In this episode, I reveal the mysteries around financial planning: What it means, what it can do for you, and what the process looks like. I also discuss the problem with simply knowing or researching things rather than using information to implement in your own life.
More specifically, I discuss:
- What is Financial Planning? – Personal/Retirement
- What Are The Steps to Creating a Financial Plan?
- Examples of What to Consider When Creating Your Plan
- The Implementation of Information and Strategies
- What Can Financial Planning Do For You?
Resources From This Episode:
The Key Moments In This Episode Are:
00:00:50 - Types of Financial Planning
00:02:17 - The Purpose of Financial Planning
00:04:58 - The Process of Financial Planning
00:09:07 - Importance of Getting Organized
00:14:37 - The Importance of Open-Mindedness in Financial Planning
00:14:59 - The Sign of a Completed Plan
00:15:51 - The Most Important Step: Implementation
00:17:23 - The Value of Assistance in Staying Consistent
00:19:01 - Continuous Monitoring and Course Correction
Do you ever wonder what in the world financial planning actually means or what the process looks like? Are you one of those people whose financial plan is to simply hope that everything works out in the end? If so, this episode's for you.
Hello and welcome to Retired-ish. I'm Cameron Valadez, certified financial planner, and today we are answering the mythical question: what is financial planning? But more importantly, why should you care? What can financial planning actually do for you?
I'm sure at some point in your life, you've thought up some sort of goal in your head and had to do some math and other planning around how to fund that goal. Whether it be to buy a new car, a boat, a home, maybe a second home, fund your child's wedding, pay for aging parents' care, start a business, et cetera. If you've done any of those things, you've at least experienced some basic level of financial planning. However, no one says, hey, I'm going to go buy a new car, but I have to do my financial planning first. It's rare that you hear the term, but when you do, it sounds so vague and mythical.
What does it really mean when someone goes through financial planning? For starters, financial planning is a very general topic until you distill it down to your top priorities and goals. If you want to plan for retirement and you want to make sure you have enough income and don't run out of money before you pass, that's a goal. And that's a form of financial planning that we'll call retirement planning. Do you plan on creating a real estate empire over the next 15 years?
Do you want to plan to open a business or maybe sell your business and create a lasting financial legacy from it? Do you want to plan to send your three young children or grandchildren to college? These can all be goals in what would be called your personal financial plan. So in the context of our discussion today, I will refer to personal financial planning and retirement planning since these are the two most common forms. However, all aspects of financial planning essentially follow the same process.
In a nutshell, financial planning is an organized process or framework to implement in order to help you strive to make the best possible financial and life decisions for the various goals that you will have. In other words, it's a way to avoid surprises. It is not a piece of paper or a bunch of papers stapled together that essentially try to tell you exactly what your financial future will look like. Our lives are not static. Financial planning is dynamic in that right after you begin to plan to tackle a goal that you've set, life smacks you in the face, and you inevitably veer off course.
More often than not, we kick ourselves off course. Why? Because we're humans, sometimes we make lizard-brain decisions that are not in our best interest. How many times have you regretted a decision that you've made? What about a financial one?
All the time, I bet. Bought that expensive Peloton bike. Used it three times. Bought the super expensive car, although it gets you from point A to point B, just like the cheaper cars. And after the first two weeks, nobody compliments your car anymore anyways. Withdraw early from your retirement account, which is supposed to be for retirement. You get the point.
The crux of financial planning is to give our lives and our brains a compass to turn back to when life changes in order to keep us in the general range of meeting our desired goals. When it comes to financial goals, it helps us to quantify them, and it also helps us reveal existing financial problems that we may already have that will also impede those goals. A prime example of this is the goal that most people have, which is to retire at a fairly reasonable age and have enough income to live off for the rest of our life.
But the initial thought of the goal is where most people stop because thinking beyond that and doing something about it, what I call implementing, is typically daunting because there are bound to be so many obstacles in the way. If I want to set a goal to retire at age 62, well, I need to figure out how much money I will need. What kind of life do I and possibly my spouse want to live? How much will we spend? How much will things cost 20 years from now?
What about taxes now versus when I'm in retirement? What if I get disabled along the way or lose my job? I have kids. How can I possibly save for retirement? What if my spouse predeceases me?
What if I need around-the-clock care in my home? While definitely not an all-encompassing list, these are all very possible and common scenarios and obstacles that we all may face. You also never know when some of these things might occur. This is the power of financial planning. You can create a plan that outlines what you need to start doing to strive for that ultimate goal or that top priority.
But you'll also be able to address the possible outcomes along the way. While life is operating as usual and things are good, you stick to your plan and the key action items you need to do year in and year out. But when the inevitable obstacle or crisis comes your way, you can refer back to the plan and make the necessary adjustments. Okay, so let's talk about the framework or the process of financial planning that I mentioned earlier. The process of personal financial planning is both an art and a science.
