The 4 cornerstones of a financial plan

The Four Cornerstones of a Financial Plan

“When planning for a year, plant corn.  When planning for a decade, plant trees.  When planning for life, train and educate people.”-  Chinese Proverb

After more than 17 years as a wealth advisor and financial planner, I have always understood that I can add significant value to my clients’ and their families as an educator who helps clients create a vision and empowers them to engage in planning to help them achieve that vision.   

This became crystal clear this week as I sat down with a long time client who thanked me for helping him and his wife articulate their vision more than 15 years ago and for working with them over that period to keep them on track to achieve their financial and life goals.  During our meeting I reminded my client about how difficult it was to get him and his wife engaged in the planning process given their busy family and career schedules and he reminded me of the trigger that encouraged them to get started and stick to their plan.  He said “Bill we saw the value in planning when you focused on the benefits of a sound plan and educated us about the risks if we didn’t plan.”  This as it turned out was of critical importance to my clients as up until that point I had only focused on the technical features of a plan – net worth, cash flow, tax and estate planning.  My clients like many others were not willing to put in the time without knowing and understanding the benefits and potential outcomes they could achieve with a customized plan.

Today, I want to briefly present the key cornerstones of a financial plan as I did over 15 years ago to my clients and as I continue to implement in my practice today.

1. Short-term Reserve Fund    
   
   This is critical to have in place for emergencies and other opportunities.  In a very low interest rate environment, many people feel that this is not necessary as they should be able to borrow at historically low rates.  The problem with this mindset is that interest rates likely won’t stay at these levels and your circumstances may change that could impact your ability to borrow.  In many cases clients’ plans have a debt reduction plan to rid themselves of non-deductible debt and a reserve savings plan once debt is eliminated.  
    
2. Income & Asset Protection Plan
   
   Although we all want to create our vision under the assumption that we will remain healthy and able to fund our goals,  a sound financial plan should create an income and asset protection plan for you and your dependents in case of premature death, disability, critical illness or the need for long-term care.  Our planning tools deliver a needs analysis that estimate the need should death or disability occur and compares this need with your current life and living benefits coverage.  If there is a coverage shortfall, then we would examine the viability of using some resources to purchase more life and/or living benefits coverage to reduce or eliminate the shortfall.
    
3. Intermediate-Term Goals
   
   In terms of timeframe, these goals tend to range from 5 to 15 years into the future.  Some examples of typical intermediate-term goals are funding your children’s education, purchasing a home or vacation property, funding leisure activities and developing a business succession plan if you are ten years or less away from exiting your business.  Once established, it is important to work backwards and establish a savings plan and the right savings vehicle to build enough capital to ensure success.   
   
4. Long-Term Goals
   
   These goals tend to range from 15 years to 30 years into the future depending on your stage of life.  Some examples of long-term goals are to retire comfortably and maintain my current standard of living, estate preservation and leaving a legacy to a charity. 

  It is important that your financial plan includes all four of these key elements and if possible you are able to allocate resources to each area.