CREATE A 1-PAGE FINANCIAL PLAN

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In the early stages of life/education, you probably had to write papers or reports. For projects like this, the requirement is something like, “Write at least 10 pages,” or “Make sure your paper is at least 5,000 words.”

As I write more and more, I realize it is extremely difficult to limit or reduce the number of words in a post. It is much harder to write 1,000 words of truly valuable content than 10,000 words of fluff.

The succinct version is typically the best version. This principle applies nearly everywhere.

Carl Richards, a former financial advisor who grew famous for his simple sketches in the New York Times, realized the value of succinctly summarizing his clients’ financial plans. He wrote the book The One-Page Financial Plan as a potential solution to dry, overly complex financial plans.

In the early stages of the financial planning industry, a client’s financial plan required scores of pages. It was littered with technical charts and complex summaries. Sometimes the plan was presented in a binder filled with page after page of assumptions and simulations.

The details of your finances are important, but the especially intricate/technical elements can be left to a professional. A wide lens view of your financial life essentially answers, “Do I have enough?” and/or “Am I on the right track?”

As with most things, simple and succinct is valuable.

A one-page financial plan should provide a non-technical, high-level summary. It is the “all-you-need-to-know” update for your financial life and future.

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Priorities/Goals

This section of your financial plan is entirely created by you. A financial advisor may facilitate the discussion around these topics, but only you can express your specific values/desires.

One of the few purposes of financial planning is to connect your values and desires to your dollars. Typically this is accomplished through setting priorities and creating goals.

Your priorities may be difficult to express initially. It takes time to uncover and develop a full picture of what really matters. Prioritization in your financial life is essential. In nearly all cases, you must choose what to do with your money.

What will you do with your income or the cash flow from your business? Will you invest for the future? Could you increase overall satisfaction by expanding your lifestyle? Would you want to generously give some or most of it away?

Do you want to provide for your kids and how will it take shape? Will you pay for college? Will you buy a car or give funds for a down payment on a house? Will you wait and leave an inheritance?

How will you live in retirement? Will you travel frequently? Will you work a part-time, satisfaction-oriented job? Will you want to spend extra time with kids, grandkids, and family?

What will you do with your business? Will you continue to operate it day-in and day-out? Will your kids be involved with the business on an on-going basis? Will you sell to an outside party or transfer to a hand-picked successor?

Your priorities inform your dollars and lead to another step. Once priorities are in place and understood, you can place more tangible goals around your financial life.

Short-term goals might look like updating beneficiaries, saving a down payment for a home, or hiring additional employees for your business.

The medium-term category of goals might require more time and effort. This may include establishing a trust, creating a Roth conversion strategy, or growing your business through acquisition/expansion.

Your long-term goals may be more intangible, expressing or fulfilling other needs. Goals may be centered around spending more time with your family/friends, reaching a certain net worth, or finding an individual to operate your business with the same level of care you provide.

Always make your financial advisor aware of any changes to your priorities/goals. Life is a winding road - it is perfectly okay if your circumstances change and certain goals should be modified or entirely scrapped.

Simply setting priorities and accomplishing goals simply for the sake of doing so does not create value. When you have priorities and goals that actually reflect your wishes and resonate deeply, you sync your future to your financial life.

Net Worth Trend

Calculating your net worth is simple. It is one of the foundational components of your financial life and definitely deserves some space on the one-page financial plan.

The simple equation provides some insight into your financial condition.

** WHAT YOU OWN - WHAT YOU OWE = NET WORTH **

When you calculate this amount at the end of each quarter or year, you can create a trendline. As you invest, grow your business, and expand your overall wealth you will hopefully see your net worth increasing. The chart will probably have an upward slant over time.

Is this a necessary component of your overall financial plan? Probably not.

Is it motivating and even exciting to see your net worth growing over time? Absolutely!

The net worth trend is mostly about providing an update on your overall progress and motivating you about your financial situation.

Cash Flow Summary

Budgeting is useful for some but is typically best for those who struggle to control spending or have relatively low earnings. There is something that may be more useful.

Just as a business carefully manages cash flows, an individual can take on the cash flow perspective. The in-flows and out-flows of cash are the major focus of nearly every business. You can look at your own financial life this way too.

