Financial Planning – Not Just Investments – Part 1

Financial Investments

Financial Congress 2011, Bilbao, Spain

Being interviewed at the biggest financial digital meeting of the world.

Financial Planning – Not Just Investments – Part 1

FInancial Planning, who needs it? Many say my bank or stock broker is doing it for me. Is that enough? What should be included in your financial plan? Everything!

Having a clear focus on your financial goals is often an important place to start but few really have any idea of what they want financially in life. And even if they did, until they can see actual projections of how expensive a good lifestyle in the future will be, it’s impossible to formulate a savings strategy. With this in mind, consider developing you current financial plan complete with projections.

Begin with first collecting and organizing important data. You will need cash and investment account statements, pay stubs, income tax returns, employee benefits statements, insurance documents, estate planning documents and a well-thought out budget. Once you have collected all of this data, you can begin building your current financial plan.

Developing your financial position is the easiest place to start.

If you have ever looked at a corporate annual report, think about how it is structured. In the beginning, smiling faces talk about what a wonderful year they had and detail all of their successes. Next might come the challenges that are ahead and a discussion about how the company will proceed to overcome these challenges. Finally comes the supporting materials – the financial statements. While the financial statements come last in the presentation, the accomplishments, challenges and action plan could not have been discussed until a current position has been established. Think of yourself or your family as a business and move forward accordingly.

Start with the balance sheet.

The balance sheet lists all of your assets and liabilities. Assets include all of your bank accounts investment accounts, cash value insurance policies, real estate holdings, business entities such as partnerships; and personal property such as your home, car, boat, furniture, art, jewelry and anything else of value. Think about everything that you own that has a value and list it. Liabilities include your loans, credit card debts, car loan, mortgage and so forth. When you subtract the liabilities from your assets, what remains is your net worth.

Next, compile your cash flows. List all of your incomes. Include not just your salary but interest, dividends, rents and so forth. A good place to find this information easily is on your recent income tax return. Use your tax statement to reconcile the income generating assets on your balance sheet. If they don’t match up, you might have made a mistake. Add all your incomes together for the year and take away the expenses that you listed on your budget sheet. What is left is either a surplus or deficit. If you have a surplus, then you should have some idle cash sitting around in your back pocket or under your mattress. No? Don’t have a surplus? Well then, either you saved it or you spent it on items that you could not classify in your budget. Review your budget again and try to learn where the money went.

Make a list of your financial assumptions. Start with the balance sheet. Assign each asset class with a growth rate. Cash assets might grow at 0% to 2%, investment assets might grow at 3% to 8% (don’t include dividend distributions). Your home might grow at 3% to 5%. Be sure that your assumptions are rational. The same goes for your income and expenses. Determine how much your income will increase each year and in what year you will retire. List your assumptions about social security. Will you even receive it? If so, at what rate will it increase each year. Look at your expenses. How will inflation impact them in the future? Be sure to look at the historical inflation rate. While inflation based on government figures may be low now, most of us are certain that our expenses are growing at more than 2% per year. Be realistic. Bad assumptions will doom your plan. Finally, determine your life expectancy. Chances are that you may live to 90 or 95. Perhaps longer. Look at your family history to pick a good age. Don’t be too conservative. There is nothing worse than outliving your income.

With all your assumptions in place, you can now project your asset values and income statement out to your life expectancy. With these statements in hand, you can now realistically begin preparing your annual report. In you had a plan in place last year, you can gauge how well you have done from last year until now. You should be able to look at last year’s plan and see if your net worth has increased as you projected that it would. If it hasn’t, you’ll be able to identify what went wrong. It will either be that you didn’t earn what you thought you would, you spent more than you projected, or your assets didn’t perform as well as you predicted. With this information in hand, it’s easy to figure out a strategy to get back on track.

Developing your financial position is just the first part in your comprehensive financial plan. Income taxes, insurance, retirement planning, education planning, investment planning and estate planning are other elements you will want to include. As you can see, developing your comprehensive plan can take a lot of time and energy but in the end, will be well worth the effort.

If you choose to hire a fee-only financial planner to do the work, planning fees can range anywhere from ,000 to ,000 or even more if you go with a big name firm. For those who would prefer to try to do it on their own, there is a free resource that you can use. Visit Free Financial Planning Advice to see how to build your own plan. Whether you pay someone to do your plan or invest your own time to build it, the benefits you gain are sure to give you peace of mind.

Facts and fiction: The truth about women and investing
Financial Investments
"It's disappointing to hear that so few Canadian women have a documented financial plan. It's an essential way to ensure your investments are in line to help you reach your financial goals," says Cimoroni. "An advisor can help you develop a financial …

Financial Investments question by Tyler: Best way to become a financial/investment adviser?
I am currently 17 and have had a binge (6 months or so) of reading finance and investment books and constantly spark debates in my investment classes, against my teacher. It’s not just the books, I have always been this way just now I feel that money handling requires proper vigor and will and also the know-how. My question is: Since I am no-joke stumping adults with my admittedly ‘limited” insight, what is the best way to get into the financial/investment both quickly and with the best education?

Financial Investments best answer:

Answer by Tangent
A high GPA, a degree in finance and something else, and some people skills will put you head and shoulders above the rest of the people trying to become financial advisers. When you first get into college try and come up with a part time internship during the school year (paid or unpaid), then you might have some actual experience when applying for summer internships. If you do that you should have no problem at all becoming a salesman of financial products.