When you ask someone “what is financial planning?” their response will typically be one that pertains to investing or managing assets. If this happens to be your own response when answering this question, you are not wrong; however, it is only one piece of a larger puzzle. This larger puzzle is your life. We don’t know what the future has in store for us; however, we typically have goals and desires that we want to accomplish in our lives. Often, we may feel that poor financial decision making or “life” will get in the way of accomplishing these goals; however, that should not be the case. Financial planning is key because it is a process of outlining how your current financial picture looks today, and then stress-testing it as “life” happens tomorrow. Financial planning embodies five individual areas (listed below), and utilizes these areas to work in unison as you maneuver through life, accomplishing your goals or helping you make a financial decision that works best for you.
Insurance
Investment
Retirement
Taxes
Estate Planning
Now, let’s talk about each of these areas in a little more detail.
Insurance
Insurance is an area designed to protect the wealth that you are building. There are so many different types of insurance, it can be difficult to determine what type(s) of insurance you need, and how insured you need to be. Generally, most people will solicit advice on their life insurance needs and disability insurance needs (or reviewing their existing coverage). In addition to these coverages, it is also recommended to review the following types of insurance coverage:
Health Insurance
Even if you do not visit the doctor often, your employer may offer a high deductible plan. Enrolling in a high deductible plan through work will allow you to set up a Health Savings Account. By contributing to a Health Savings Account, you will be able to lower your taxable income. When it becomes time to withdraw the funds in your Health Savings Account for medical expenses, these withdrawals will be tax-free. Health insurance provides additional benefits as well, the above is just an example.
Auto Insurance
Automobile insurance coverage is also very important. Are you driving around in an expensive car, but have the state minimum liability limits? Trying to save a dollar or two in auto insurance coverage may cost you a lot more if you were to injure someone in a car accident.
Home/Renter’s Insurance
Reviewing your home insurance coverage or renter’s policy should also be done every so often. Do you know what your coverages are on those policies? If you own a home and a catastrophic event were to cause severe damage to it, the cost of repair may be more than your policy covers.
Long-Term Care Insurance
For those nearing retirement, do you have long-term care insurance? If not, do you have a plan for potential future long-term care needs? Once you are properly protected, then you can begin to grow your wealth through investing.
Investment
Investment is an area designed to increase your monetary wealth by saving the money you earn into an asset, and utilizing that asset to grow the amount of money that you have been putting away. Investment assets are tangible or intangible items obtained for producing additional income or held for speculation in anticipation of a future increase in value. Examples of investment assets include mutual funds, stocks, bonds, real estate, and retirement savings accounts such as 401(k)s and IRAs. Selecting the asset you want to use to accomplish the goals you have depends entirely on your individual situation. With investing, you may feel that you need to be doing everything in order to grow your wealth; however, I do not believe that is true. I believe that you have to do what you are comfortable with. At the end of the day, you want to be doing what you need to do to be able to accomplish the goals that you have, and that can be done in many different ways. Depending on how complex you make your investment strategy will determine the type of tax planning assistance you will need. As you are growing your assets, you may wonder whether or not you will ever have enough to retire, or if you will have enough to fund an unforeseeable expense. These questions can be answered through retirement planning.
Retirement
Retirement planning is not only used to show your retirement projection outcome, but it can also be used to help you make current financial decisions. The software tool used at Fortitude Financial Planning takes into consideration your current income, expenses, inflation assumptions, current bank account balances, and investments to make the projections. Based on that information, we have the ability to test different scenarios. For example, if you're interested in purchasing a new car, the software can provide a hypothetical of how it may impact your retirement. Or if you have children and want to help pay for college, the tool can account for that. Depending on which specific software the financial planner is using, they have the ability to show tax projections or the tax implications for certain financial decisions.
Taxes
The tax area of financial planning is designed more around tax planning strategies than completing tax returns. The purpose behind this area is to make sure that any investment decisions or cash flow financial decisions made do not have adverse tax consequences. If a negative result is inevitable, based on a decision that was made, then the goal is to mitigate the effects as much as possible.
Now, suppose your financial planner is a CPA (Certified Public Accountant), tax attorney, or EA (Enrolled Agent); in that case, these individuals may offer tax preparation (completing tax returns) as a service, while also having the ability to represent you before the IRS when dealing with an audit, payment, or collection issue. Historically, financial planners have kept tax preparation separate from tax planning. This same concept applies to estate planning and attorneys.
Estate Planning
Estate planning is an area designed to help protect the wealth you are accumulating, such as ensuring that you have the correct designation beneficiaries on your retirement accounts (IRAs or Roth IRAs) and employer-sponsored retirement plans. Additionally, estate planning allows you to dictate where or to whom you want that wealth to go. For example, estate planning ensures that you have a will, living will, healthcare power of attorney, etc. Although financial planners are legally not able to write up the paperwork unless they are licensed attorneys, they can assist by keeping you accountable and making sure you are on the right track.
If you were unsure of what financial planning was, or if you assumed that financial planning was all about investments, I hope that this blog provided better insight into financial planning. I truly consider financial planning my passion, and have seen the powerful impact that it can have on a person’s life. If this post has inspired you to want to learn more about how financial planning can positively impact you, please feel free to reach out to schedule a 30-minute free consultation with me. I'd be more than happy to speak with you and see how I can assist you.
Sincerely,
Travis Tracy, CFP®, EA