In retirement, the in-flows come from several sources.

1/ Income from Social Security.2/ Income from withdrawals from your retirement accounts.3/ Income from the activity of your business or a part-time gig.

These sources of income become the basis for your financial life in retirement. Your out-flows will be monthly living expenses and any needs/wants within everyday life.

Managing this cash flow will not fall solely on your shoulders. Your financial advisor can help to determine what amount is appropriate and implement a strategy around your monthly cash flow.

The “guardrails approach” to retirement income is a flexible path to managing your cash flows. Your withdrawal rate will be set and modified based on the overall level of your retirement assets, adjusting for any changes in the market.

If budgeting and creating spreadsheets is your life’s greatest joy, go for it. Managing cash flows is the worthy (and simpler) alternative.

Asset Allocation

Over the years, many people don’t realize how their investments have grown and changed. “Asset Allocation” is just a fancy phrase to express, “What do I actually own?”

A simple chart can dissect what percentage and amount of your dollars are invested in a specific asset class. The most basic (and probably best) definition has three asset classes:

1/ Cash.2/ Stocks (formally called “Equity”).3/ Bonds (formally called “Fixed Income”).

There are other, more specific asset classes, but these three do the trick for a concise update.

To a degree, the percentages in each of these asset classes will determine the risk/return dynamics for your retirement savings. You may choose to “rebalance” or adjust the allocation to any asset or asset class to more closely align with your priorities/goals.

Any buying/selling activity can create potential tax impacts. Make sure you understand what taxes will be owed if you would like to rebalance your portfolio.

Your asset allocation may shift over time.

Initially, young investors probably have a very aggressive stance. The portion of their portfolio exposed to the broad stock market or equities is probably high. Later on in life, you may choose to slowly come down the risk scale with more exposure to fixed income or an additional allocation to cash.

It is good to be aware of your broad asset allocation to ensure that your portfolio is aligned with your stage of life and any goals you might have.

Asset Location

Because of the nature of life and investing, your assets are probably spread across several different accounts.

Each of these accounts will have a different purpose, function, and tax treatment. The main focus of asset location is to determine how funds in a certain account will be taxed. You need to know what amount of your assets will be taxed when withdrawn.

Because you paid taxes before the transfer/deposit of funds, the dollars in your Roth IRA, Roth 401k, and HSA will not be taxed when withdrawn.

When it comes to your Traditional IRA, 401k, or other pre-tax savings vehicles, you will be required to pay taxes on any amount you withdraw to create income.

For a brokerage account, you will pay taxes on any gains from investment activity. The taxable moment occurs when a gain is realized, not when any amount is withdrawn.

The little pie chart of asset location can be instrumental in certain decisions. You may choose to complete a series of Roth conversions from a pre-tax account to a Roth account or take another action to improve your tax location situation.

Tax location affects the order in which you will withdraw income from your retirement accounts and the amount of taxes paid on this income. Your withdrawal strategy is important and if done in a non-optimized way can be costly.

An update on the tax location of your assets allows you to have a full picture of your after-tax total assets. In an effort to minimize “Total Lifetime Taxes,” you can make adjustments to tax location over several years.

Action Items

After reviewing your one-page financial plan, you might need to complete some specific tasks or provide information to your financial advisor.

A discussion without action might feel good, but it likely won’t create valuable results.

After every conversation or meeting, it makes sense to dialogue back-and-forth about what should be completed next and who will complete it.

Your financial advisor should explicitly state what they will be doing for you. Better yet, they should provide a summary of the meeting and the action items via email.

Some action might be required of you too. In many cases, this should be facilitated by your advisor, but any final step or decision will be completed by you.

Preparing, planning, and discussing can be fun but in the end, take action!

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TL;DR

It may not be easy at first, but a simple summary of your financial plan creates more value than an overly complex mini-book.

One page is enough!

Your one-page financial plan is like a guide, providing confirmation that you are on the right path and giving basic insight about the future ahead of you.

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Have you created a one-page financial plan? Do you work with someone who can provide it to you and answer your questions about the future?

There comes a time when you should have a high-level view of your financial life.