The artistic element comes into play because we're talking about money, which is emotional. If we all made the most rational money decisions, we'd all be financially successful. Therefore, when we plan, we have to be cognizant of our own behavior around money. And what about money is important to us? How might my emotions get in the way of carrying out the various financial decisions that my plan tells me to make?
You can have the best financial plan in the world, but if you can't stick to it and implement it, it's absolutely meaningless. Again, this is the artistic piece of planning equally, if not more important than the science or the rational component. Now, the science of planning lies in the actual step-by-step process that you will need to go through. The textbook financial planning process consists of multiple steps. The process is the same for everyone, but the goals and the roads to get there will be different for all.
Let's take some time to go through the scientific part or the general financial planning steps so that you can learn how to get started doing some of the meaningful planning work for yourself. Step one is to develop goals that you would like to work towards, and most importantly, you need to write them down. You want to be able to quantify the financial goal in terms of dollars and within the defined time frame that you want to meet that goal. An example might be I want to retire in ten years at age 60 with my mortgage fully paid off and $9,000 a month in after-tax income provided by my retirement savings alone, not counting any potential Social Security. Assuming there was a reasonable amount of retirement savings by age 50, this can be a reasonable goal.
An example of a goal that's not specific enough would be something like I want to become semiretired by age 55 by selling my business or stepping away from it and living off some of the proceeds. Now, this is very vague. It leaves too many questions. How would you value your business at that time? Who will buy it?
Will there be a ready buyer at the time that you want to step away or sell it? What would you expect to receive? What would be the tax ramifications? And will you have other income sources in addition to the sale proceeds? The list goes on.
The point is that goals that are not specific, measurable, realistic, and timely are far less likely to be achievable. Then you'll want to prioritize these goals based on how important they are to you. Ideally, try to focus on three or less at a time. When you have more than three, they get harder to manage. Now, step two is to identify what you already have and what you have done so far and then get that organized.
Before you're able to begin building your plan, you need to fully understand where you're already at. It's like when you look at one of those maps in a mall or something, and it says you are here. To do this, you should essentially create your own simplified household balance sheet, which is simply a list of the things that you own and the things that you owe. Otherwise known as your assets and your debts or liabilities. You'll also want some sort of cash flow statement or sheet, which essentially breaks down all of your income sources and all of your expenses.
So everything that comes into the household and everything that goes out. When creating that cash flow sheet, you want to be sure to include any active savings you already do, such as into a 401(k) plan or even savings into something like a savings account. Those could be looked at as an expense, even though they are building up the assets on your balance sheet. Try to make sure you get these two things done before moving on to the next steps. They're so critical to have completed and updated.
From there, you'll also want to know what types of insurance policies do you have and for how much. What do they cover? What don't they cover? These will come in handy when managing the risks of your plan. You'll want to gather everything else relevant to your goals. Some examples might be details of future pension benefits, maybe some potential stock awards or business interests, pets, wills, specific investment information, powers of attorney, employee benefits, et cetera.
Now, once you think you've identified everything, you need to get it organized in a way that's easily trackable and accessible. I can't stress this enough. Have you ever had something come up where you had to use maybe your home warranty or even need to file a claim under your homeowner's insurance? But then you realize you have no idea how it works, where it is, what the deductibles are, and the other costs to you, or even if the thing you want to call or make a claim about if it's even covered? I'm sure you have.
And I'm sure like I said, you couldn't even find the policy either. That's why getting organized is so crucial. When the plan gets off track, you will need to be able to quickly get back on. There's no right or wrong way to get organized. Everyone's different, and they have their own preferences.
I'll give you an example, though. At my firm, Planable Wealth, we keep copies of our client's vital information to their plan, and most importantly, we can provide back to them a picture of their entire financial lives on one single simplified page. Aim for simplicity. The simpler, the better. In fact, if that sounds like something that you want, I'll put a link in today's show notes where you can begin building one of those pages or maps, I call them, for yourself. And we can help you finish it with the fine details later if you'd like.
Step three is to analyze and evaluate. Take a look at your current situation once you have a foundation in front of you, and look for the low-hanging fruit. What are the current strengths and weaknesses of what you're currently doing or not doing? For example, maybe your top goal is saving enough for retirement, and you've been saving heavily and accumulated a fairly large balance, which is fantastic, but because of that, maybe you live paycheck to paycheck. In that case, look at your emergency fund. Is there one? Is it adequately funded? What if you suddenly need to purchase a new vehicle due to the transmission going caput?
