Money flows through almost every aspect of your life. Whenever your job, family, or property changes, for better or worse, your financial picture changes, too. This means your financial plan must constantly evolve.
This begs the question: What does a financial plan actually do for you? Do you need a financial plan? Or do you have financial need? planning?
It is wise to recognize that there is a difference between getting a one-time financial plan and hiring a financial advisor to provide ongoing financial planning.. Understanding this distinction can help you avoid costly mistakes and get the right level of guidance.
What is and what is not a one-time financial plan?
First, let’s discuss the purpose and benefits of a one-time financial plan.
At its core, a one-time financial plan aims to provide a detailed picture of your current financial situation. Think of a plan as a snapshot of a point in time that shows the state of your overall financial health. Having an accurate, up-to-date and detailed picture of your financial situation can be very useful.
A one-time financial plan can be especially valuable when you’re faced with a life-changing or complex money decision, such as taking advantage of Social Security benefits, buying a home in a high-interest rate environment, deciding whether to fund a Roth IRA. or increase your 401(k) contributions, invest in a rental property, evaluate your insurance needs, or sell your business.
For those preparing to leave the workforce, it is crucial to make a plan to determine whether you can afford to retire. He or she can also guide you through a variety of retirement decisions, such as choosing an annuity, evaluating long-term care options, and planning around RMDs and Roth IRA conversions.
That’s why a one-time financial plan is most valuable when you’re faced with a big financial decision. However, it is an evaluation limited only to your current situation. Herein lies the danger.
People get into trouble using a one-time financial plan because they think it will guide their financial future. This is not a road map. A one-time financial plan is a snapshot, whereas your life is a movie.
The danger of a one-time financial plan
Unlike a static financial plan, ongoing financial planning is dynamic. Your personal financial life is constantly changing, and so is the overall market and economy. As a result, your one-time financial plan has a shelf life. It gets stale after a while.
If you consult an outdated financial plan, you run the risk of making wrong decisions based on outdated information. You may also miss opportunities that have arisen since your plan was created. Your outdated financial plan no longer reflects your life circumstances or addresses the decisions you need to make for your new life. For example, the investments recommended to you in your old plan may no longer be the best option for you.
If you’re considering a one-off financial plan, carefully weigh the benefits and drawbacks. And if you decide to do this, consult a qualified fee-only financial advisor who can provide a plan based on your (and your family’s) entire financial picture.
People often ask advisors for a “financial plan”; This plan serves as an up-to-date evaluation even when it contains investment advice. But what you may really need is guidance with advice; This is something that one-time plans cannot provide.
Retirement planning, for example, requires periodically stress-testing all of your current and future cash flow assumptions using a variety of possible scenarios so you can correct course knowing your circumstances have changed. Engaging with a fiduciary advisor for comprehensive ongoing financial planning (and investment strategy) will help you stay on track to achieve your desired outcome.
One-time financial plan etc. ongoing financial planning
What most people need as they progress through their financial journey is a planning process that adapts as they go. Whether you do the planning yourself or seek help from a professional, the important thing is that you can see for yourself how you won’t run out of money once you stop working.
While a one-time financial snapshot usually means paying a one-time fee to the advisor, ongoing financial planning involves a life plan that comes with investment advice for an annual fee. Think of it as the difference between 2D and 3D views of your financial life.
Ongoing financial planning means you have a partner in your financial decision-making process and a dynamic financial plan that adapts to changes in your cash flows, interest rates, investments, taxes, income, and home life. Beyond the numbers, an experienced financial advisor can help you manage change and avoid emotional decisions when markets are down. For couples, an advisor can be a valuable third party to help them communicate and get on the same page financially.
Financial planning is especially valuable for people with complex financial situations. This includes people approaching retirement, those with significant tax planning needs, or those experiencing a major life change such as an inheritance, marriage, divorce, or birth of a child. Solid and detailed financial planning, when done correctly, should give you confidence and peace of mind.
The biggest misconception about ongoing financial planning is that you have to be rich to afford it. There are highly qualified financial advisors who work with clients at all income and wealth levels. They may spend several hours a year collaborating, educating, and talking through your investment and planning decisions. Many work with clients for only a few hundred dollars a year.
If you are considering hiring a financial advisor, be sure to choose someone who is fiduciary and fee-only; This means they are legally obliged to act in your best interests and do not receive kickbacks (or kickbacks) from third parties. parts. Your advisor should work directly and only for you. (To learn more about advisor fees, see my article Should I Pay Financial Advisors and Assets Under Management Fees?)