Most of us put more effort into planning a vacation than planning our financial future.
According to a study issued by BMO Harris Financial Advisors, only 38 percent of Arizonans have a financial plan, yet a majority admit a financial plan plays a critical role in achieving key life goals, such as saving for a home and being comfortable in retirement.
“There’s an obvious disparity when it comes to financial plans – most people know they need one, but they don’t have one,” says Larry Skolnik, regional sales manager, BMO Harris Financial Advisors. “No matter your income level, a financial plan can be an essential component to achieving your financial goals and ensuring the fiscal security of you and your family.”
Experts say a financial plan helps people work towards their short and long-term goals, providing a roadmap that outlines the path from where they are today to where they want to be in the future.
“Everyone should have some type of financial plan,” says Jason Miller, vice president and director of financial planning – Western U.S., BMO Private Bank. “Whether you are just starting out in your working years or nearing retirement, a solid plan is crucial to reaching your goals and protecting yourself and your loved ones.”
One crucial mistake people is assuming that they cannot afford to create a financial plan and will do so when they are making more money in the future, says Lisa S. Jackson, a certified public accountant and financial advisor with Whitman & Jackson CPAs.
“There is no better time to start than immediately,” she says.
Miller says the goal of a financial plan is to understand exactly where you are today and where you want to be in the future and then determine the necessary steps to get from point A to point B. A financial plan should include an analysis of where you currently are and what risks and/or challenges you currently face, as well as an analysis of how likely you are to reach your financial goals. Common areas included in a financial plan may be:
- Budgeting and cash flow management
- Asset allocation and investment management
- Retirement planning
- Risk management (e.g. life insurance coverage, disability insurance coverage, long-term care, creditor protection, etc.)
- Estate planning
“When establishing goals it is recommended to include dollar and time specific targets in order to regularly measure the plan with clarity,” says Mary Collum, senior vice president and director of private banking, National Bank of Arizona.
“Staying true to the vision is very important and will take discipline on both the planner and individuals’ part. Circumstances such as consistent injections of savings for the future, coupled with a plan to enjoy life today and live within one’s means, will weigh in on how successful the plan is.”
One of the most important elements to consider is making sure your financial plan is comprehensive and takes into account various possible outcomes, experts say.
“One of the most important elements of a plan is to make sure you are testing the outcome of your goals based on various economic environments such as rising interest rates, inflation, economic expansion or deflation and unforeseen events,” says Curtis L. Smith, registered investment advisor and wealth advisor for Raymond James Financial Services.
Smith’s list of things to consider when establishing your financial plan include:
- Asset and investment allocation
- Retirement accumulation and retirement income forecasts
- Risk management items (liability coverage, life, disability, long-term care and health insurance)
- Estate and philanthropy planning
- Your economic and lifestyle goals (retirement needs, savings goals, housing goals, vacations, etc.)
- Family legacy goals
Another mistake people make when establishing the goals for their financial plan is not looking at all their investment options.
“People can get too focused on one investment strategy and forget to look at all options,” says Erik Pedersen, vice president of AXA Advisors. “The one they are focused on might not be the most suitable to reach their goals.”
Once your goals and plan are established, experts say you must remember to keep your financial plan organic and revisit the plan often.
“Be sure to revisit the plan when your goals have changed or events have happened in your life such as marriage, divorce, loss of job, inheritance or children going off to college,” Pedersen says. “But, there is truly never a bad time to revisit your financial plan.”
Once established, it’s been proven that financial plans will keep you financially responsible and healthy. According to the BMO Harris Financial Advisors study, 85 percent of Americans who have a financial plan say those plans have helped them achieve their goals, and 61 percent wish they has created a financial plan sooner.
“We are quick to take our car into the shop when the engine light blinks, giving us peace of mind our vehicle will take us safely to the next destination,” Collum says.
“Take charge of your financial world with this same sense of urgency in order to create and ensure you are headed on a successful journey to your financial destination.”