Let's take a minute and answer a fundamental question when it comes to financial planning: What is a financial plan?
If you search this question online, you'll find sources like Investopedia or the CFP Board defining a financial plan as a comprehensive document that outlines a household's current financial situation, along with short- and long-term financial goals.
It typically includes an analysis of income, expenses, assets, and liabilities, as well as strategies to achieve future objectives such as retirement planning, paying off debt, and investment growth.
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.
We go through life and get to a point where we realize we need a little bit of advice, guidance, or strategy around all the money decisions we make every day.
So, at our firm, we 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. The way we see it, there are four critical elements to creating a financial plan.
Keep reading or watch the video below to learn more about what a financial plan is.
Financial plans are based on your goals, wishes, and hopes for the future. They're not backward-looking to indict or shame us over our decisions in the past. They're driven around helping us move toward the future to ensure we are working toward what we want to have.
As the old saying goes, managing money is easy, but managing ourselves is the difficult part. A good financial plan will help highlight the types of decisions we need to make to move us toward our vision for the future.
The whole reason we're undertaking a financial plan is to move in that direction. So, the strategy and the decisions we're inclined to make should help reduce the risk of not achieving success as defined by goals.
Tracking our process — where we were, where we are, and where we want to go — helps us better identify what is important to us. And that can change as our life evolves over time.
An effective financial plan is one where we gather the appropriate information so that we can make decisions or take action, reduce risk, and track our progress along the way. All of these align 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®.
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.
A financial plan is a plan for the future that helps us manage our own money decisions, reducing risk and tracking our progress along the way. All your decisions around money are represented by one of The 6 Money Decisions buckets — earn, spend, save, borrow, give, and protect. These components are critical for a thoughtful and effective financial plan.
If we can help answer additional questions, or if you're 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.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
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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.
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