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Financial planning provides a comprehensive analysis of your complete financial situation. It considers the totality of your resources, income, and obligations. Perhaps the greatest benefit of financial planning is its ability to illuminate potential opportunities that might otherwise go undetected. In this same way, financial planning can reveal hidden obstacles that could stand in the way of your financial progress. In this article we’ll discuss some of the initial steps in the planning process, take you a little bit further down the planning path, and show you how to put some of your extra money to work.

If you haven’t read the first piece in this two-part series and would like to get caught up, go ahead and do that before reading further.

Consider the Horizon Before Looking Beyond it

Before planning for far-off consumption goals, like retirement or creating a legacy for heirs, you should take a close look at your current situation. Do you have sufficient resources to handle an unexpected expense? If not, then a good place to start – before you do any long-term planning – is to establish an emergency fund.

Many financial planners regard this as the foundation of the bridge that takes you from where you are today to where you want to be in the future.

This is because things happen in life that are unpredictable, and sometimes expensive. Having an emergency fund allows you to prepare for completely unexpected expenses that…if paid for out of your long-term savings and investments…could postpone or even derail future high-priority consumption goals.

It is important that your emergency fund remain separate from other short-term savings accounts you may have. For example, it should be separate from and in addition to a vacation fund. That can be one of your goals. But the objective of financial planning is to fund your goals and not sacrifice them because of poor planning.

Not having an emergency fund is poor planning. And it is important to remember that if you have to use it, you must also make it a priority to replenish it.

Establishing an Emergency Fund: The Five Things to Consider

There are five questions to ask yourself as you build your emergency fund.

1)      How long will it take me to save three to six months of income?

2)      What can I do to offset lost income?

3)      How much flexibility do I have?

4)      How will I pay for healthcare?

5)      What resources are available to help me?

If you work in a specialized field or have an executive position, it could take longer to find a similar job. For some, the search could last more than a year. You need to factor this in when estimating the size of your emergency fund.

Factor in any transportable skills you have that might help you earn temporary income if you lose your permanent job.

If your lifestyle is flexible and you can comfortably live on less income, that will have an impact of how much you could have in your emergency fund. Also consider how a career change, or moving to a new location, will impact the fund.

Consider the cost of your healthcare and factor in the career options available to you.

Use sound judgment when reaching out for help, if necessary. It is important to know where you can turn in a pinch…not just for money.

Balancing Assets and Liabilities

Once you have an emergency fund in place it is time to focus on managing your balance sheet. This might include removing debt before investing. Financial planners debate which to prioritize.

You should consider the numbers in the context of your individual situation. There is a tradeoff between decreasing debt (and other monthly obligations) and increasing investments.

One rule of thumb is to keep your total housing expenses (mortgage, tax, and insurance) under 28 percent of your gross pay. Some financial planners suggest that the ratio of your total debt (excluding housing expenses) to income should be less than 20 percent of your take home pay.

Why it is Important to Know Your Credit Score

Make sure your credit score is accurate. Review it periodically. If there are any errors, address them immediately. Maintaining a good credit history directly impacts the rates at which you can borrow.

Make a list of everything you owe and the terms of each obligation. If you feel you have too much debt, plan to reduce it.

One school of thought suggests paying off the lowest balance first. Another says pay the highest interest rate first. What is most important is to have a plan you can follow. After getting your debts under control, you can focus on investing towards your goals. The sooner you do this, the more power your investing will have.

Consider Investments Conceptually

Many financial planners suggest that you think of your investments as residing in different buckets: preservation of capital, current income, and growth. There is variation within each bucket. But, in general, what will make an investment appropriate for a given bucket is:

  • Your age
  • Your specific goals
  • The timing of your goals
  • Where you are in life
  • Your financial wherewithal
  • Other circumstances unique to you

Seek to Optimize Retirement Savings

Just as financial planning helps you to differentiate your consumption goals in terms of timing and priority, the investment strategy you use to finance those goals should likewise be differentiated. This is especially the case with retirement planning.

Investments earmarked to fund retirement can be optimized when made in qualified accounts rather than in taxable accounts. A 401(k) or the government’s TSP program are great examples. They allow investment growth to remain untaxed until used.

Your employer’s qualified retirement plan is the optimal starting point and is where the bulk of your retirement assets should be concentrated. This is because contribution limits in a 401(k) and TSP are typically higher than they are in either a traditional IRA or a Roth IRA.

There are income limits on both types of IRAs, but under certain circumstances they can complement the savings in your employer’s plan.

For more help getting started, members are encouraged to run some what-if scenarios using Victory Capital’s tools and calculators. Or contact a Member Service Representative for more clarification of any of the topics introduced above.

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We are proud to serve your investment needs. Our Member Service Representatives are available to provide portfolio planning, college savings services and general investment guidance. Please contact us. We’re here to help you find the right investment solutions for you, your family and your future.

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