When your friends or colleagues talk about financial matters, how often do you hear them mention a financial plan?
They may talk about how their investments are doing, but rarely about whether their finances are proceeding according to a plan.
This raises the question: Do they have a plan? More importantly, do you?
Investing or buying financial products without a financial plan is like trying to build a house without a blueprint: The final product is certain to be substandard.
Having a personal financial plan is easily as important as having a carefully drafted plan for your business. Few business owners lack such a plan because without one, they couldn’t set goals, project revenues or measure results — and their businesses would suffer greatly. Though many business owners do have viable business plans, some unfortunately fail to do the same regarding their personal finances.
Sure, you can accumulate personal investment gains toward retirement without having a blueprint, but those gains are likely to be poor. The chances of good average returns are much greater when you invest according to a well-thought-out plan. A key reason for this is that too many individual investors are like many college football teams — all offense and no defense. They play offense — often strategically flawed offense — by investing, but fail to take defensive measures to protect investment gains.
Every personal financial plan should include:
- An outline of your specific goals and objectives. Most people save and invest for retirement, but there are other goals, which may include educating children, taking care of aging parents and buying vacation property that will someday become a retirement home. These goals have different time horizons and can call for different investing strategies to provide funds with the right timing.
- Realistic, conservative projections of likely investment returns. If you’re planning to retire based on unrealistic projections of investment returns, you could ultimately be in for a rude awakening. A sound plan includes realistic projections; and your portfolio should be the servant of your plan.
- Risk management. This starts with managing portfolio risk. You want to avoid investments that carry uncompensated risk. Often, investment companies ballyhoo enticingly high expected returns, but the returns actually realized are often lower. Also, you want to balance out the stock portion of your portfolio with investments that don’t usually rise and fall with stocks, such as government bonds. This diversification can cushion big hits to your portfolio from the stock market falling.
- Adequate insurance to protect your hard-earned assets from legal judgments. You need coverages for your home that carry acceptable deductibles, and you should make sure you have an umbrella liability policy to cover such risks as slips and falls in your yard. The nicer home you have, the bigger target this may make you for lawsuits by opportunistic plaintiffs.
- A strategy to avoid paying unnecessary taxes. For some, this can include holding tax-inefficient investments such as bonds and certificates of deposit in tax-deferred accounts while holding tax-efficient investments like stock mutual funds in taxable accounts. Also, making efforts to avoid short-term capital gains (and the tax they bring) can be invaluable.
- A solid estate plan. Make sure your heirs benefit from your accumulated wealth as much as possible by filling in any holes in your estate plan. You may need to augment your will with a trust that includes various directives to assure that your wishes are granted after you’re gone. Your estate planning package should include durable powers of attorney for health care, empowering your designated agent to make medical decisions for you if you’re incapacitated, and for finance, to make decisions regarding your assets and financial affairs. You should also have a living will.
By having a comprehensive personal financial plan, you’ll significantly increase the probability of reaching your goals while you’re living — while also providing security for your loved ones after you’re gone.
Tim Decker is president of ISI Financial Group, a wealth management firm in Lancaster, and a fee-only financial planner. His weekly call-in radio show, “Financial Freedom,” airs Saturdays at 10 a.m. on WHP 580 AM.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it is not intended to provide specific financial advice. Investing involves risk, including the loss of principal. Past performance is no guarantee of future performance. You should always seek professional guidance before making any financial or legal decisions, as everyone’s needs are different.