A RACE WITHOUT A FINISH LINE

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It is difficult to run a race when you don’t know where the finish line will be.

The parameters of the race matter. The distance of a race. The surface on which the race will be run. The time the race will be run. The number of competitors. All of these elements are key inputs. Each parameter will play a part in determining a runner’s goals, strategy, and plan.

Even short track sprinters will have a race plan, but life is more similar to an ultramarathon. Race planning for these athletes is incredibly detailed and intricate.

The planned stops for meals and rest. The carefully chosen shirt, shorts, and shoes. The race kit with random supplies. The support team following closely behind or preparing in advance.

A race without a finish line and other much-needed parameters makes it nearly impossible to prepare and create a plan. Life without guardrails and a financial plan is essentially the same way.

Your financial plan is like an ultramarathoner’s race plan. It helps to determine when to stop, what to do along the route, and what your ultimate goals will be.

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Components of Financial Planning

Many of these different aspects of a financial plan are closely related or even directly tied together. Choices made in regards to estate planning will clearly impact your tax planning efforts. Your investment choices and overall portfolio management will determine aspects of cash flow and retirement income.

We’ll look at four broad components of a financial plan.

1 - Risk Management and/or Estate Planning

Generally speaking, this category is the least exciting component of a financial plan. The content is a bit grisly, and humans as a whole typically prefer to avoid discussing their own mortality.

Loosely speaking, risk management is most concerned with insurance products and mitigating the downfall of any unexpected events. This may include purchasing life insurance, disability insurance, or other forms of insurance to protect your income.

A financial plan always includes insurance but don’t be confused. There is more to it than insurance.

Many companies and so-called "advisors" focus exclusively on this component of financial planning because their compensation is tied to selling insurance products. I can’t state it clearly enough. Although important, insurance is not always the answer! (I saw this post on LinkedIn recently about insurance products and their issues.)

If someone always recommends/provides an insurance-only solution to all of your financial needs, you need to carefully consider whether the recommendation has your best interest in mind.

Estate planning is the process of transferring your assets after your passing. It is typically completed alongside an attorney and financial advisor, who will work alongside you to minimize estate/gift taxes and ensure heirs/beneficiaries receive any assets.

Because it is so crucial, there will be many future posts covering estate planning in greater detail. Just as a high level preview, there are typically a few elements to your estate plan.

You will start by assigning beneficiaries to your accounts and assets. This typically allows the asset to avoid probate and pass directly to the named individual. You will see that avoiding probate (i.e., a court supervised proceeding about transferring assets) is an important theme in estate planning.

If you have a complex situation or want a higher degree of control about how your assets will be transferred, you may decide to create a trust. There are several different types of trusts, but generally speaking, a trust allows you to dictate how your assets will be distributed.

Nobody wants to spend time discussing what will happen at the end of life, but this component of financial planning is incredibly important because it is most concerned with caring for your loved ones in the event you are unable to do so.

2 - Investing and/or Portfolio Management

Investing is about putting dollars to work in order to create wealth. For you, this may be accomplished through simple retirement accounts and brokerage accounts, through real estate, or through a business.

Your contributions are important, but most of the heavy lifting will be accomplished through compound growth. It’s an oft-cited cliche and makes an appearance in nearly every financial topic/article. Nevertheless, compound growth is important and investing allows you to harness its power.

The dollars you use to invest in a real estate asset or an individual business will generate their own version of compound growth, which will allow you to reinvest in the growth of the business or pull cash out of the business in the form of income.

Portfolio management is an art and a science. It involves carefully tracking and overseeing all of your investments from a holistic perspective, taking into consideration how each individual asset or decision will impact everything else.

This process will help you address where you should invest your next dollar and how you will withdraw dollars to support your lifestyle in retirement.

As you approach the later stage of life or the last lifecycle of your business, portfolio management becomes even more crucial. Your asset allocation (for simplicity’s sake think about stocks and bonds) becomes increasingly important.

When should you sell your business or a piece of real estate? This is a portfolio management decision that requires a framework and detailed analysis. This decision can easily be incorporated into and accounted for in your financial plan.

Portfolio management takes everything into account and provides a framework for your decisions.

3 - Tax Planning

This may be the most important category while simultaneously being the most frequently overlooked.

