MoneyMonday: Financial Planning Essentials: The Whole Picture

If you’ve attended other sessions, you’ve been introduced to the three stages of financial wellness. If this is not familiar, plan to join an Intro to MoneyNav session offered at the beginning of every month. Or look for the Money Milestones course which explores these stages in detail.

This session is considered a core course appropriate for anyone at any stage.

So, let’s get started. If you’re here today, it’s probably because you are motivated to do well with your money. And, deciding to set aside this time to learn about financial planning suggests you are probably pretty money smart already. Money Smart people are future-oriented, calculated, patient, and able to delay gratification.

Money Smart people build good financial habits like planning and budgeting wisely, living within their means which means avoiding impulse purchases and overspending and they make money decisions with intention. That means viewing money as a valuable, non-renewable resource and putting it to use in the ways that bring the most joy and fulfillment to your life.

Let’s hold on to that concept of intentionality as we progress through this workshop. Intentional money management means having a game plan. According to a 2021 Schwab survey, among folks who have a written financial plan, 54% feel “very confident” in the likelihood of achieving their financial goals. By comparison, only 18% of those without a written plan express the same level of confidence in their financial future.

The survey also found that folks with written financial plans maintain healthier financial habits and report feeling more financially stable, are more likely to have an adequate emergency savings fund, are more likely to have little or no debt, and more consistently demonstrate good investment practices like considering risk tolerance when investing.

Despite the clear benefits of having a written financial game plan, only 1 out of 3 Americans actually has one in writing. For the other 2/3rds, they cite reasons like feeling they don’t have enough money to warrant a plan, believing the process is too complicated or saying they don’t have enough time to do it.

Hopefully, by the end of this workshop, you’ll recognize that none of those are valid reasons to give up the financial peace of mind that comes from believing you will reach your money goals.

As for the “it’s too complicated” excuse… let’s get started eliminating that one now. Financial planning can be simple.   You are here, and you want to be there. What do you want to experience along the way and how do you need to prepare for the journey? That’s what it really boils down to. Sure, you need to tackle some more complex subjects like taxes, insurance, and investing. But, just remind yourself to keep it simple.

There are 8 components of a financial plan… (click through)

The planning process starts with setting goals. You can make a plan unless you know what it is you want to accomplish with your money. That includes setting a vision for big, long-term goals like when you want to retire but also includes the short-term stops along the way like building an emergency savings account and taking a trip to Disney. For each goal, you need to set a timeline for when you want to accomplish it. Then you can organize these goals by those that are short-term, mid-term, and long-term. Short-term goals are things you want to accomplish in the next 5 years. Goals that are 5-10 years away are mid-term and those that are more than 10 years away are long-term goals.

Next, it’s time to pull out the calculator and assign a dollar value to each goal. As you estimate the money needed for each goal, tag them as a need, a want, or a wish. This helps you with step 4, ranking each goal. There aren’t many of us who have all the money and resources we need to accomplish every wish, whim, and desire. But, if financial planning is all about using money to bring more joy and fulfillment to our lives, then we need to be clear with ourselves in prioritizing those things that give us the most “joy for our buck.”

With goals ranked and organized by timeline, it’s time to put them in writing. While money really is a tool of endless possibility, some common financial goals we see are…

getting married, buying a car, eliminating debt, buying a home, planning a dream vacation, saving for a child’s education, and reaching the day where you no longer have to work for a paycheck… also known as retirement.

Setting goals sounds easy but that’s not always the case. From visualizing to prioritizing to finalizing a game plan, we can help. Just reach out and schedule a 1-to-1 session so we can talk about your unique situation.

Next, it’s time to set a baseline. The easiest way to assess your financial fitness and chart your progress is to plot your net worth. Establishing your current net worth at the start of your financial planning process sets your starting point. With intention and discipline, we’re certain you’ll be able to look back on this starting point one day with an abundance of pride for how far you’ve come and how much you’ve accomplished.

