Making a Financial Plan

A financial plan is a working document that can be as flexible or as focused as you want it to be.

Whether you work with an adviser to create a plan, use computer-based software, tap into a financial planning site online, or devise one on your own, you’ll need to use some basic financial documents to establish your starting point. Advisers, for example, usually ask to see recent income tax returns, a summary of your investments, information on your retirement plan, and your life insurance policies.

Some advisers develop a detailed written plan, also called a personal financial analysis. The document summarizes the information you’ve provided, includes an overview of various financial planning strategies, and recommends specific investments or other steps you should take to achieve your objectives.

If you prefer, you can request a simpler approach, and receive a letter summarizing the goals you’re working toward, the approach to investing you want to take, and the type of investments the adviser recommends.

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OWNERSHIP: ONE OF THE KEYS TO PLANNING

The kind of ownership you select for property and other assets determines what you can do with them, how vulnerable they are to creditors, and what happens to them after you die. Laws are complicated and vary from state to state, so you should seek professional advice.

Individual (or sole)

• You own the asset outright

Joint tenants with rights of survivorship

• You share the asset equally with one or more joint owners
• At your death, the assets automatically transfer to joint owner(s)
• You generally can’t sell property without consent of joint owner(s)

Tenants in common

• Each owner holds a part, or share, of the whole
• Individual shares can be sold, given away, or left as owner wishes

Tenants by entirety

• You must be married
• Mutual consent is needed to divide or sell the property
• At death the property goes to the surviving owner

Community property

• In the nine states with community property laws, most property acquired during marriage is owned equally by both partners
• Once property becomes community property, it remains so even if you move out of the state

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THE RISK ISSUE

Financial planning almost always involves making investments. One issue you’ll have to resolve is the kind of investment risk you’re comfortable taking. The choice ranges from very little to a great deal, with a broad middle ground between the extremes.

Conservative investors tend to protect their principal to the extent that’s possible while hoping to realize enough return to outpace inflation. They may prefer insured certificates of deposit (CDs), US Treasury issues that they hold to maturity, and securities such as high-rated bonds, blue-chip stocks, and balanced mutual funds.

Aggressive investors are willing to put their principal at greater risk for the potential of realizing a higher return and greater growth. They may invest in new or troubled companies, higher-risk bonds, and a range of alternative investments.

Moderate investors emphasize growth over safety, though they typically prefer to limit the percentage of their portfolio assets committed to higher-risk investments. They may select a variety of securities and other products, including some alternative investments.

The risk of investing too conservatively is limiting your ability to realize your goals. But investing too aggressively, especially as you get older, increases the potential for losing money in a market downturn without leaving time to recoup your losses. That’s risk you may not want to take.

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BEATING INFLATION

Conquering the effects of inflation, or the gradual increase in what things cost, is one reason financial planning is so important. Because prices rise, money doesn’t buy as much this year as it did last. Ten years from now, it will buy even fewer of the things you need.

That means to maintain the same standard of living, you need an equivalent increase in income every year. One way you may achieve that is by investing money so it earns more than the rate of inflation, even after you’ve paid the taxes on your earnings. What you have left of your earnings after inflation is called your real rate of return.

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ASSESSING PROGRESS

At least once a year, you and your adviser should evaluate the investments you’ve made to see if they’re providing the return you expected. If not, it may be time to make some changes to your portfolio. But keep in mind that what’s happening in securities markets will have a major effect on how individual investments perform.

If the economy is healthy and the markets are prospering, your investments should reflect that strength. But if investments overall are lagging, yours are likely to lag as well. A diversified portfolio of investments helps you manage some of the market risk that every investor faces, though it doesn’t guarantee a positive return.

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CHOOSING AN ADVISER

If you’re looking for a financial adviser, you’ll want to set up some criteria to help you evaluate the people you may work with. Among the questions you can ask to help you make a choice:

• How much experience have you had working with clients that share my situation and goals? – Ten years of experience isn’t too much to expect, especially if you’re new to investing.
• What’s your background and expertise? – You’ll want to work with an adviser who has a strong reputation in the field, either as an individual or as an employee of a respected company, and appropriate credentials.
• What kinds of investments do you sell most often? – Be wary of an adviser who emphasizes one or two types of investment products instead of a broader range of traditional and perhaps some alternative investments.
• How are you paid? – Some advisers are paid commissions on the products they sell, some receive flat or hourly fees for their service, and some are paid a combination of fees and commissions.
• Will you explain how the investments you recommend will help me achieve my goals? – You’ll want an adviser who’s willing and able to explain how investments work and why they’re suited to your needs.
• How will I know if my investments are producing the results I want? – Advisers should provide regular reports on the status of your accounts and be willing to explain how well your investments are performing and what adjustments to consider.