Certain types of financial advisors are not legally allowed to give any advice related to taxes and avoid the topic entirely. Another large percentage of the financial planning industry does not actively provide tax guidance due to the fact it is too time-consuming or too difficult.

I’ll be the first to admit that tax planning is dull. There will be few movies created where the main character is a tax planning expert.

You probably aren’t excited about tax planning either, but you undoubtedly hate paying taxes.

Most tax preparers and CPAs have a backward focused point of view when it comes to paying taxes. It’s a good thing! You want someone to carefully review the previous year and ensure that you won’t be receiving any mail from the IRS.

Your financial plan will be most concerned with your “Lifetime Taxes” or the total amount of taxes you will pay across your entire life. This is a forward looking perspective. Hopefully, your financial advisor takes this perspective to balance out the CPA.

Although uninteresting, the potential impacts of any given decision can be quite large. As you near or enter retirement, this category of financial planning becomes especially important.

4 - Retirement Planning and/or Succession Planning

You’ll still require income in retirement. In most cases, you will be pulling money from retirement accounts or using cash flow from other investments (real estate or a business) to fund your needs/wants.

This is best accomplished through a rules-based process which takes into consideration market conditions and your needs. Many people utilize a “guardrails strategy” that automatically adjusts your withdrawals based on the total value of your accounts.

If you are a business owner, you will want to transition your business to an internal successor or an outside buyer. Finding a trustworthy individual to care for your business is no small task and requires a future-focused planning. You want your business to experience the same level of care that you provided.

Forward thinking and planning makes this component of your financial plan significantly easier. You should know how much income you’ll require or want in retirement far in advance of actually retiring. You should have a succession plan for your business in place far in advance of realizing it is time to scale back or sell.

This part of your financial plan may require work and a series of difficult discussions, but the process can be incredibly rewarding if done right.

Benefits of Financial Planning

1 - Increased Understanding

One of the best things about creating a financial plan is the opportunity to examine your motivations and goals. You’ll naturally begin to answer questions about your life and future.

Do you love your job? How long will you want to work? Do you worry about retirement and if you’ll have enough income to support your lifestyle? Are you concerned about whether or not you’ll be able to scale back in your business and find someone to steward what you’ve built?

With a financial plan in place, you have a measuring stick for all of these questions. You can parse through from a numbers perspective and talk it out with your spouse, friends, or an advisor.

In addition to the plan itself, a good advisor provides guidance and answers to your questions/concerns. Over time, they become a trusted source where you can formulate or test new ideas for your financial situation or in your business.

Your financial plan gives you a greater understanding of your long-term financial goals but also life generally.

2 - Increased Confidence

The initial stages of financial planning are often filled with uncertainty. What insurance policy should you choose to implement? What investment accounts should you open? How should you use your income or business cash flows to invest?

All of these questions (and many more) quickly rise to the surface, and you may not be sure about what is best for you.

When you have a financial plan and are working alongside an advisor, you have easier access to information than ever before in your financial life.

Google may have every answer to any question, but an advisor helps apply these answers to you and your specific plan/situation. You’ll have fewer doubts about your situation because all of your questions have been answered and incorporated into your financial plan.

With your financial plan created and regularly reviewed, you can be confident that you are aligned with your long-term financial future.

3 - Increased Focus/Intentionality

Once you know where the finish line will be, you can start preparing and planning for the race. You know what needs to be done and can go about accomplishing it.

The financial plan isn’t exactly the finish line, but it provides a course of action. You will have a general outline of the future.

Your life and finances will evolve with time. Chances are excellent that your financial plan will change too. That being said, a financial plan will provide parameters to add more intentionality. You will have targets and goals to account for along the way.

With these targets in your sights, you’ll quickly take advantage of the incremental focus and each of your decisions regarding your financial life can be viewed in light of your financial plan. A financial plan isn’t a guarantee you will achieve all of your goals or become wealthy, but it make your financial life/decisions more intentional.

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TL;DR

You can't run a race without a finish line. Maybe life is the same way.

Without a financial plan, it is easy to be unfocused in the present and worried about the future.

A good financial will provide confidence in the fact you are doing the right thing and are on the right path.

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Have you created a financial plan for yourself and your family? Do you regularly review your goals and strategies?

Take this email and forward it to someone you know who is financially successful, perhaps a business owner. You’ll want to know what they are doing and how their financial plan guides their actions.