Financial Planning Akron-Canton, OH

What, Who, Why, When of Financial Planning

What is it? 

Financial planning involves the analysis of the financial resources of a family, couple, or individual, current and projected, as they relate to enabling them to achieve their financial and retirement goals. It can also include the implementation and ongoing monitoring of the resulting financial plan.

Who should engage in financial planning? 

Anyone who has financial goals will require either saving, investing, or both to achieve them. This task becomes more crucial as you approach retirement. Tax planning is also vital for every U.S. citizen. Pre-retirees especially need to craft a tax-efficient strategy, to ensure they maintain as much of their hard-earned income as possible.

Why financial planning? 

As with almost any complex goal, planning is vital to boosting your chances of achieving your financial objectives. Because these goals often won’t be reached for years or even decades, there are a wide variety of factors that must be taken into account when figuring out how to meet them. 

Taking the time to plan out the steps needed to achieve these goals helps you optimize your chances of reaching them.

When should you start financial planning? 

One good answer would be as soon as possible. Because of the power of compounding interest, the earlier you start saving for a goal, the greater the amount you are likely to amass. Once you are in a position to start setting aside funds for your goal, you should do the planning necessary to ensure that you are investing your funds optimally given your time horizon and risk tolerance.

Chapter 1

Financial planning for the life of the relationship (not just a projection prepared once)

If you are evaluating financial advisors, it’s important to look for one who focuses on financial planning designed to help you meet your long-term goals. This means not only helping you project how much you will need to save to reach your goals but working with you to monitor your performance towards reaching those goals on an ongoing basis. In today’s rapidly changing economy, a strategy that involves ‘setting and forgetting’ your goals and the investments intended to help you reach them is not likely to be an optimal approach.  

Besides a rapidly evolving economy, volatile investment markets can also present a challenge to plan attainment. This is one reason making a single goal projection, whether for retirement planning purposes or any other objective, can be risky. If the markets don’t perform as projected, or if other variables change, it can cause you to fall short of your goal. 

Working with a financial planner who focuses on planning for the life of the relationship, rather than just preparing a projection in order to sell you financial products, gives you the ability to benefit from the planner’s expertise as your financial situation or market conditions change. 

It’s also important to look for a fiduciary advisor who is required to put your best interests first at all times when providing financial advice. This contrasts with an advisor who falls under the ‘suitability’ standard, which means they only have to focus on whether a particular transaction is suitable for you. This can result in a focus on transactional advice designed to sell you a financial product, rather than advice focused on what is likely to work best for you over the long run. 

Fiduciary advisors often offer advice on a fee-only basis, to avoid the potential conflict of interest involved in charging commissions.

Chapter 2

Comprehensive financial planning defined

Comprehensive financial planning involves considering the entire scope of your financial situation. Unlike planning for a particular event, such as retirement planning, or focusing on investment strategies in an attempt to improve performance, comprehensive financial planning includes these and other aspects of managing your finances in order to optimize the planning process.

When financial planning is done on a goal-by-goal basis or without considering all aspects of your financial situation, it can make it more difficult to plan effectively. For example, if you have to raid your retirement savings to fund a child’s college education or a down payment for a house, this is not an ideal planning approach. In the worst case, such a scenario might involve having to settle for a lower than expected standard of living in retirement or even cause you to delay your retirement date. 

By treating your financial situation as a whole, comprehensive planning enables you to see how each of your goals impacts the other. In the above example, this could allow you to decide to set aside more money to fund your other goals, avoiding the need to dip into your retirement savings to fund them.

Comprehensive financial planning also covers preparing for financial emergencies by taking steps to build up an emergency reserve or evaluating your insurance needs. Purchasing life, disability, and other insurance can help protect your assets and your loved ones from unanticipated financial setbacks. 

Finally, a comprehensive approach often also covers estate planning, both with regard to making sure your assets are distributed in the manner of your choosing and in establishing a living will or another legal document to enable someone to make healthcare decisions or manage your affairs for you in case of incapacity.

Chapter 3

Comprehensive financial plan versus investment management (what is the difference?)

When you are working on a comprehensive financial plan, whether on your own or with a financial advisor, it’s important to understand the role of investment management in the process. Because comprehensive financial planning covers both goal setting and projecting the returns needed to reach those goals, investment management is a crucial part of such plans. 

