Financial Planning 101: What You Need to Know About Financial Planning

All too often, we get caught up in life’s biggest questions, like “What goals do you want to accomplish?” without giving enough thought to how you’ll accomplish them. Thinking about your future requires thinking about your full financial landscape, and this is where financial planning comes into play. Let’s take a look at the many different elements that make up a truly holistic financial plan, and how they can help you create the future you dream of.

First, what is financial planning?

Financial planning is the process of setting and achieving financial goals through careful management of your financial resources. Financial planning is not a set-it-and-forget-it process; it involves actively monitoring and adjusting your portfolio and sometimes your overall strategy as circumstances change.

What can a financial plan help you address?

The simple answer — a lot, as long as your financial plan takes into consideration every aspect of your financial life, which it should. A comprehensive financial plan can include the following:

Investments: Financial planning can help you decide how much to invest, where to invest, and when to reassess your investment portfolio. It helps you keep a high-level perspective of your portfolio while also exploring new investments responsibly.

Taxes: Tax laws change all too often, and it’s on you to understand how they impact your finances. Creating a comprehensive financial strategy can help you plan ahead and reduce the tax liabilities  of your finances. 

Insurance: Risk assessment is a crucial part of managing your finances and determining what type of insurance your portfolio needs. After looking at your assets, liabilities, income, and expenses, a financial plan can help you identify potential risks and potential areas of coverage related to your health, property, and life. 

Education Planning: As the price of secondary education rises, so does the need to plan for it. Planning ahead can help you with the sticker shock of private and secondary education expenses by helping you set goals, budget, save, and explore scholarship opportunities that could help you down the road.

Estate Planning: One of the most popular and useful reasons individuals create a comprehensive financial plan is to help with estate planning. A lot goes into play when planning for the future of a property, and taking a holistic view of your finances can help you understand your estate’s wealth assessment, tax efficiency, and succession plan. In turn, you can live with the peace of mind of knowing the future of your property is intact for generations to come.

Why is it important to take a holistic approach to financial planning?

When you begin financial planning, it is easy to get caught up in the weeds and focus too much on one aspect of your portfolio while ignoring the others. But by doing so, you can easily lose sight of your overarching goals and miss out on other opportunities to maximize the value of your portfolio. 

Our advice is to maintain a bird’s eye view of your financial resources while paying attention to situational details as they emerge. Your financial advisor can help answer any questions you may have and help you avoid focusing too much on one angle.

The benefits of holistic financial planning

Holistic financial planning encapsulates the full scope of your financial situation. Its focus is not just on achieving specific financial goals, but also on how those goals fit into the bigger picture of your financial future. The benefits of approaching financial planning this way include:

• Gaining a comprehensive understanding of your financial situation

• Aligning your financial and personal goals

• Reducing financial stress by addressing the full scope of your financial life

• Getting greater financial security and peace of mind

The process of creating a financial plan

Financial planning can be a significant undertaking, but the payoff is well worth the effort. In fact, it could change your life. Here, we break down the process of financial planning into easily digestible pieces to help you understand how it works, why it’s so important, and how a financial advisor can guide you through each step.

How to understand your financial goals

The first step in creating a financial plan is setting your goals. To understand your financial goals, you need to have a firm grasp of your entire financial picture. Review your various accounts, investments, and potential opportunities, so you can be well positioned to conceptualize exactly what you want to accomplish financially. One could argue that the first step is the most important one because until you set your goals, you can’t create a clear roadmap for your financial journey.

What kind of goals can you set for yourself?

Everyone’s journey is different. We all have different ambitions with different trajectories to get us there, but setting actionable goals is something that can help everyone achieve what they want in life. Here are a few goals we’ve helped clients achieve at Dekker Financial:  

1. Setting up an emergency fund: Get ahead of unexpected medical bills, car repairs, and other unforeseen costly events that could put you in an uncomfortable financial situation. 

2. Paying off debt: Pay off high-interest debt, such as credit card balances or student loans, so you can save money down the road and improve your credit score.

3. Saving for retirement: Create the future you want by setting aside money in a retirement account, such as a 401(k) or IRA.

4. Investing for growth: Set aside money in a diversified investment portfolio with the goal of earning returns that outpace inflation over the long term.

5. Creating an estate plan: Prepare for the transfer of assets to your heirs and beneficiaries after death (We’ll talk more about this later on).

Assess your current financial situation

Taking stock of your existing financial situation is a key step in your financial planning journey. Once you identify all of your income sources and expenses, you can then create budget and savings strategies that can help your account long-term. Many people find that creating a budget helps them become more confident in their overall financial savviness. From there, they can make more profound financial moves, like evaluating their investment strategies and determining how much they need to save for their retirement goals. 

Consider planning for retirement

It’s quite literally never too early to start planning for retirement. Many people make the mistake of neglecting their retirement strategy until later on in life, but getting a head start on it will help you achieve the retirement you want. Whether you contribute to a 401(k) or IRA, what’s important is that you invest a lot early on and consistently.

Planning for retirement early enables you to take advantage of compounding interest — interest that grows exponentially over time. For example, $1.00 contributed at age 20 can be worth as much as $5.84 at the age of 65, but that same dollar will only be worth $2.67 if invested at the age of 40.¹ Over time, all of those dollars (and interest) adds up and you will end up making your invested money go further.

Consider investment strategies

Choose investments that align with your financial goals and then pursue more diverse investments so you have a well-rounded, robust portfolio. Not only will this help you accomplish your financial goals, but it will also add complexity to your portfolio and potentially provide new opportunities for you down the road. We highly recommend working with a financial advisor to build a well-diversified portfolio aligned with your financial goals.

Look into estate planning

Estate planning helps you prepare for transferring your assets to your heirs and beneficiaries after death. This may include creating a will, establishing trusts, purchasing life insurance, naming beneficiaries, distributing assets, and appointing guardians for minors. Since many of us don’t necessarily like to think about our own mortality, it’s one of the most common avoidances when it comes to financial planning – but it’s also a fundamental step in the process, as it helps ensure your assets are secure and where you want them to be after you pass.

Evaluate your appetite for risk

There is risk involved in every decision we make – especially financial decisions. But there are steps you can take to mitigate the impact of them, so that you and your finances remain protected and secure. Resources like insurance and emergency funds can help alleviate risk by ensuring you have dedicated funds available in the case of an unexpected event like a recession or unforeseen cost like a medical emergency. When it comes to your investments, your financial advisor can help you understand the amount of market risk you’re able to take on, and allocate your assets accordingly.

Work with a financial professional

Let’s take a step back and recap. Deciding to create a financial plan is almost always the right call, but it shouldn’t be done alone. A financial professional will guide you throughout the process and educate you on all of the topics covered here. Working with an advisor will empower you to make informed decisions that work toward your goals and ensure a prosperous future for generations to come. 

And that’s where we come in.

At Dekker, we empower you to live the life you want. We get to know you and your goals, the challenges in front of them, and the path forward. Sure, there is a lot that goes into financial planning but we’ll make it an enriching experience that helps you become more financially savvy. Over time, your perspective will shift and managing your financial plan will become a normal part of your life. The payoff? You can live with more peace today and reassurance that your loved ones will be taken care of tomorrow.

 

1. When Should You Start Saving for Retirement?, Vanguard: https://investor.vanguard.com/investor-resources-education/retirement/savings-when-to-start