Financial Planning Guide

Like playing an instrument or mastering a trade, financial planning is a skill. A natural interest and aptitude helps, but there is no substitution for education, time, and experience. In this guide, we’ll discuss what financial planning entails, the process of financial planning, and how professionals like financial advisors and wealth managers can help.

Financial planning starts with assessing where you are financially, pinpointing your goal, and figuring out what milestones you need to reach to get to your destination. You need to consider your savings, debts, benefits, investments, and anything else that could impact your financial state now or in the future.

Some talk about a financial plan as if it is a simple one-page document that you put together once and never need again. The reality is your financial plan is not a static document — just as your life changes, so too may your financial plan. Along with unexpected detours or pivots, positive changes like career progression and starting a family are things your plan needs to take into account 

To be clear, having a solid financial plan does not mean you’re planning out every last detail of your life. It’s there to guide you and keep you on track to make sure you aren’t putting big goals like retirement at risk, empowering you to live more confidently today and comfortably in the future. 

Financial planning on your own is absolutely possible, and many choose to do this (especially early on) but with a financial advisor or wealth manager as your co-pilot, your financial journey will be less stressful, and you’ll have an unbiased third party to turn to for tough decisions. A good advisor will use the following to help you answer big financial questions with a bit more confidence:

1. Their knowledge of things like investments, tax strategy, insurance, estate planning, and more. Ideally, they’ll be certified in their understanding of financial planning with a CERTIFIED FINANCIAL PLANNER (CFP) designation.
2. Your financial plan that comprises your situation and habits as well as short- and long-term goals.
3. Data, not just on individual pieces of your plan like investment performance, but a comprehensive look at the likelihood you’ll be able to achieve your goals, typically in the form of a financial independence analysis.

Financial planning gives you an understanding of your current spending and budgeting habits to help you feel in control of your income, expenses, and investments. 

A solid financial plan should:

1. Cater to your unique needs and goals
2. Minimize your tax liability
3. Increase confidence
4. Adequately diversify your investment portfolio
5. Define an action plan to achieve goals
6. Establish an actionable legacy 
   
   

If the plan you have in place now isn’t inspiring all of the above, it’s time to go back to the drawing board.

Financial planning starts with assessing where you are financially, pinpointing your goal, and figuring out what milestones you need to reach to get to your destination. You need to consider your savings, debts, benefits, investments, and anything else that could impact your financial state now or in the future.

Some talk about a financial plan as if it is a simple one-page document that you put together once and never need again. The reality is your financial plan is not a static document — just as your life changes, so too may your financial plan. Along with unexpected detours or pivots, positive changes like career progression and starting a family are things your plan needs to take into account. 

To be clear, having a solid financial plan does not mean you’re planning out every last detail of your life. It’s there to guide you and keep you on track to ensure you aren’t putting big goals like retirement at risk, empowering you to live more confidently today and comfortably in the future. 

Financial planning on your own is absolutely possible, and many choose to do this (especially early on) but with a financial advisor or wealth manager as your co-pilot, your financial journey will be less stressful, and you’ll have an unbiased third party to turn to for tough decisions. A good advisor will use the following to help you answer big financial questions with a bit more confidence:

1. Their knowledge of things like investments, tax strategy, insurance, estate planning, and more. Ideally, they’ll be certified in their understanding of financial planning with a CERTIFIED FINANCIAL PLANNER (CFP) designation.
2. Your financial plan that comprises your situation and habits as well as short- and long-term goals.
3. Data, not just on individual pieces of your plan like investment performance, but a comprehensive look at the likelihood you’ll be able to achieve your goals, typically in the form of a financial independence analysis.

• What is your monthly income?
• What are your expenses?
• What does your savings look like?
• Do you have any investments?
• What debts are you paying off?
• What are your short-term goals?
• What are your long-term goals?
• What large expenses are you anticipating? (college, new home, retirement, etc.)
  
  

Once your advisor better understands your life and your goals, they can start with goals-based financial planning. This is where you’ll start to attach specifics to your goals — rather than saying, “I want to retire,” you’d say, “I want to retire at 55 with enough money to travel occasionally.” With current inputs, future goals, and data that takes a variety of situations into account, your financial planner can help assess the likelihood you’ll be able to achieve your goals or if you need to make adjustments. 

Other specific goals:

• I want my house to be paid off in 10 years.
• I want to retire early, and I want to travel for a year.
• I want to pay for my child’s college expenses and not worry about what’s in my bank account.
• I want to make sure healthcare as I age doesn’t impact my family.
• I want to make investments that will help me retire early.
• I want to pay off my student loans.
• I want my family to be cared for when I’m gone.
  
  

What Does a Financial Plan Look Like?