Many financial advisors who provide comprehensive financial planning will select outside investment managers to manage the funds being invested in accordance with the plan. Even people who are planning for themselves will often either hire an investment manager to select the securities in their portfolio; this can be done directly in the case of a manager who buys and sells securities in your account or indirectly by investing in a mutual fund or ETF which invests in pools of securities for those who buy their shares.

At McGervey Wealth Management, we use a Full-Cycle Investing Process that strives to keep your portfolio more stable in all market conditions.

Chapter 4

Financial planning decisions based on detailed financial modeling

When making financial plans, more is needed than just calculating the amount of funding you need to set aside at a particular rate of return to reach your desired savings amount. This type of simple calculation can serve as a starting point, but much more is required to gather enough information to put yourself in a position to optimize your financial decision-making. 

Financial modeling can provide this information by going beyond a simple savings calculation and using historical performance data to provide a percentage chance with regard to how likely it is that you will achieve your goal based on the amount you are investing and your time horizon. These projections are typically referred to as Monte Carlo simulations. They can involve thousands of projections based on past results, helping provide you with a sophisticated analysis of the likelihood that you will achieve your goal.

This type of modeling enables you to make changes to your saving and investment assumptions based on your success percentage. If it’s lower than you are comfortable with, you can make changes designed to increase your likelihood of success. 

For example, if a Monte Carlo simulation shows that you have a 50% chance of achieving your retirement savings goal, you could increase the amount you are setting aside in order to raise your chances of reaching your objective. Alternately, if such a step did not exceed your risk tolerance parameters, you could take a more growth-oriented investment approach to try and boost your returns.  

Goal Identification

Identifying goals is crucial to boosting your ability to reach them. Simply setting aside extra funds in order to finance your goals without specifying what those goals are and analyzing exactly how much you are likely to need to meet each of them individually is generally not the most productive approach to take. 

One reason for this is the danger that achieving a goal may use up so much of your savings that it makes it difficult or impossible to fund other goals. For instance, as mentioned previously, a person may find it costs them so much to buy a home, or pay for a child’s college education, that they don’t have enough left to afford to pay for the retirement lifestyle of their choice.

Thus, it’s important to identify your goals well in advance so you can plan for them separately, reducing the chance that paying for one goal will negatively impact your ability to afford others.

Budget/Cash Flow Optimization

For financial planning purposes, when creating a budget, the main focus should be on optimizing your cash flow. Excess cash flow is the engine that powers your ability to save for your goals. Thus, generating this free cash flow should be a priority throughout the budget process.

How can you optimize cash flow when budgeting? One way to do this is to separate your expenses into ‘musts’ and ‘wants.’ Once this is done, you can analyze the dollars you are spending on ‘wants’ and decide whether any of this discretionary spending would be better devoted to savings than current expenditures. 

Some, or all, of this excess cash flow, can be used to increase the amount you are setting aside in savings, thus improving your chance of achieving your goals.

Chapter 5

Comprehensive financial plan financial goals (How can I plan out my financial goals?)

When planning for multiple goals, it is helpful to budget separately for each goal. This approach is fundamental to comprehensive financial planning. It doesn’t prevent you from moving funds from one goal to finance another if needed, but it does make it easier to keep on track towards each goal. 

To accomplish this, the first step is to estimate how much money it will take to achieve a goal and when that money needs to be available. From there, you can calculate how much money you should set aside in savings to meet your goal, either in a lump sum or in incremental amounts over time. You can use a Monte Carlo simulation to evaluate how likely your savings and investing plan is to be successful in funding your goal and then make any adjustments necessary to improve your chances if feasible.

Chapter 6

Do I really need a comprehensive financial plan?

In today’s complex financial world, taking a simplistic approach to financial planning is generally not the ideal approach. In the past, people could often rely on a pension from a long-term employer to fund the majority of their retirement, which significantly reduced the financial planning needed for retirement. These days, you are typically expected to fund your own retirement by contributing to a 401(k) or other retirement plans yourself. 

Many people also set aside other funds for retirement, whether in a simple savings account or an investment account investing in stocks, bonds, mutual funds, ETFs (exchange-traded funds) and other securities, or in other financial assets.

If your planning doesn’t take into account all of the various goals you are working for and how they interact with each other, you risk being blindsided by unanticipated events that can throw your planning off course. As previously mentioned, this can result in consequences such as having to delay your retirement or downgrade your retirement lifestyle expectations. It could also make it more difficult to finance a child’s education or purchase the home of your dreams. 

