process. It’s important to just get started. Even if you don’t know what the end result is going to be. Start the financial planning process. But generally speaking, the reason that most people don’t have specific financial goals is because they don’t know what’s possible. The financial planning process, as we go through it, helps unlock what is possible in each person and each family’s life so that they can start to open up their mind to how they want to use their money to live their best life. Because when you don’t even have a plan, you don’t even know what’s possible. Most people don’t really think in big terms. They think “I get up, I go to work, I make a paycheck, I say 5% of it in my 401 K plan. And I’m going to be doing that for the next year.” Next thing you know, 40 years of my life. And then maybe one day, I’ll figure out what I want to do. But good financial planning done early can help unlock a lot more possibilities for you over your lifetime. That’s one of the great values of financial planning, it helps you define your goals as you go along because it lets you know what’s possible. So, again, we start with a general direction of where you want to go. Obviously, retirement is a big one for most people in America, where we have more of a work-first culture, then well nowadays is more like part time work for a little bit than a full break into retirement.

Kevin Zywna, Wealthway Financial Advisors:  So it’s important to have enough assets in order to maintain your lifestyle for the rest of your life, when you are no longer producing an income or getting a paycheck. So whatever the goals tend to be, and if they evolve over time, a good idea is to order them in short term, medium term goals. Short term things are those that you want to achieve in like say the next five years – paying off credit card debt or buying a new car. Medium term goals, those you hope to achieve in the next five to 10 years -a down-payment on a house, perhaps starting your own business. And then long term goals are those that are 10 years or more away. Usually college or higher education for your kids, obviously retirement, maybe a vacation house, or maybe a boat or maybe the sale of the business. Then long term, elaborate travel plans – we want to go to Egypt, we want to cruise around the world, those types of things are long term goals.

Kevin Zywna, Wealthway Financial: If you order them in the short, medium or long term, then you can start to narrow in on a specific dollar figure and a target date of when you’re going to need it and exactly how much money. Once we know those pieces of the puzzle, then we can develop saving and investing plans to arrive at that particular date with the right amount of money or with a good estimate of what the amount of money will have. Obviously, the future is always unpredictable. Plans are always changing. Investment markets are not guaranteed, although we do have some reliable predictors of investment performance, and that gets baked into financial planning. But once we know the specifics, target date and dollar amount, then we can start to formulate the rest of the plan. I will say that anytime is a good time to start formal financial planning. The earlier you start financial planning; the more options will be open to you later in life. But practically, I would say that we see most people ready to hunker down into the real analytical financial planning process around age 50 to 52. That’s when people tend to get serious about their finances. Retirement is no longer as theoretical as it once was when you were 20 and 22. When you’re 50 and 52, you’re looking at 10 to 15 years by American standards of when you might shut down working for a paycheck and when you might be able to get to enjoy this dream we call retirement.

Develop A Cash Flow Plan Or Budget

Kevin Zywna, Wealthway Financial Advisors: We are talking about the components of good comprehensive financial planning, something that is fundamental to our practice and something that we do for all our clients of our practice. The service everyone needs that they don’t know they need. The next evolution of financial advice after investments, the reason why we invest – to have more money. Financial planning tells us what to do with more money. So financial planning helps you get the most out of your life, use your money to get the most out of your life.

Kevin Zywna, Wealthway Financial Advisors: First half of the show we covered financial goals, and net worth statements. Now for budgeting, we’re going to tell you what your budget is. Cash Flow Planning is a better way of saying it, so people don’t recoil from the word budget. So Cash Flow Planning, and usually we’re the ones telling our clients how much they’re spending on an annual and monthly basis. So we do the work for them. That cash flow plan or that spending plan that they have is your baseline lifestyle at this current point in time. And so it serves as a foundation for conversation. Are you satisfied with your lifestyle? Do you would you want more? Do you want more opportunity? Do you want more opportunity for your family, for your kids? Do you want more travel? Do you want a bigger house? Do you want some toys like an RV that type of thing? At least when we know the baseline lifestyle now we have a foundation for making good informed conversations around more concrete financial goals. Remember I said at the outset, you don’t have to have them to get started. It’d be ideal if you did, but most people don’t. That’s okay. They often present themselves as we go through the financial planning process.