There are three steps in determining your net worth. First, make a list of your assets. That’s basically a record of your balances in savings and investment accounts, 401ks and IRAs, real estate value (minus any outstanding loan or mortgage), and the value of personal property like antiques and collectibles, cars, etc. This is what you “own.”

Next, list your debts. This is a record of what you “owe” and includes credit card and student loan debt, car loans, mortgages, etc.

Then you can determine what you are “worth” – in a financial sense, of course. What you “own” minus what you “owe” equals your net worth.

What happens if your liabilities outweigh your assets? Does that mean you are worthless? Absolutely not! In fact, most of us will spend a good bit of our lives in this “out of balance” spot. As we take on student loan debt, mortgages, etc. we are probably only just getting our savings and investing habits rolling. So, it’s not important to focus on what your net worth is but rather on how it improves. And that’s why setting a baseline, or starting point is the second step in building your financial plan. In a minute, I will show you how MoneyNav helps you track your net worth and chart your progress.

You’ve attended other workshops; this might sound like a broken record by now. But that won’t stop me from beating this drum again. Step 3 in the financial planning process is to establish an emergency savings account. I believe this is the most important thing for you to (remember) about healthy financial habits.

Life happens and you will no doubt face things like job loss, surprise medical expenses, and accidents. Without an emergency savings account, these potholes can knock you right off your financial journey.

Building emergency savings is something you’ll likely tackle in stages. Our Start Smart workshop covers this in more detail. For now, I’ll mention that the stage 1 goal is to save $1000. Divide $1000 by the number of months you want to allow yourself to reach this goal and then set up an automatic deposit to a savings account that isn’t too easy to access. From there, aim to build your savings to a level that would cover 3-6 months of your living expenses.

Building an emergency account is one thing. Maintaining discipline to leave it alone is another. In your written financial plan, including a list of “permissions” for tapping your emergency account. Similarly, list some expenses you can eliminate that fall in the “wants” category so you can prioritize directing dollars to the things you “need” instead.

Moving on to step 4, creating a spending plan. Our Dollars and Sense workshop takes a deep dive into this subject and your MyMoneyNav platform is built to take a lot of the work out of this process.

A spending plan, or budget, is really where the rubber meets the road when it comes to financial planning. You have to know where your money is going so you can redirect dollars toward the action plans for reaching your goals. A budget isn’t about denying yourself anything, even though it feels that way. It’s about being intentional with the way you direct your financial resources. This chart is included in the Dollars and Sense workbook, so I won’t dive in here but make sure you watch that workshop to complete this important step in your planning process.

Let’s take a minute to walk through your personalized MyMoneyNav program. I’ll point out some ways that the program helps you with all of the steps we’ve covered so far.

Okay. So, let’s keep on. Step 5 is eliminating debt. This is part of improving your net worth and finding more dollars to direct to those high-priority goals you set. Our Living Debt Free workshop is a great resource to reference on this topic. It covers the two common methods for eliminating debt including the snowball method where you pay off your smallest balance first and roll up payments to the next smallest balance as you pay one debt off. This method is best for folks motivated by small victories. Each time you pay off a balance, you get to celebrate… not enough to get you back in debt though. Just enough to inspire you to tackle the next debt.

Another method is the Avalanche method. In this approach, you tackle the debt with the highest interest rate first. Since that can be a debt with a higher balance, progress can feel slower here. But, if you’re a person who is motivated by the bottom line, this method will have you paying less interest overall.

Also, even though debt is one of THOSE four-letter words, not all debt is bad. Debt for things that appreciate in value is actually good debt. That generally includes things like mortgages and education. Its debt incurred for low-priority purchases that don’t bring long-term joy and satisfaction to your life that we want to eliminate and avoid.

That brings us to step 6, building your insurance plan. Like most parts of your financial plan, your insurance needs change during your lifetime.   In stage 1, our primary needs are establishing a foundation to ensure loved ones and property. In stage 2, we might have more property to insurance but might need to increase insurance to cover things like paying for college or preserving investment assets. Finally, in stage 3, insurance is used to protect your retirement income, as part of an estate plan, or to execute a charitable giving plan.