As we mentioned above, your financial plan is not a static document. It will change as your life changes. When you begin with a financial planner, they’ll conduct a financial independence analysis, which includes the following: 

• Monthly cash flow (income, expenses, benefits etc.)
• Plan(s) to pay off debt
• Plan to build an emergency fund
• List of insurance coverage
• Savings breakdown (simple savings accounts, 401(k), IRA etc.)
• Investment portfolio
• Plan to pay taxes
• Retirement savings
• Estate planning
  
  

There is a tendency as your needs progress to hire out a team of professional services without connecting them. You might occasionally need a CPA, estate planner, broker, etc., but miss the opportunity to have one central financial advocate who understands you best and a team of experienced professionals behind them for added support. A great financial planner (often called a wealth manager) will proactively connect all aspects of your goals and financial life together for a cohesive plan that reduces duplication.

College Planning

Help prepare for your child or grandchild’s future by adding a 529 strategy to your financial plan. A financial advisor can help you save for education while still meeting your other financial goals. 

• Financial planner/advisor: Helps clients manage their financial situation and prepare for the future 
• Registered representative: Works for a client-facing financial firm like a brokerage company and helps clients with trading investment products and securities 
• Financial consultant: Works with corporations to provide financial advice 
• Wealth manager: Handles complex financial situations with a comprehensive approach
• Investment/portfolio/asset advisors: An individual or company that is paid to provide financial investment advice
• Brokers: A person or company that buys and sells stocks or other investments on an investor’s behalf
• Financial coach: Teaches clients money management skills but may not be allowed to offer investment advice 
• Robo-advisor: Provides digital investment services based on algorithms 

How to Find an Advisor

As you begin your search for an advisor, there are two important designations to keep in mind: CERTIFIED FINANCIAL PLANNERs™ (CFP) and fiduciaries. If you want to go the extra mile, look for a CEFEX-certified firm, meaning they are certified in their their dedication to always do what is right for their client.

Fiduciary advisors are tasked with working in their client’s best interest rather than the firm’s. Not all financial planners are fiduciaries. A fiduciary financial advisor is legally required to operate in your best interests, not theirs. They are typically compensated in a fee-based way and will charge you a fee and act based on your needs, regardless of where you invest your money. 

On the other hand, brokers and some investment advisors may make commissions if they sell certain products to their clients, presenting a conflict of interest. Some see this brokerage model as tainted because it de-incentivizes the client relationship.

CERTIFIED FINANCIAL PLANNERS (CFP) are required to complete courses in topics such as investment planning, saving for retirement, and education planning. Then, they must pass a two-day board exam and complete three years of related professional experience or two years of apprenticeship. To maintain CFP status, they regularly refresh and update their skills to make sure they’re staying up to date to best serve your needs in a rapidly changing world. 

As you search for a planner, here are some questions you could ask in the interview process:

• Will you put your fiduciary commitment in writing? Do you have a certification?
• Will you run a tax projection to support your recommendations?
• Will you review my estate planning documents? 
• If something happens to you, who will take over my account?
• How are you paid?

How Do Financial Planners Get Paid? 

Knowing how your financial planner gets paid can be crucial to the hiring process. After all, you want someone who works for YOU and in your best interests, not their own. 

Commission planners: May charge a commission based on transactions, trades, or for purchasing annuities, mutual funds, or insurance policies within your larger financial plan. Because they earn a cut, the potential for bias is ever-present.

Flat, hourly, or service-based planners: Charges a set level of service for a flat fee, no matter what. This service is perfect for one-off projects like creating an estate plan. Because the fee is set, everyone receives the same level of service.

Advisory fee: Often charged based on the percentage of assets under management with a tiered fee schedule, similar to a retainer fee. These advisors aren’t paid to recommend specific products, so their advice is less prone to conflicts of interest and therefore likely independent.

Commission planners: May charge a commission based on transactions, trades, or for purchasing annuities, mutual funds, or insurance policies within your larger financial plan. Because they earn a cut, the potential for bias is ever-present.

Flat, hourly, or service-based planners: Charges a set level of service for a flat fee, no matter what. This service is perfect for one-off projects like creating an estate plan. Because the fee is set, everyone receives the same level of service.

Advisory fee: Often charged based on the percentage of assets under management with a tiered fee schedule, similar to a retainer fee. These advisors aren’t paid to recommend specific products, so their advice is less prone to conflicts of interest and therefore likely independent.

Stages of Financial Freedom

There are seven stages of financial freedom:

1. Dependence: Relying on someone else to pay your living expenses 
2. Solvency: Meeting your financial obligations on your own (even if you live with a partner) 
3. Stability: Solvency plus an emergency fund and the ability to still live within your means   
4. Security: You’re eliminating debt regularly, have a nest egg, and could comfortably navigate a period of unemployment 
5. Independence: You can retire at any time without worrying about the cost of living
6. Freedom: You have more than enough money to cover your needs, and you can begin making riskier investments with money you’re willing to lose

Disclosure

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Plancorp is a registered investment advisor with the Securities and Exchange Commission ("SEC") and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure and our Form CRS for additional information regarding the qualifications and business practices of Plancorp.