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Financial Planning - The Basics

a "Down to Earth about Financial Matters" column

This month, we are going to discuss the basics of a financial plan.  A simple way to look at this is by asking yourself or with your partner, a few simple questions.  What do I want my life to be like in the short term (less than 2 years), in the medium term (3-5 years) and in the long term (more 6 years and beyond.  You also will look at your values.  Where do charitable organizations, financial help for your children, travel, continuous education, build wealth, or have a comfortable retirement fit into your priorities?  Once you have started to ask these questions and looked at your answers, the process can start. 

Financial Plans include setting financial priories, property insurance, personal insurance, asset building, debt strategies, credit strategies, retirement planning, planning for education both for you and your family, budgeting or cash flow management and estate planning.  One of the most important factors is the amount of time you have to reach your goals.  Age 64 is not a great age to start saving for retirement at age 65!

This is definitely an area where one size can not fit all.  Everyone has different views on how they are willing to live their lives, what kinds of risks they are willing to take and how they handle things going wrong.   One key element is finding that right balance for you between living today (your day to day needs) and preparing for the future.

A good financial plan will allow for the bumps in the road but they will not stop them from happening at the worst possible time.  What it does is gives you the start of a road map to move you towards your personal destination. 

So, where do you start?  The first step is to gather all the information about where you are today.  This will include your savings, your assets, your debts, your insurance coverage for your assets & illness & death and liabilities, your employer’s group coverage, your current cash flow and assess the risks you might face.  In dealing with the risks, they can include the stability of your employment, your health and the family history of health, your lifestyle.  For example, are you going off road at high speed on an ATV regularly or do you only participate in organized sports?  Do you have unhealthy addictions; one of the most common is smoking. 

Lastly, what is your financial risk tolerance?  I was once asked what investment will give me the best possible return.  My answer was a one dollar lottery ticket.  You can get a return of 25,000% but the odds are you will lose your dollar and get nothing.  That is what is meant by risk and reward.  The higher the likelihood of losing everything, higher the potential return.  The less risk then the lower the reward.  That same dollar, if put in a savings account might be worth $1.03 in a year.  Not much of a reward but you are very unlikely to lose the dollar.

Once you know where you are, what is important to you, what you have to work with and the risks you are willing to deal with, you have the basic tools to make a comprehensive financial plan that fits you.  Next months we will go through asset building, investment choices, debt strategies, insurance, budgeting, retirement planning, and estate planning.  We will also talk about tax planning, whether you want to have the help of a planner or are you a do it yourself type.  We will also talk about how to move from a dream to a goal.

Bill Chapman
Northern Credit Union

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