Financial Planning Fundamentals

A Common Misconception

We often hear that financial planning is a confusing term. Many people do not know what it means. In most cases, people think that financial planning is the same thing as investing, or investment management.  The idea is that financial planning means, "I give somebody my money to invest and their job is to make it grow." That may be well and good, but if your planning begins and ends with investing, you are left with your monthly statements and a lot of uncertainty about your future.

Although investing is usually a part of any long term plan, it is just a part of the process. Real planning can actually be much more valuable to you than using one investment strategy versus another. When you have completed the following four basics for your financial goals, you will have much more clarity and confidence about your future. Current events and market fluctuations just don't bother you as much when you know you have planned well.

Let's face it. You will need money to provide for yourself in retirement regardless of what happens in the world. Spend the time getting the planning right, so that you can have more confidence in your own financial future.

Controlling the Controllables

Most of financial planning is behavioral, and therefore completely controllable. You are in total control of your behaviors. Whether you save or spend your extra money. Did you insure against that risk? Are you investing long term? Or are you letting the news or your emotions influence your long term accounts? These are all in your control. Here are a four basic questions you should answer.

Do you know exactly what you will need?

You cannot succeed in meeting a financial goal that you don’t have.  It’s a number. Retirement funded? It’s a number. Buying that new property? It’s a number.  You need to be able to estimate accurately what those numbers will be before you begin.

Do you know how to most efficiently achieve your goal?

Achieving your financial goals will take work.  There will be specific, controllable behaviors that you will need to discipline yourself to complete. Discipline equals freedom, and those who follow the best financial habits tend to achieve their goals. 

Saving: How much will you need to invest to reach your goal?

Risk: How much risk can you handle on the way to that goal? If the goal is 20 years away, you can take more risk than for a goal due next year.

Investing discipline: The most successful investors stick to their strategy through thick and thin.  The temptation is to sell or change after periods of poor performance. Even great investments have periods of poor performance.  They tend to turn around though, and those who stick to their strategy and re-balance can experience recoveries.  Those who sell low and buy high tend to have worse long term performance.

Do You Stress Test your Plans for Emergencies?

Life happens.  Uncertainty exists everywhere, but your goals will remain.  To have a solid plan, you need to stress test your plans for common emergencies that can happen along your life’s journey.

1.       Long Term Disability: If you were disabled and could no longer continue your career, how would that change things? Does your plan mitigate this risk?

2.       Premature Death: If you or your spouse died in the next year, how would that change your plans? How can you mitigate this risk?

3.       Long Term Care needs: If you or your spouse were to need full time care due to aging or illness, how would that change your plans? How can you mitigate that risk?

4.       Bear markets in early retirement: What if there was a major decline in the stock markets immediately after you retire? How can you mitigate that risk?

Do you Know the Odds?

For every projection and situation, you should have a clear idea of your probability for success.  What is the percent chance of success if you follow strategy B vs strategy A?  Do you know? You should do this before every financial decision.

For help with your financial planning needs, contact us today at (847)299-8877 or visit our website at  www.athenaprivatewealth.com