Will you have to make premature withdrawals from your retirement savings and incur taxes and penalties to solve that issue, which would cost maybe an extra 30% or so? Will you have to use credit cards or loans with 20-plus percent interest rates? Or do you have an adequate emergency fund to take care of it with no extra penalties or costs? If you identify that you don't have adequate cash to access quickly, maybe that tells you to pare back on the retirement savings until you beef up your emergency fund first, then refocus on the retirement savings. These are the little things that you can spot by just getting things organized first.
You have to analyze what you have and what you don't have. Identifying something similar to that example can help prevent you from running into that major obstacle later, which would derail you from your plan. A second example could be that maybe you want to explore retiring early, say around age 54. In a case like this, you'll want to look at how you will get your health care coverage. You won't be eligible for Medicare for another eleven years or so at age 65, so you'll either have to go to the health insurance marketplace and pay through the nose for eleven years for okay coverage or get coverage through your spouse's employer plan, and that's if they have one and if they don't retire early with you.
If you have to go to the health insurance marketplace, you may need to increase your projected retirement living costs for those eleven years due to high insurance premiums and coinsurance if something catastrophic happens. What if you or your spouse need in-home care four days a week in your early 80s? Where will the money come from? Health insurance doesn't cover that. This evaluation step is a good time to analyze whether or not you have done a particular thing you know you need to do, or maybe you simply need to adjust something you already have going.
Regardless, write it down as an action item. Later on, you can prioritize those action items. For example, if you have a lackluster household balance sheet and haven't done any budgeting or cash flow from step number two, write that down as an action item and maybe place a priority on that since you can use it to get a clearer picture during this step of analyzing and evaluating. Step four is to develop your financial plan and revisit your objectives and current picture of what you have and what you might be missing. Come up with calculated yet reasonable action items that will progress you toward your various goals within the given time frames. Come up with thoughtful and reasonable strategies or solutions to the issues you face now and may face in the future that could take you off track.
This is typically the part where you will likely spend copious amounts of time researching and calculating things. Without highly specialized financial planning software, this can get cumbersome, but it is still very possible. For example, you found a way to withdraw a sufficient amount from your retirement nest egg while legally paying the least amount in tax as possible over the rest of your lifetime. And if you ever needed a lump sum of money at any given point, which you will, you can get access to it with little to no tax implications or penalties of any kind. The key thing to understand here is that there will almost always be more than one way or strategy to choose to pursue a particular goal that you have.
Very rarely in financial planning are there black-and-white answers to something unless it's a very technical situation. So when developing your plan, don't just accept going down the first road you discover. Be open-minded. See if there's an alternative route to go as well. Then evaluate the pros and cons of each and take the road that you're most likely to stick to and feel comfortable with in the long run.
You'll know you're done with developing your plan when you're encouraged or highly motivated to act on it. You should have enough confidence in your planning so far that you're itching to get it done. However, if you've done a bunch of work and now you're just bored staring at a bunch of numbers scattered all over several pages on your kitchen table, you're not done. The trick here is not to create something that is too massive and opaque. Your action plan should be clear yet succinct.
Otherwise, it may be way too overwhelming to implement, which is our next step. At this point, you should have all of your work distilled down to one single page of action items for you to tackle at or along specific time frames. Okay, so as I mentioned, step five is to implement your plan. This is the most important step of all. People hate planning because it can be time-consuming and boring.
I get it. But that's also because most people don't actually carry out their plans and finish the process to see the fruits of their labor. They don't know what that process feels like. They are just stuck living in constant flux and chaos, letting the outside world control what happens next in their life versus taking control. That's why this is the most important step.
No positive changes in your financial life will ever happen unless you actually do something about it. You can go Google everything there is to know and waste hours of your time learning how to retire. Go ahead, knock yourself out. If you don't act on the things that you learn, you simply wasted time and acted like you were being productive. Don't be that person.
It's kind of like having a reality check visit at the doctor's office. They told you your blood work is a mess, and you need to get healthier. You know, intuitively, that means eating better and exercising. But guess what? It's still hard to do.
You have to make the time to exercise. You have to make the time to cook. You have to go to the gym or the grocery store more often. You make the excuse you need to have a gym at your house because you don't have the time to go to one. But then you use it for two weeks, and you stop.
But if you find a way to stay consistent, it absolutely changes your life for the better. Financial planning is much of the same. The really impactful things in life are hard but fruitful. A lot of people that are honest with themselves know that they need some kind of motivation or assistance to get them to start doing these things and to keep doing them on a consistent basis.
That's why people hire trainers or go to CrossFit. They want the workouts designed for them so they don't have to think, or they don't have to spend time doing that. They can just show up and do whatever it is. Or for eating healthier, it's why people find those meal prep services where you can have healthy meals cooked for you, and then they get them delivered, or you pick them up. Whatever the case is. You know what food you need to buy and cook. But be honest, are you going to cook it?