Create An Emergency Fund

 Once people realize what’s possible with their money, after doing those things, we want to make sure we have an emergency fund. And the right emergency fund is usually defined in the financial planning profession as three months, but ideally closer to six months’ worth of essential living expenses. So the mortgage, the rent, the car payments, the utilities, the groceries, all those types of things are essential, typically, to good daily living. And so setting aside three to six months’ worth of those expenses in liquid, safe, stable bank accounts is the preferred parking place for that type of money. And this is true emergency money. So it’s not vacation money, it’s not just save it up and then spending half of it down on a vacation, or redoing the kitchen, or buying furniture for the sunroom. No, those are separate types of expenses. This is a true emergency, the roof needs to be repaired unexpectedly, car repairs, medical bills, it’s your peace of mind. It’s yours, put your head on the pillow and sleep easy money. I don’t have to worry about the short term market performance. It’s stable, it’s safe, it’s reliable, it’s liquid in earning you much of anything, but that’s okay. That’s not the purpose of an emergency fund. So, a good foundation of a financial plan is to have that emergency fund. It keeps you out of trouble. It keeps you out of bad debt. Because when an emergency does arise and unexpected, unforeseen financial calamity, you don’t have to run the credit cards, or a personal loan from your father in law that you know that you must pay back at some point. If you have that cushion to absorb most of life’s unforeseen events, the loss of a job. That’s a big one, right? You know, unexpected loss of a job and even government employees, which you have the most stable, reliable forms of employment, still can get furloughed, as we know through budget conversations going on right now. They can get furloughed for a couple months, not draw any income, now you get your back pay, but you better be prepared to go a couple months without any pay. That’s your emergency fund. So the unexpected loss of a job is a big one. That Emergency Fund helps soften the blow.

Tackle Bad Debt And Retain A Good Credit Score

Kevin Zywna, Wealthway Financial Advisors: Then after the emergency fund, now we want to tackle debt management. So first, don’t get into bad debt, and you don’t have to get out of it. Okay. There’s straightforward financial advice. But that’s not possible for everyone. And I know that not all debt is bad debt. Mortgage debt typically has been until recently, good debt. Good debt is defined as something with a low interest rate, low in this environment we would consider basically anything 4% or below. So a lot of people were able to purchase houses or refinance houses, in the fours, the threes and sometimes even in the twos 30 year fixed rate mortgage 2.75%. Man, you got something like that you should be laughing yourself to sleep every night because that is historically low, cheap, long term debt that is likely not to be duplicated, maybe ever again in your lifetime. So that’s good debt because it isn’t costing you much. And you should not rush to pay off cheap debt like that you should redirect that cash flow that you would have applied to the debt because we still have this weird fascination with having to have our house paid off. Our mortgage paid off when we go into retirement. There’s no requirement that says that. It’s an antiquated Depression era notion. It certainly lowers your overall net worth if you rush to pay off cheap mortgage debt too fast instead of redirecting the cash flow into higher earning vehicles like common stocks. We do the math for clients all the time so they can see it. Just know that all debt is not bad debt. Cheap debt can be good debt if used properly, but high interest consumer debt like credit cards is something you want to try to avoid at all costs. Use them for convenience. Use them for whatever the perk is: mileage or points, that type of thing, but pay them off in full each and every single month. That should be your objective.

Kevin Zywna, Wealthway Financial Advisors: In addition, by doing that, you retain a good credit score. If you have too much money on credit cards, that lowers your credit score. That starts to infiltrate other aspects of your financial life. So get the high expense debt paid off. Don’t go into it in the first place if you can avoid it. But if you do get it paid off as quickly as possible, because every dollar you pay in finance charges and interest is one you can’t put towards other goals. And then if you have several different types of high interest rate debt, like maybe consumer loans. Maybe you have a high interest car loan because maybe your credit isn’t that good. With credit cards, there are strategies and techniques that you can use as a financial advisor that can help you try to tackle and get down quickly or as quickly as possible. It’s not something we specialize in too much, but just know that that exists out there. If that describes you. So get that bad debt paid off and keep it paid off. We’ve got three or four more components of a good comprehensive financial planning process that I want to go through and let you know about.

Financial Planning Answers Life’s Biggest Questions

Kevin Zywna, Wealthway Financial Advisors: Tonight we’re talking about the components of good ongoing financial planning. And financial planning, I contend, is a service that virtually everyone needs, that they don’t even know they need. It’s the next evolution of financial planning advice after investing. Most people who are financially savvy know they need to save and invest in the long term. But then they don’t know what they do with it. Are they doing it fast enough? Or do they have enough? Do they need to keep doing it? That’s where financial planning comes in. Financial Planning harnesses all your financial resources so that wherever money touches your life, the financial plan is there to help you make the best decisions. So you maximize efficiency with your money. Build it as quickly as possible over time and what we do in our practices in the accumulation stage as people are saving and investing over time. One of our typical goals, whether stated or unstated, is to get our clients to a point of financial independence.

Saving For Retirement

Kevin Zywna, Wealthway Financial Advisors: Financial independence is being freed from the ability to have to work to earn an income in order to maintain your quality or your standard of living. It’s because you have saved and invested wisely over time. You now have enough critical mass of savings of a nest egg to then live off your own savings. Live off your own money, maintain your lifestyle. At least maintain your lifestyle off your own nest egg that you saved and earned over your lifetime. And you answer to no man at that point in time and it’s incredibly liberating, freeing to have power and independence in the best sense of the word. It just gives you so many more options when you are at that point of financial independence. And to know that you don’t have to work for money.

