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Many people have heard the term “Financial Planning” without really understanding what it actually means. Some believe that financial plans are appropriate only for the very wealthy. The fact is that anyone who wishes to attain something in the future can benefit from a financial plan. The reason for this is that financial planning provides a roadmap to the most efficient route to attain future financial goals.

Simple Memo to Complicated Report

One’s financial plan can range from a simple list of goals and budget on a spreadsheet to a detailed accounting prepared by a team of professionals. It can range in cost from a few hundred dollars to tens of thousands. It all depends on the complexity.

A financial plan details your present economic condition and lays out the action items necessary to get you to a desired future monetary outcome. Having a plan also acts as a safeguard against an unscrupulous advisor selling you something unsuitable. This is because proper financial planning focuses on specific topics.

Put to Paper or Etched in Stone

A common misconception about financial planning is that it must be rigid. It shouldn’t be. A plan should be a fluid document that gets reviewed and adjusted annually, or whenever important life events occur. Planning is intended to help you clarify goals and outline the steps necessary to achieve them. It also helps you better prepare for life events, including:

  • Getting married
  • Having a baby
  • Buying a house
  • Changing jobs
  • Starting a business
  • Retiring

General George Patton once said, “A good plan executed now is better than the perfect plan executed later.”

Your plan doesn’t need to be perfected at inception. It can be adjusted as conditions dictate. To paraphrase Patton: have a plan, act on it, and adjust as needed. The real value of financial planning comes directly from the actions it prompts you to take in order to get you where you want to go.

The Financial Planning Process

Before beginning, it is important that you not be intimidated by the financial planning process. The financial planning process begins with articulating your goals. After that, an evaluation of your current financial situation is in order. This is to gain an understanding of whether stated goals are attainable. If not, it’s time to assess the gaps and determine what strategies can be deployed to fill them.

In the context of financial planning, “goals” are financial goals. There could be many of them. Each should be assessed separately. The planning process should begin with goals of a general nature:

  • Want to buy a house
  • Want to retire at age 65

Then, the focus should get more specific:

  • Four bedrooms, three baths
  • In Florida, on the water

The more specificity around goals, the greater the need for a definitive means of measuring progress toward them. This could mean that goals or funding strategies get adjusted. A financial plan is a fluid document after all.

Each goal should have its own time frame regarding specific funding strategies. In other words, the plan should articulate how long it will take to accumulate enough money to fully finance a given goal. Likewise, the plan should account for the duration of such goals.

For example, a car can be paid for instantly after saving up for it. But you could spend years, if not decades, in retirement. This would require having sufficient funds available over that same time frame.

After some goals are in place, you should reassess your current economic situation. Purposeful planning requires honesty. You have to take a solid inventory of where you are now. From there you can make some assumptions about where you will be if current trends continue. This will require some forecasting.

The projections you make in a financial plan should be conservative. It is better to err on the side of caution than to be overly optimistic about the future. The questions to ask while performing this financial forecast are:

  • How much can I save with future income?
  • How will my earnings change over time?
  • What toll will inflation take?
  • What retirement benefits will I have?
  • How will my investments behave?

The next step in the process is to address any potential gaps between your current financial position and where it needs to be. Filling in gaps with specific action items for each goal can improve the odds of achieving them. Each action item requires a specific financial strategy for funding each goal.

Implementing the Financial Plan

Implementing a financial plan means budgeting and continually saving sufficient dollars to see the plan come to fruition. In this regard, financial planning forces you to understand where all your money goes. This doesn’t mean that you must sacrifice entertainment. It simply means that you must be aware of how satisfying current consumption desires could impact your future financial goals.

If saving is problematic, you should create a spending log. This will illustrate potential saving opportunities. Any areas that can be scaled back, should be. Those incremental dollars can then be reallocated to savings and help put you closer to meeting future consumption goals.

Saving for far-off goals can be optimized using different investment vehicles.  Mutual Funds provide an excellent opportunity for you to diversify your portfolio and to structure it so that its asset allocation is aligned with your investment horizons and risk tolerance.

Bear in mind that mutual funds have different types of risk than a bank savings account. But they may offer returns that could help you more efficiently achieve your specific goals.

Get in the habit of regularly and routinely revisiting your financial plan. Continue running various “what-if” scenarios. By comparing potential future outcomes against one another you can gain insight into the timing and priority of different goals.

This is the core benefit of financial planning. And it is as valuable to someone who is very rich as it is to a person who aspires to be.

For more help getting started, members are encouraged to run some what-if scenarios using Victory Capital’s tools and calculators. To learn more about financial planning, read the next article in this series. 

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