Comprehensive planning takes into account your progress towards all your goals, giving you time to make adjustments when necessary to reach as many of them as possible. If you take a comprehensive planning approach it can provide you with advance warning of any potential goal shortfalls. 

For instance, if you saw years ahead of time that you weren’t saving enough to be able to purchase a home, you could address this issue by increasing your savings. Doing so could put you into a position to both buy your dream house and fund a comfortable retirement. By taking into consideration your overall financial picture in the planning process, comprehensive planning can help boost your ability to achieve your financial objectives.

Chapter 7

What is the difference between financial planning and retirement planning?

Financial planning covers budgeting, tax planning, and investing for a multiplicity of goals, while retirement planning is focused strictly on putting you in a position where you can live the retirement lifestyle of your choice. Both types of planning often involve projecting investment returns and calculating funding needs, but financial planning is much broader. 

In a comprehensive financial plan, retirement planning is a major piece of the puzzle, but not the only goal for which planning is needed. This type of planning is attuned to the impact saving for other goals has on saving for retirement, and vice versa. 

Retirement planning focuses on determining how much you will need in savings to finance your chosen retirement lifestyle. It requires first calculating the total of your expected income from all sources, including pension plans, annuities, rental property, Social Security, savings, etc. Understanding tax strategies is vital here, to avoid penalties and maximize your retirement savings. 

Once this is done and you have calculated your expenses the next step is to address any gap between your retirement income and expenses. If the latter is slated to be greater than the former, planning must be done to fill the gap. This could involve setting aside more in retirement savings, attempting to increase returns, or reducing planned expenses.

Chapter 8

Top components of a comprehensive financial plan for families (or couples, or individuals)

Building a comprehensive financial plan involves considering the complete financial circumstances of a family, couple, or individual. The main components of such a plan typically include:

  • Goal identification: Financial goals are the building blocks of your plan. They will determine how you structure your finances in order to accomplish objectives such as:
    • Finance a child’s education 
    • Saving for retirement
    • Major purchases: 
      • Buying a home
      • Buying a car
      • Other major purchases
    • Finance your dream vacation
    • Pay off debt
    • Start a business 
    • Build an emergency reserve
  • Balance statement: This documents both your assets and liabilities and is crucial to determining how much more you need to save in order to reach your financial goals.
  • Budget and cash flow: This shows how much money is coming in and going out, and how much cash flow remains for either discretionary spending or future saving. It provides you with the opportunity to make changes to your spending to free up more cash flow if needed to fund your goals.
  • Financial projections and analysis: Once you’ve established what your goals are, how much you already have saved to meet them, and how much you can afford to put aside in additional savings for them, you can run financial projections to determine how likely you are to reach your goals with your current plan. This enables you to make adjustments to your planning as necessary. 
  • Insurance analysis: Your plan should provide an evaluation of how insurance products such as life or disability insurance could help protect your assets and income, either for yourself or your loved ones. 
  • Estate plan: A comprehensive plan often includes details as to asset distribution once a family member or individual passes. This includes aspects such as a will or trust and any specific instructions and documentation needed to appoint a guardian to make healthcare and other decisions if a person becomes incapacitated. Common documents used in estate planning include:
    • Last will and testament
    • Living trusts
    • Guardianship nominations
    • Durable power of attorney
    • Advance health care directive
Chapter 9

Investing risk tolerance and its impact on your financial plan

Many financial plans involve investments in the stock or bond markets to help build wealth and amass sufficient savings to achieve your goals, whether purchasing a home, retiring, financing a college education, etc. However, given the volatility that equity (stock market) investments can experience, it’s important to take into consideration your risk tolerance when making any financial plans. 

Generally, investing in higher risk/higher return assets for growth purposes is strongly encouraged for investors with longer time horizons, as it gives them enough time to recover from any market downturn(s) that may occur while they are saving for their goal. For instance, if you are saving for retirement and the market plunges, this would be less worrisome to someone with 20 years to retirement than it would be to someone one or two years away from retirement. 

While individual risk tolerance will vary, of course, a general guideline is that an investor’s portfolio should emphasize stock market investments when they have a significant amount of time before they plan to retire, while investments in bonds or bond mutual funds or other investments typically classified as conservative should become a bigger part of their portfolio as they get nearer to and enter into retirement.

Chapter 10

How does inflation impact my comprehensive financial plan?

Keeping in mind the impact of inflation on investment returns is important, especially when inflation is elevated. In such cases, an investment return that might otherwise appear impressive could be less so on a real return basis and, in some cases, even negative. 