In addition to the types of insurance you need, the amount of coverage you need changes as well. Let’s consider life insurance for example. In your single years, your life insurance need is pretty low. But as you find a partner, buy a home, and start a family your insurance needs grow. Then as you build your own investment assets, launch children into adulthood, and enter retirement, your need for life insurance may decrease.

This is a good time to mention that financial planning is a dynamic exercise. It’s not something you check off the list and set on the shelf. Having a written plan is a great start in the right direction but monitoring your progress and adjusting as life unfolds is what ultimately determines how successful you’ll be in reaching those goals you set.

Insurance is one of those more complex parts of building a financial plan. Just reach you to schedule a 1-to-1 session which you can do right from your MyMoneyNav dashboard.

We are coming down the home stretch now as we discuss step 7, retirement planning. There are several workshops you can check out to deep dive into this topic including Retirement Income Planning, What’s Next: Spending Time in Retirement, and Social Security Overview.

For now, remember that retirement is likely the single most expensive financial goal you’ll set. It’s also probably the one thing you can’t take a loan for. That’s because retirement is the stage where your paychecks stop. And if you need a loan, it’s because you haven’t saved enough assets. And I don’t think you’ll find a loan officer willing to offer up a loan to you without an income or assets.

Most textbooks will suggest you will need to replace 70-80% of your pre-retirement income in order to maintain your lifestyle when your working days are behind you.

The amount you will need is dependent upon your desired retirement lifestyle. For example, how much you plan to travel. Also, keep in mind that healthcare costs are a significant expense in retirement. Depending on your medical situation, you may need more or less than that recommended average to meet your needs.

Like insurance, you’ll need to do some calculating here. But don’t worry, we are here to help. 

With that, we’ve arrived at step 8, estate planning. I’ll admit that this isn’t the most inspiring step in building a financial plan. It’s much more fun to talk about goals and life and retirement.

But estate planning is a give you give to others. Losing a loved one is never easy but with a well-thought-out estate plan, you can take a lot of the burden off the shoulders of your family and friends.

Our workshop, Estate Planning Basics, covers this in detail so I’ll just mention the key components of an estate plan.

First, your Last Will and Testament. This is where you name key people who will carry out your wishes including the executor of your estate. If you have children, you will also name custodians for them. You might also put legal provisions in place to provide financial instructions for caring for minor children and staggering inheritance for them as they enter adulthood. This is a way of allowing young children to “grow” into a more mature money mindset and preserve your financial legacy in the process. Your will address your assets that do not have a beneficiary designation associated with them. This includes personal property, bank accounts, etc. Your insurance policies and investment accounts typically have beneficiary designations, so part of estate planning is keeping those designations up to date.

Another important document is a Power of Attorney. This is a person you appoint to handle your legal, medical, and financial affairs in the event of your disability. While this is a document separate from your Will, most attorneys will draft them as a package.

Finally, you may want to consider creating a charitable legacy to support the communities, organizations, and movements you care about. There are some great investments and planning tools that can ensure you make those dollars stretch to benefit things you care about long after you’ve moved on to greener pastures.

So, let’s wrap up with a reminder of four behaviors that are prerequisites for successfully executing a financial plan.

First, stop living paycheck to paycheck. While budgeting and debt elimination aren’t fun, remember, this is about setting intentions and directing your money resources to things that matter to you.

Next, build that emergency savings account so a bump in the road won’t bring your journey to a halt.

Save as much as you can. Delayed satisfaction means you can put your money toward MORE joyful and MORE fulfilling things. Yes, it seems like buying that new iPhone the day it comes out will bring you joy but will it bring you as much joy a year from now as being debt-free?

Finally, prepare for the unexpected with your emergency account, insurance plan, and estate plan. These things bring you peace of mind knowing you’ve taken steps to protect and provide for your loved ones.

As you can see, financial planning can be simple. But that doesn’t mean it’s easy.