Financial Planning 101: The Elements of a Sound Plan
- 2005 1 Apr
There's an old Yiddish proverb that says, "If you don't know where you are going, any road will take you there." A solid financial plan starts with a vision - a dream of where we want to go with our financial future. In other words, if you lack a vision you'll just waste all the money you earn and later in life, when you can no longer earn it at the same rate, you'll be sadly disappointed.
We meet with hundreds of families each year and a common question we receive is, "should the basis of our financial plan be to accumulate money or should it be more than that?" Although accumulating reserves is important, there must be more than that. Financial planning is actually contingency planning - "what if" planning. What if I die prematurely? What if I become disabled? What if I live for a long time? Financial planning is less about stashing away millions and more about being ready for circumstances.
But it clearly begins with a vision - a dream. Every dream is different. Find your dream, know your vision, and then build your plans accordingly. Set your sights on the important things in life. Don't neglect the financial issues that you face. You see, once you have a plan in place, it only requires routine maintenance. You don't have to worry about it every day and let it consume you.
Once you have a basic game plan, financial planning is a series of "what if" scenarios. The first "what if" is "what happens if I die?"
Most of us have family of some kind. Many of those family members are dependent upon you for their very existence. This is the reason we should do financial planning - to provide for our family.
"But if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel" 1 Timothy 5:8 (KJV).
But does that responsibility end at death? I don't believe it does. With the exception of people with acute illness, almost everyone can qualify for life insurance. You may even have coverage at work. Even people in dangerous occupations can purchase insurance, albeit at higher than normal rates. I am a huge believer in every person, man or woman, who has people dependent upon them to have an adequate amount of life insurance which will last for the duration of the need (unless of course, you have enough assets to provide for them).
How do you know which type of insurance to choose from? There are all sorts of choices. The best kind of insurance to own is the type which provides the right amount of coverage for the least amount of cost. If you only need coverage for 10 or 20 years, term insurance works great. If you need longer-term coverage or you want to use your insurance to accumulate assets without tax consequences, permanent products like whole life may be appropriate.
The key is to have the coverage and hope it is the worst investment you have ever made. Life insurance is just part of your planning for your death. A complete plan also includes having a will and a guardianship plan.
We also need to have an emergency plan - "what if we lose our job?"
Do you have a reserve fund in case you lose your job? If you lost your job right now, how long would your savings last?
Solomon said "moreover, no man knows when his hour will come. As fish are caught in a cruel net, or birds taken in a snare, so men are trapped by evil times that fall unexpectedly upon them" (Ecclesiastes 9:12 NLT). A big part of financial planning is to set aside funds in preparation of what we least expect will happen. You should set aside at least three to six months income in a non-risk, interest-bearing account. The best vehicle is a money market or short-term bond fund. You will want something without much risk where the emphasis is on the return of our capital, rather than the return on our capital. An emergency fund should not be part of your retirement plan.
These insights and recommendations are general. Please consult your financial advisor for personal recommendations.
Steve Scalici is the Vice President of Treasure Coast Financial, a financial planning firm in Stuart, FL. He is co-host of God's Money which can be heard weekdays at www.oneplace.com. He can also be reached at his website www.tcfin.com.