October is Financial Planning Month. Getting someone to be excited about that is like trying to get your 12-year-old (or me for that matter) to eat their brussels sprouts. However, I love this month as I think it’s a great time to review the fundamentals of finances, discuss the benefits of having a plan and review the fundamentals when it comes to your finances. It doesn’t matter where you are, there is never a bad time to assess your current situation and look at how you can improve moving forward. Below I will discuss a few things that I feel are crucial in your plan and your process.
Build the Foundation
As I said, there is never a bad time to assess your finances. The foundational pieces are relatively simple … how much money is coming, how much is going out, where is it going and how much longer does it have to go. To accomplish that we need to take care of the simplest of all planning documents … your budget. It’s imperative that you look at your last 2 or 3 months of bank and credit card statements to understand how the money is being spent. It doesn’t matter if you make $1, $100,000 or $1,000,000. If you have no concept of your expenses, then the odds of you succeeding financially are reduced dramatically. Do not feel bad if you have never done this, studies show that only approximately 42% of Americans have a written financial plan, so you are not alone. By understanding your cash flow and budget, you can take the necessary first step that should be the foundation of all financial planning which is to build an emergency fund. Having the proper amount of cash liquid, (that is also earning a rate of return for you) will keep you out of high interest debt, which often leads to a debt spiral that is difficult to recover from.
Goals Based Investing
I often find too many accounts with no clear strategy as well as improper locations and allocations. For example, if you are using a brokerage account as an investment vehicle but also plan to use some or all that account for a house purchase, you shouldn’t be in leveraged or overly aggressive funds. Conversely, if you already own your home, your budget is set and the account is intended to simply to grow your wealth, then we can take advantage of higher growth areas in the market without having to fear volatility as much.
The same concept can be applied to your account performance. If I meet you for a review and you made 10% on the year, you most likely walk away from that meeting happy. However, if I told you we were down 2% for the year, you will most likely walk away from that meeting unhappy. BUT, if I explained to you that the S&P 500 was down 15% on the year, and that was the benchmark tied to your account goal, how do you walk away from the meeting? Context is key.
Finally, understanding the type of account (Asset Location) to open is critical. When you get your first job you are bombarded with paperwork for employee benefits, typically without much direction from your company. To use your 401K as an example, most companies default to enrolling people in the pre-tax 401K. But if you don’t have a family yet, or are living at home, tax deductions really aren’t a priority for you. In that case, there is no benefit to funding a pre-tax 401K. The better route would be to utilize the ROTH 401K, start putting tax free money away for retirement while still taking advantage of the match from your employer. We all have a finite amount of dollars to work with, so using them in the most efficient way possible is crucial to your success.
The Future of Financial Planning and the Impact of Social Media
I remain steadfast in my belief that the future of financial planning will be a balance of human touch while incorporating AI and technology behind the scenes to help construct portfolios, rebalance inside of portfolios and stress test your written financial plan for potential pitfalls and solutions.
Notice I used the terms “AI” and “technology” NOT “social media.” The number of things sent to me from social media has become concerning. Not the fact that clients send them to me, I actually encourage the dialogue, it’s the fact that it’s even allowed to be published in the first place that’s concerning. I was recently sent an Instagram post by a VERY prominent financial figure. In the post he described the amount of savings needed over time to get to $1 million dollars. The nicest thing I can say is this person was simply wrong. The problem with social media finance clips (see people yelling into the void on X) is they often lack context and nuance, especially when you are trying to fit something into our 30 second attention spans. While some of the clips have generated good conversation (and I continue to encourage you to send them), I have yet to come across a plug and play strategy that wasn’t already either in the plan or discussed as an option. If it looks too good to be true it probably is.
AI on the other hand is significantly improving our business behind the scenes. As we continue to incorporate these new technologies, it does two major things. First, it frees up more time for me to work with clients, speak to clients and research new opportunities for clients. Second, the stress testing on the plan has become much more dynamic than just a simple Monte Carlo simulation which improves the odds of success.
Financial Planning doesn’t have to be as scary as it sounds. Not only that, a recent
Kiplinger study found that 83% of respondents who work with an advisor were “somewhat” or “very confident” about their retirement, versus only 53% of those who do not work with an advisor. There is never a “bad” time to start, revisit or revise your financial plan. Sometimes you just have to eat your brussels sprouts. Who knows, if you throw a little bacon and honey on them, you might like them!
Feel free to share this with anyone you feel may benefit.