And how long before you're tired of your bland version of the food for the 15th time in a row before you order pizza instead? Those meals typically change things up so you don't get bored with it, and you stick to it. And this can be extremely valuable by keeping you consistent long enough to see changes. Again, financial planning is much of the same. You can absolutely do it yourself, but if you don't have the drive, the desire, or know how to develop a plan, or you know, you just won't stick to it because life keeps happening to you, be honest with yourself and get someone to help you implement and stay on track.
This is what financial planners are for. They develop and implement plans alongside you to try to help you get real outcomes that can change your financial life for the better and spend less time and stress about money and more time spent doing what you love with the people you love. You have to decide what is valuable to you. Google and Chat GPT are not going to change your life for you. I don't know who coined this phrase, but I found it rings true in many aspects of life.
If you want to go fast, go alone. If you want to go far, go together. And this leads me to the last step of the planning process, which is to monitor your plan. Step six. Monitoring your financial plan has to do with all of that talk about staying consistent. Whatever you decide to implement, you have to stick to it.
In addition, you should continuously monitor your progress, or lack thereof, to determine whether or not the strategies and the path that you chose were even a good decision. I will caution you, however, that many of the life-changing concepts and goals that people have as it relates to financial planning or retirement planning, they are long-term goals. So if you monitor it too often, you may feel like something's not working when it really is, and there's nothing wrong with what you're doing. Just keep in mind what you're tracking and be realistic about the time frame you originally attributed to whatever goal you have.
I'd say keep an eye on it and make any necessary adjustments maybe two to three times a year. And guess what? A lot of times, you won't make any adjustments. Sometimes the right decision is to just keep doing what you're doing. A good analogy I think of when it comes to this is when a plane takes off across the country.
If the plane is just one foot off left or right of its intended direction at the start of the flight, it will likely end up hundreds of miles off at the other end of the country in a completely different state than intended. That is unless it adjusts its course along the way, and that doesn't include obstacles along the way like wind or other planes. Same for you and your financial planning. If you don't consistently get back on a course or even realize if you're off course at any given time, you will likely end up in a far different place than you imagined. One easy way to monitor your plan is to make sure you have a continuously updated household balance sheet.
Remember, this is a visual of your assets and your liabilities at a given moment in time. And you'll also want that cash flow statement or sheet which shows all of the money coming into your household and all of the money going out. If you keep these two things updated every six months or so, you can easily see your progress financially. Again, that's why I stress the importance of having these at the ready. So why should you care to go through such detailed planning? Well, the answer is simple.
It is a framework to help you make the best possible decisions with the information you currently have at your disposal and reasonable expectations going forward. More importantly, it is a forcing mechanism to make you realize what strengths you have to your plan and what weaknesses you have so that you can address them. For example, you may be great at saving for retirement, but if you don't have any risk management in place, if you were to lose your job, become disabled, maybe lose your spouse, or get sued, if someone gets hurt by your pool out back, et cetera, then your plan is exposed to failure. Financial planning is a process that, when completed, implemented, and monitored, can provide you with ease when making future financial decisions and less day-to-day stress about financial arguments with your spouse, not to mention the positive financial impact you'll have by being better at accumulating wealth and saving in taxes which can compound to be hundreds of thousands of dollars or more over a lifetime.
Now, that does it for today's show. If you have more questions regarding financial planning or retirement planning that weren't answered on today's episode, feel free to ask me a question on Retiredishpodcast.com. You can go to the Ask a Question page at the top. I will also include a link in the show notes for today's episode and ask a question. I will do my best to answer it in a future episode. If you have a minute and find this information actionable and insightful, and you want to stay up to date on the latest and useful retirement planning content, please subscribe to or follow the show on your podcast app.
If you'd like to learn more about the rules and the strategies discussed in today's episode, you can find links to the resources we have provided in the show notes on your podcast app, or you can visit us at Retiredishpodcast.com/25. There, you can also sign up for our monthly Retired-ish newsletter, where each month, we discuss money and emotions, investing, tax reduction strategies, estate tips, Medicare and Social Security, long-term care planning, and even a brief discussion about the current markets in layman's terms and what it means to you. We always include something actionable in our newsletters so that you can implement something right away, such as how-to guides and other simplified strategies. Again, this can all be found at Retiredishpodcast.com/25. Thanks again for tuning in and following along. See you next time on Retired-ish.
00:23:14 - Disclaimer
Securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA, SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.
In addition, if you are required to take a required minimum distribution, RMD, in the year you convert, you must do so before converting to a Roth IRA. Investing involves risk, including the potential loss of principle. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and change in price. Government bonds and treasury bills are guaranteed by the US government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value.
Treasury inflation-protected securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes a more sensitive to price declines associated with higher interest rates. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free, but other state and local taxes may apply. If sold prior to maturity, capital gain tax could apply.
Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.
Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk.