Let's take a minute and answer a fundamental question when it comes to financial planning, and that is: What is a financial plan?
If you Google this question, you'll come up with answers from Investopedia or the CFP Board website that describes a financial plan as a report of data outlining a household's current financial position and short- and long-term goals.
While this may be technically accurate, at least according to some, at Spaugh Dameron Tenny, we see that as being a little short-sighted or inadequate.
And the reason is that an effective financial plan is not just information. After all, information alone doesn't change lives, accomplish goals, retire, or send kids to college. It is action based on information that attains objectives and changes lives.
So, at our firm, we like to describe effective financial planning as the process of gathering information that allows us to make decisions that align our financial choices with our goals and priorities.
Please take a moment to consider this: An effective financial plan is one where we gather the appropriate information so that we can make decisions or take action that aligns our financial choices with our goals and priorities. It's that alignment of our goals and priorities with our choices that really allows us to feel effective about our planning.
Now, with this said, of course, we need the pertinent information. We need to make decisions in all areas of our lives. And so, a thoughtful, holistic financial plan involves far more than just looking at investments, discussing insurance, or finding ways to save money on taxes.
An effective financial plan requires making good choices in the six key money areas. We refer to it as The Six Money Decisions™, and here they are.
A good financial plan is going to help you make decisions about how you earn money.
This is more than just your paycheck. But as life advances, things get more complicated. You may have side income, moonlighting income, or rental income. You may get some 1099 earnings and W2 wages.
In any event, understanding how money is earned, when it is paid, and when it hits your bank account is really important to making thoughtful decisions.
The second category is, of course, spending — how we spend money now versus later. Our fixed expenses, our variable expenses, what is routine, and what is out of the ordinary.
Understanding how your income and expenses play together gives you a much better idea of what you have available to work toward the other four decisions.
Of course, saving and investing is a key one. Where to save, how much to save, what's the appropriate allocation? All of these are crucial decisions.
Consider how you borrow money. Student loans are a big concern for many of our clients, but equally important and part of this category includes buying into surgery centers, financing a house, buying cars, and whether to lease or make payments on an amortized schedule.
We need to make decisions about how money is given away. And this takes two forms. There's voluntary giving to family, church, charity, and philanthropy. And then there's involuntary giving to the IRS and paying taxes. How do we maximize the one and minimize the other?
And finally, we need to make decisions about how money is protected. We safeguard money with legal instruments like wills, trusts, and LLCs. We also protect money with insurance — malpractice insurance, life insurance, and disability insurance, to name a few types.
Understanding how these six critical money decisions interact with each other so that you can prioritize your choices with your goals is vital. Earn, spend, save, protect, borrow, give: Those are the key components of a thoughtful and effective financial plan.
If we can help answer additional questions, or if you are ready to discuss how a financial plan may benefit you and your family, don't hesitate to get in touch with our team of financial planners.
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