For example, if inflation is running at a relatively high 8%, a return of 12% on your investments, while likely to be satisfactory on a nominal basis, would not be as impressive as it looked in real terms, coming in at an unexciting 4%. A return of 7% in such circumstances would equate to a real return of negative 1%.

A comprehensive financial plan typically offers the ability to perform financial modeling which includes factoring inflation into the equation. The software that performs these calculations usually has the flexibility to adjust the inflation rate to provide you with visibility into how high (or low) inflation would impact your real investment returns and your ability to achieve your goals in real terms. This enables you to make adjustments to your planning to help you deal with the consequences of an inflationary environment.

Chapter 11

5 ways financial planning can help

If you have financial goals you’d like to reach, planning is essential to improving your chances of making your dreams a reality. Financial planning can help you accomplish this by:

  1. Moving your goals from wishes or hopes to specific, concrete objectives you can use to guide your planning
  2. Providing you with a series of steps to take to reach your goals.
  3. Allowing you to stress test your plans for achieving your goals by running simulations to see how likely they are to succeed
  4. Harmonizing your financial efforts so you can optimize your plans to achieve your goals
  5. Monitoring your progress towards your stated objectives over time in order to see if any adjustments are needed to get you back on track to achieving them
Chapter 12

Financial planning: Is it too late to start?

For most people, it’s never too late to start financial planning. Certainly, as referenced previously, the longer you have for your savings to compound, the greater the growth potential. However, even if your goal is a short-term one, financial planning can help you achieve it. 

The reason for this is that for all but the simplest financial transactions, analysis can typically improve your ability to make financial decisions. This is the key to financial planning, and it can be employed both for short-term and long-term planning. For this reason, if you have financial decisions to make that involve investing or comparing the benefits of financial products, there’s no time like the present to get started.

Chapter 13

The different types of financial planning

Financial planning involves a variety of different approaches. The right type for you depends on what goals you are trying to achieve. For instance, if you are simply looking to improve your return on investment, investment planning is the way to go. On the other hand, if you are trying to optimize your finances for the long-term, comprehensive financial planning is likely your best bet.

Types of financial planning include:

  • Investment planning: Focused on selecting the investment approach that is right for you given your investment objectives, time horizon, and risk tolerance.
  • Comprehensive financial planning: An approach that considers all of your financial goals and how they impact each other as well as your insurance and estate planning.
  • Budgeting: Financial planning focused on budgeting centers on tracking your expenses and income in order to look for ways to improve cash flow.

Basic: This type of planning focuses on determining how much you can set aside to reach your financial goals without necessarily identifying them. It generally doesn’t involve tracking funds saved for each goal separately. This can be a good form of planning for someone starting to save, while still building up the resources to be able to save for multiple goals simultaneously.

Chapter 14

Tips for staying on track with your financial plan

Developing the financial discipline to stay on track and on target with your financial plan is not easy, but there are a variety of methods to help you accomplish this. The following are tips for sticking with your financial plan:

  • Focus on realistic goals: Especially early in the planning process, it’s important to select achievable goals so that you can build on the momentum this generates when aiming for more ambitious goals. 
  • Check in on your progress on a regular basis: While it may be tempting to ‘set it and forget it’ when it comes to your financial goals, this runs the risk that changing economic or market conditions, or changes in your financial circumstances, will impact your ability to achieve your goals. To prevent such incidents from knocking you off course, stay on top of your progress towards your goals so you can make any adjustments that may be needed. 
  • Work with an advisor: If you don’t have the time or interest in following your progress towards your goals regularly, working with an advisor can pay dividends in this regard. An advisor can help make sure your financial plans are on track by actively monitoring your progress and keeping you apprised of any changes that may be needed.

Be flexible: Between changing market conditions and any changes that may occur in your financial situation, being flexible is important to stay on track towards your goals. For instance, if your investment progress is less than expected due to a market downturn, it may be necessary to increase your retirement savings contributions to hit your target number. On the other hand, if your investments perform better than expected you might be able to add items from your wish list to your plans – buy a second home, do more traveling, etc.

