7.5 MIN READ
Financial advisor. Financial advisor. Investment advisor. Or even investment advisors.
Do these terms create stress vibrations in your life?
Yes me too.
You see I don’t really know what they mean! Each of these people who call themselves by one of these titles seems to be doing something, if not completely different from everyone else.
And I know a lot of them.
Furthermore, the financial industry doesn’t seem interested in making this clear to families. I’ll try that here.
I will tell you exactly what I do for customers – not as a selling point, but so that you can take something away from it and apply it in your life.
The four areas of financial planning
Ok, you won’t find this in any textbook, but here are the four areas as I see them (with more details below):
- Protect what you have – For me it makes sense that we have to protect what we already have before we look into the future.
- Know where to go – Since we spend money almost every day, it is important to know how much is being spent where and what we are spending it on.
- Let it grow – Of course, investing is an essential part of financial planning, but you can see that it is nowhere near as important as some might think.
- Independence and dignity – We want to live our whole life with financial independence and dignity or, in other words, we do not want to live from our children at our age.
Protect what you have
It seems sensible to understand the protections we have for our assets and make sure they are properly structured. No bank would last very long without locking the vault, and no family is likely to be financially successful if it does not protect what it has.
There are two main tools we use to protect what we have: insurance and estate planning.
When I say “insurance” I mean all types of insurance and, more importantly, all types of risks.
So this includes insurance for your car and your homeowner. Your top policy protecting you from lawsuits and other forms of liability. Perhaps you are on some of the bodies that caused a personal lawsuit, or you are part of your HOA.
Regardless of the potential source of liability, we want to know and understand the risks we are taking so that we can consider purchasing insurance to cover those risks. Note, I am not saying that you should always get insurance to cover everything. I’m just saying that you should know and understand all of the risks you are taking – as much as possible!
Life insurance is also important – but only if we have other people in our lives who are dependent on our income.
Most of the time, of course, this is your spouse or children. And note that we say they are based on your income. If they depend on your wealth, they are most likely the heirs to your wealth so life insurance may not be required.
Estate planning does something different: it allows you to make decisions at times when you would otherwise not be able to.
This includes determining what and how your children will inherit your wealth. Who will raise her when you’re gone?
This also includes whether you want to be kept on a ventilator.
The standard suite of estate planning documents enables you to make these decisions in a clear and legally enforceable manner today.
Know where to go
This is the scary one.
Nobody likes to look at their expenses! We live in a very expensive place and the cost of existence is very high and it makes us uncomfortable to see it.
But that’s exactly why knowing your expenses is so important. Knowing that you typically spend $ 4,000 a year on clothing and have already spent that amount this year, you will be forced to rethink your next purchase with greater intent.
In other words, you will begin to weigh the real value of your purchase against the cost.
Once you’ve done this for a short period of time, it will be liberating. You will no longer be spending $ 50 on lunch if you don’t really appreciate it.
How do we get there?
We have to keep track of our expenses. This at least gives us the price for our current lifestyle. As we go further into this process and assign categories to our expenses, we gain even more knowledge, and the end result is usually that we spend less and at the same time find much more enjoyment from our expenses.
From a practical point of view, if we want to retire for 30 years, we need to know how much we spend each year to find out if we are fine. We cannot guess our expenses because we will always be guessing too low.
We need to track our expenses to get the financial planning right!
Let it grow
This is our investment philosophy and strategy.
First, we need to have an investment philosophy to anchor our strategy. If we don’t, we’ll jump from strategy to strategy, probably always picking yesterday’s winners and seeing them as tomorrow’s losers.
Realizing that we cannot select winners (and no one else) is the first step towards a coherent investment strategy.
