Even if you have a budget and a will, you could still be lacking a financial plan. This important guidepost affords a big-picture overview of your money situation, so you can map out your future…
Even if you have a budget and a will, you could still be lacking a financial plan. This important guidepost affords a big-picture overview of your money situation, so you can map out your future and achieve long-term goals.
Brad Owen, senior wealth advisor and senior vice president at EP Wealth Advisors in San Diego, says a financial plan not only takes stock of your current situation, but also makes recommendations for the future. According to Owen, the underlying question of the planning process is: “What direction are we going to take our family?”
If you’re wondering what’s involved and whether you can create a financial plan on your own, keep reading to learn more about the skills, tools and resources required to create a financial blueprint and prepare for the future.
Take stock of your current financial situation and set long-term goals. You’ll need all your financial documents, including your current budget, recent tax returns and account statements, to help facilitate the creation of an accurate financial plan. Gathering these materials in advance can make the planning process smoother. It’s also beneficial to have conversations in advance with a spouse to map out shared goals and financial philosophies.
Financial plans aren’t standardized. The first thing to understand about financial plans is that they aren’t standardized documents. Each advisory firm or professional may use their own format. Scott Oehrle, president and CEO of Pittsburgh-based Marbury Wealth Management, says financial plans as long as 120 pages were common in the past. Nowadays, finance professionals focus on creating documents that are easy to use and scan. Oehrle says 50 pages tends to be the norm, with the largest section of the plan focused on retirement planning. Asset allocation, insurance and recommendations are also covered in a typical plan.
That length may still seem intimidating, but it’s required to cover all the material included in the plan. “It typically is a document that is meant to be followed for a very long time,” Oehrle says. It needs to not only list current assets and cash flow information, but also future projections. To make a financial plan more user-friendly, Oehrle includes a bullet-point summary, so his clients can quickly review highlights and actionable items. The cost of financial plans can vary depending on the complexity of someone’s situation. Oehrle says $2,500 to $5,000 is a typical price range for someone who has significant wealth and requires a more in-depth and more expensive plan to cover complicated investments, tax strategies and estate planning.
A well-rounded financial plan offers a holistic approach to finances. While the format of a financial plan can vary, most include a review of the same materials. Depending on a person’s situation, a plan may cover the current state of a person’s finances, project its status in the future and make recommendations based upon a household’s needs and goals.
While a plan will not include specific documents such as a will or insurance policies, it will address whether those exist. Many financial planners help clients create what is known as a vault, where all essential documents are stored. In most cases, these will be kept in a cloud-based system so clients can download paperwork as needed. Oehrle says people might also get a password-protected USB flash drive or three-ring binder with their financial plan and essential documents included.
Plans are difficult to create on your own. With a bevy of online personal finance tools and apps, such as Mint and Personal Capital, it’s easy for people to manage their budgets without professional assistance. However, a financial plan includes diverse components, from retirement to estate planning to investments. That may make it difficult for someone without professional experience to manage the creation of a sound financial plan on his or her own.
“You could come up with a savings plan online, but you might not be putting [money] in an optimal place,” Owen says. As part of the planning process, a finance professional can make recommendations that complement other aspects of a person’s financial big picture.
While it may be challenging to write a financial plan yourself, that doesn’t mean you’re not involved. “You’re very active in the process,” says Jared Feldman, partner at accounting firm Anchin, Block & Anchin LLP in New York City. “There has to be a lot of involvement and buy-in.” Beyond providing the financial information and goals to be included in the plan, clients need to be committed to following through on recommended action items.
Revisit your financial plan often. When a financial document is written initially, there may be steps to be implemented immediately. These include opening accounts, transferring balances or starting direct deposits.
“I won’t let them put it in a drawer,” Oehrle says of his clients. “I will make sure the insurance is in place [and] that the 529 plans are in place.” To ensure nothing falls through the cracks, Oehrle charges one half of his fee upfront and collects the second half once all the appropriate accounts are in place. Depending on how quickly a client addresses outstanding issues, a financial plan can take anywhere from six months to a year to complete.
After establishing an effective financial plan, it’s important to revisit the plan at least once a year. “It’s a living, breathing document,” Feldman says. “It has to change because circumstances change.” Family goals may be adjusted, emergencies arise or funds don’t perform as predicted. All of these life events may require changes to the financial plan.
A financial plan is an essential part of creating a sound future for you and your family. While the expense may be off-putting, it can be an investment that provides peace of mind and prosperity for years to come.