Chapter 15

Common mistakes people make with their finances

While engaging in financial planning is a key ingredient in improving your ability to reach your financial goals, it doesn’t in itself prevent you from falling into some common financial mistakes. As a result, it’s valuable to understand these errors so you can take steps to avoid making them in your financial planning. Such mistakes include:

  • Setting unrealistic goals: While there is nothing wrong with dreaming big and setting a goal or two that you are unlikely to reach, if too many of your goals are unrealistic it can harm your ability to optimize your finances. First, failing to reach these goals can discourage you from doing what it takes to achieve your more realistic goals. Second, in trying to reach an unrealistic financial goal you may be tempted to take excessive risk, which can end up harming your finances and leave you worse off than if you never set the goal in the first place.
  • Failing to budget: Even people who earn substantial incomes can run into trouble with their finances if they fail to budget. If you don’t accurately track your expenses, you can end up spending more than you make without even realizing you are doing so initially. Credit cards and other forms of consumer credit can hide this fact for a time, but, ultimately, failing to draw up a budget to make sure you aren’t overspending can have a significantly deleterious effect on your finances.
  • Failing to stick to the plan: If you lack financial discipline, even if your financial planning is sound, you are unlikely to achieve your financial objectives. To optimize your finances, follow-through is crucial.
  • Unrealistic investment expectations: With the rise of the ‘meme’ stock, it can be tempting to expect that your investment portfolio will generate returns similar to these market darlings, year in and year out. This can cause investors to take on more risk in their portfolio than is prudent given their risk tolerance.
  • Chasing hot stocks: One form of excessive risk-taking that often comes back to bite investors is chasing the latest fad stock. However, stocks that rise rapidly often decline just as fast, or faster, once the excitement evaporates and the crowd moves on to the next ‘big thing.’ Chasing hot stocks is a sure recipe for taking more risk than most people are comfortable with and can seriously hurt your investment returns when the momentum behind such stocks fade.

Prioritizing current spending over saving for the future: Determining the ideal mix between current spending and saving for the future is not an easy process. However, those who consistently sacrifice saving for the future for current spending can jeopardize their ability to reach important financial goals such as purchasing a home or saving for retirement. This doesn’t mean you should always choose to save instead of spend, just that you should do everything you can to stick to your saving plans in order to avoid hurting your chances of achieving your goals.

Chapter 16

DIY or hire a financial advisor? 3 considerations

A financial advisor can provide a variety of planning services to people looking for help in the process. Whether or not it is worthwhile to hire an advisor depends on a variety of factors. Three of the most important considerations are:

  • Your level of expertise and experience: Without training, navigating complex modern securities markets can be perilous. Even those who have studied or received training in financial planning and investing may find that without significant experience it can be difficult to put their knowledge to use in the real world. Many people find that working with an advisor who has the requisite expertise and experience is preferable to doing it themselves.
  • The time you have or want to devote to managing your finances: Even if you have both the expertise and experience to perform your own financial planning, do you have the time to do so? Besides the time to actively manage the planning process and implement your plans, there is also a considerable time investment required to stay current on financial conditions and to monitor your progress towards reaching your goals. Retaining an advisor to perform these tasks significantly reduces the time you need to devote to planning and managing your finances.

Your access to, and knowledge of, high-end planning tools: While there are a number of financial tools you can access online for basic planning tasks such as calculating return on investment or funds needed for retirement, for more complex calculations powerful financial planning software may be needed. For instance, performing Monte Carlo simulations to gauge the likelihood you will achieve your financial objectives given your specified parameters. A financial advisor will typically have both the software and the expertise in using such software necessary to perform such an analysis and explain what it means to your plans.

Chapter 17

How can I achieve my financial goals with the help of a financial advisor?

In today’s complex economy, financial markets can be highly volatile. The training, expertise, and experience of a financial advisor can help you take the steps necessary to improve your ability to reach your financial goals. Many advisors have designations such as CERTIFIED FINANCIAL PLANNER™ which require significant training and ongoing education in a wide range of financial planning skills. An advisor can help you both in drawing up plans to meet your goals and setting up and managing investment accounts to help you reach them. This ongoing monitoring is crucial, given the volatility investment markets can exhibit. 

Your financial advisor can help you plan a strategy that takes into account your investment objectives, time horizon, and risk tolerance and help you implement that plan. If changes are needed in your asset allocation, investment goals, or any other aspect of the planning process, your advisor can help you make them.

At McGervey Wealth Management, our business was founded around financial planning, active investment management, and fiduciary duty. All of our relationships are grounded in financial planning for the life of the relationship (versus a projection prepared just to get the assets).  All financial decisions are made with the benefit of detailed financial modeling of a client’s situation. Our services are offered on a fee-only basis.

To learn more about how the financial planning services we offer can help you achieve your financial goals, please contact us for a no-obligation consultation.