The philosophy that my clients and I have includes:
- Believe in the future – This is the view that things in the world look rather bleak at times, but always seem to improve over time. In other words, you might say to yourself during these times, “I don’t know for sure How Things will be fine. I just know it The Everything will be fine! “
- Patience – At the same time, we know that the ups and downs of the world can last for longer periods of time. You could say, “I don’t know when Everything is going to be alright. I just know it The it will be alright! “
- discipline – Finally, we are sticking to strategies that have proven themselves in history over long periods of time and are of the opinion: “I don’t care what works now. I care what always worked and I’ll just keep doing whatever worked! “
The resulting investment strategy includes an asset allocation that gets you where you want to go in the past, as well as a broadly diversified approach that includes regular realignment.
We must also be careful with the investment vehicles we use, as well as our service providers and the overall structure.
Managing a portfolio well is no small feat, but efforts shouldn’t be directed towards “doing what is smart today” or even changing the portfolio very often.
Independence and dignity
This may sound more like an outcome than an action, but we need to know what we must do today to live our lives with independence and dignity.
To do this, we need to at least guess all of our expenses for the rest of our lives including: will we pay for our 5 year old daughter’s wedding? What if mom has a health problem? What do we really want to do when we no longer work full time?
If we do not take into account realistic expectations about our entire life, our planning process will fail.
Once we have a “base case” of projections for the rest of our financial lives, we can play around with “what-if”.
What if we take a 2 year sabbatical? We can just put this into our model to see how it affects us in the long run.
What if one of us retires much earlier and we cut our cost of living? Simply plug it into the model.
And on and on. You see, only at this point, when you have made your life forecasts, can real planning begin!
At this point I feel it is necessary to add a cash planning process as it addresses so many of the challenges we face in our financial lives.
If we do a detailed forecast of cash inflows and outflows over the next five years, we’ll see what net costs we need to finance.
For example, if you have two children starting college in the next five years, how are you going to pay for them? Where does the money come from?
What if you know your home needs a new roof and that you need to do it within the next five years – same questions. How do we allocate resources now so that we can be sure that we can do it in due course?
These negative net cash flows over the next 5 years should flow into a savings or cash account. We don’t want to take any chances with these funds because they are designed for expenses that we know will be incurred.
Additionally, we should consider some emergency savings. If we lose our job, how long will it take us to find a new one? How do we pay for our expenses in the meantime?
If we’re fairly certain that we can find a new job within 6 months, we may go back to our spending plan and invest 6 months of living expenses in savings as well.
With a solid cash plan, you can rest assured that you can invest your remaining funds knowing that even if the market is empty, you won’t have to hold those funds for at least five years.
Wouldn’t that increase your confidence in your investment plan?
What’s in the way
Three things really seem to get in the way of creating and maintaining a good financial planning process.
First, it’s boring!
Gosh, this is so boring for most people! (Ok, not for me, but I understand!)
If this was what you wanted to spend your time with, you would have gone to school for it! And let’s face it, the industry doesn’t make it very tempting to do the right things. Most of the time they are trying to trick you into doing things that fill their pockets – not yours!
Second, there are a ton of technical issues that you can stumble upon along the way. Without the expertise in tax and estate law, it is very difficult to come up with a solid estate plan. Without tax expertise, it is difficult to do something financially secure!
And third, this is about being accountable to you, who will be alive 30 years from now. And it is very easy to evade this responsibility.
Here’s the good news
There is a lot of good help out there!
First of all, of course, you can hire a good financial planner to help you. This is what I do, but there are many more like me on www.napfa.org.
If you absolutely don’t want to work with professionals, at the very least find a good accountability partner or group where you can pool your financial knowledge. It is quite rare for someone to do this on their own and find their own optimal success without much fear and effort!
About the author
Joe Morgan is a financial planner who works with women who need to reduce their financial fears. By creating clarity about their situation, he enables his clients to take control of their finances so they can pursue the intentions of their lives. He charges a flat fee for financial planning services.
Did you know that XYPN consultants offer virtual services? You can work with clients in any state! View Joe’s Find an Advisor profile.