5 Tips for Building a Financial Plan
Presented By Joshua Bradburn
This summer, one of my clients took a road trip up our legendary California coast, stopping along the way and enjoying the sandy beaches and small towns, wine country and redwood forests. The itinerary was detailed, including hiking trails, restaurants and shops to check out along the way. Like any road trip, it is not enough to just have a final destination. You need a roadmap that tells you which turns you’ll make along your journey. This is how I think about financial plans as well—they’re your roadmaps to help you reach your financial destinations—your goals.
According to recent Schwab research, those who put pen to paper with written financial plans are more confident, more engaged with their wealth and demonstrate more positive saving and investing behaviors.
Of course merely having a financial plan doesn't cut it. It needs to be complete, realistic and actionable. At Schwab, we believe these are five key factors to consider as you develop a plan to manage your wealth:
1. Create a list of goals that that include how much you’ll need and a deadline. If you write down your goals, you’re more likely to achieve them. Think of them as a road map to where you want to go—and make them practical and attainable. Here’s a simple two-step approach:
Step 1: Divide your goals into three categories: short term (less than one year); medium term (one to five years) and long term (more than five years).
Step 2: Attach a dollar amount to each goal. For instance, a short-term goal might be a family vacation. How much will it cost? The more specific you can be, the more motivated you’ll be to work toward that goal.
2. Review your current situation. Total up how much money have you already accumulated toward each of your goals, and how is it being invested. Be sure that your allocation between stocks, bonds and cash investments is appropriate to help reach your short-term and long-term financial goals. Also consider your investment vehicles. Make use of tax-advantaged accounts for retirement savings. But avoid tapping those for non-retirement purposes, like the down payment on a home. Instead, use taxable accounts for these types of major purchase goals.
3. Make assumptions about your future. For longer-term goals like retirement, consider how much you'll be contributing towards each of your goals over time. The earlier you start saving, the less you’ll have to set aside each year. If you start saving in your 20s, 10% of your salary before taxes each year is a good goal. If you wait until your 30s, that number needs to bump up to 15%. Wait until your 40s, and you’ll have to put away 30-35% each year. No matter when you begin, the important thing is to stay on course.
4. Assess your risk tolerance. Evaluate the amount of risk you're willing to stomach with your investments to help inform how you should allocate your portfolio between stocks, bond and cash investments. This is key to staying the course toward your goals during the inevitable ups and down in the market. Your willingness to take on risk will and should vary depending on your various savings goals. For example, if you’re getting ready to send your child off to college, you probably don’t want to risk significant losses in your portfolio. Rather, you might be aiming to grow the value of your investments but also have current income needs and want relative stability. Just as an example, for those types of needs, Schwab’s moderately conservative model portfolio has 40 percent allocated to equities, 50 percent in fixed income and 10 percent in cash or cash investments. A more long-term goal may allow you to be a bit more aggressive in your allocation, but always stay diversified.
5. Analyze return expectations. Based on your risk tolerance, a sound investment plan contains some sort of expectation regarding the portfolio returns. These return expectations aren't year-by-year forecasts, but represent long-term averages used in the planning process. It’s important to stay realistic. If your return estimates are too optimistic, you run the risk of not being able to retire on time or pay for a child's education. If they're too pessimistic, you may needlessly sacrifice some of your current lifestyle. To reap the most reward from your investments, try to avoid unnecessary fees and taxes.
Developing a written financial plan is one of the most critical items to a successful investing and reaching your financial goals. In fact, Schwab’s Modern Wealth Index shows those who put pen to paper with written financial plans are more confident, more engaged with their wealth and demonstrate more positive saving and investing behaviors. However, Schwab research shows just 28 percent of Los Angeles residents have a financial, plan, so there is plenty of room for improvement.
Joshua Bradburn is a financial consultant at the Charles Schwab branch in Santa Monica. He has over ten years of experience helping clients achieve their financial goals. Follow Josh on Twitter @JoshBradburnCS. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC.
Investing involves risk including the potential loss of principal. Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Information presented is for general informational purposes only and is not intended as personalized investment advice as individual situations vary. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified professional.
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