Kevin Zywna, Wealthway Financial Advisors: Now you might want to work because you enjoy it. Or you might want to work because you don’t have a retirement plan figured out just yet. What are you going to do with all your free time? But working with the idea in the back of your mind that you don’t have to do it. And we’ve seen firsthand people who didn’t like the job so much thought that they were really ready to retire. But once they hit that magic number, where we told them, gave them sort of professional permission to let them know that they were financially independent, and they no longer had to work for money. All of a sudden, you know what, sometimes that job that’s kind of irritating becomes more tolerable, because you now have the power, the freedom, the independence to walk away whenever you choose. You control that not your boss, not your employer. You have that and if you know what if some layoff happened unexpectedly, that’s okay. You’re financially independent, you don’t need that. So it’s a whole day of reframes a lot of people’s thinking about work, leisure, retirement, what it looks like, what it should look like. Just having that power of financial independence is a great liberator. So that’s one of the things that typically comes out of the financial planning process done well throughout the years.

Kevin Zywna, Wealthway Financial Advisors: Alright, so I think I left off at debt management will make sure you pay off bad debt. Next thing want to do is an investment plan. I’m not going to get into a lot of details on investment plans, because I’ve had a couple of shows on those recently. But after we get out of bad debt, and then we’ve got to save for long term objectives and investments, mainstream investments, US stocks, equities, mutual funds, ETFs. Those investment vehicles through which we get to common stocks, one of the greatest wealth creation devices ever created by mankind, fractional ownership shares of publicly traded companies that we call stocks. So much incentives built into publicly traded companies to continue to grow revenue, grow earnings, which grows value, which you get to participate in, if you own shares of that company. It’s one of the easiest, labor uninventive ways of generating wealth, if you do it properly.

Suggested Asset Allocation In Your Investment Plan

Kevin Zywna, Wealthway Financial Advisors: So investment planning is a major component of comprehensive financial plan. And the asset allocation that makes up your investment plan is the primary driver of your long term performance. And we are a proponent of most people, at most stages of their life, having a portfolio investment portfolio made up of primarily, if not exclusively, all common stocks, all equities. Which is somewhat of a departure from the rest of the investment world that likes to throw a lot of bonds into portfolios. For the illusion of safety, I like to call it. Bonds have certainly been no friend over the last couple of years, it was not a conducive interest rate environment for bonds, and then bonds do little more than drag down your long run rate of return. They occasionally provide some temporary stability in periods of market downturn, stock market downturns, but at a cost that we feel is far too great to long term performance. So think that most people should be invested primarily for growth in equities over most stages of their life. And that’s where I’ll leave the investment talk for right now.

Kevin Zywna, Wealthway Financial Advisors: Then, after the investment plan or retirement plan, one of the biggest unstated goals that most people have when they start doing true analytical financial planning. So, to give you a sense of what that might look like retirement planning, so you know, kind of an old rule of thumb used to be that you need approximately 80% of your present income in retirement. So you know, whatever you’re earning in your early 60s, multiply by 80%. That’s probably about what you could expect to spend to maintain your lifestyle in retirement at 65. If that’s the magic age.

Kevin Zywna, Wealthway Financial Advisors: I would say, though, that we’re not, you know, if you save 20 to 30% of your pre retirement income, and that’s a big number for most people, most people are not saving anywhere close to 20, or 30% of their pre retirement income. They’re probably, if they contribute to a company retirement plan, they’re probably saving six%, their company is matching them with 3%, they’re saving about 9%, I would say. But if you save 9% in 2030, you’re on track for that number most people are saving less than that, which means they’re going to have to rely on less income in retirement. And that’s, you know, that’s not necessarily a problem. It depends on what retirement looks to you.

Kevin Zywna, Wealthway Financial Advisors: For most people nowadays at least in our demographic that we work with, don’t look to have a hard break from work, they don’t work. One day, turn it off, and go sit on the rocking chair on the porch and go play golf. That’s not what we’re seeing much of anymore. Most people are choosing to work well past traditional retirement age. But work in part time with your current employer, if the employer allows it. We’re seeing more of those options now. It’s a win-win for employer and employee. So it’s okay if you don’t save that much. If you’re going to work longer than expected, because you want to work longer and you need to do something, you have to have something to retire to. So you can’t just have something to retire from. You have to have something to retire to. And if you don’t, you might not be ready to retire. Know that going into it.

Kevin Zywna, Wealthway Financial Advisors: Okay, retirement plan, insurance coverage, good component, important component of any good financial plan. Insurance Coverage includes health insurance, possibly disability insurance, most people get that from their employer if they have it. Of course, auto, homeowners, renter insurance, and then life insurance. If there’s other people dependent on you for your income, and if your early demise would cause them financial hardship, then life insurance is a good use for that. So making sure you have the right types of insurance coverage in the right amounts in order to protect against the catastrophic event. All right, I’m running out of time. Last thing on the comprehensive financial planning and estate planning. Don’t forget about the wills and trusts.


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