As you know, financial planning incorporates investing, tax, insurance, estate and retirement planning, as well as budgeting and life goals. While you can do your own financial planning, you will still have to align yourself with the proper professionals.
Getting a Professional Opinion
At minimum, we recommend consulting the following professionals when establishing your financial plan:
You should have an insurance agent to determine the appropriate amount of coverage you will need. Depending on your assets and current financial situation, you may need life insurance, long-term care, disability or personal liability policies.
You should consult a tax adviser, who will be able to determine your tax exposure and offer suggestions to minimize your tax liability.
Estate Planning Attorney
An estate planning attorney can draw a Will for you to ensure your assets are properly titled so your wealth will pass to your family or heirs. Properly titled assets may also decrease both your personal and tax liability.
Without these elements in place, you truly do not have a plan. One catastrophic event could wipe out both your current assets and future earnings.
Establishing saving and spending patterns are also important for do-it-yourself financial planning. While there are thousands of retirement calculators available on the Internet to calculate how much you will need to save for retirement and how much you will have in retirement based on the amount you are saving annually, these estimates are often over simplified. These do not always take into consideration inflation, life changes such as births, marriage, divorce or death, or even an increase in income or savings.
There are education cost calculators, mortgage interest calculators and even calculators that compare the cost of leasing a vehicle versus buying a vehicle. These can provide you with an idea of how much money you may need in the future and how much you should be saving now. These estimates may be a place to start, but developing a financial plan will require you to revisit these estimates often to adjust the variables such as income, inflation or tax status.
At Henssler Financial, we follow a philosophy called The Ten Year Rule that incorporates long-term planning with long-term investing. With this philosophy, any money you need within 10 years should be invested in fixed income securities, and any money not needed within 10 years should be invested in high quality, individual common stocks or mutual funds that invest in common stocks. This method essentially protects your money to live on for the next 10 years. If your child is entering college in four years, the money you have saved for Junior’s education should be in a fixed-income security such as a U.S. Treasury or municipal bond that will mature when those funds are needed. Likewise, if you plan to retire in 30 years, you should be investing the money you are saving for retirement in high quality investments.
While there are inherent risks with all investments, investing should not be considered a gamble. We see investing as a long-term process. With 10 years of liquidity covered, the money you invest today should have more than 10 years to grow before you will need to liquefy the assets. Investments made with a long-term horizon further reduce the risk to a financial plan. Couple this philosophy with some strict investment criteria, and you should further reduce your investment risk.
When the market is healthy and most investors are bullish, do-it-yourself investors feel that they are smarter than the average person. During this type of market cycle, anyone can invest and turn a profit, leading many investors to believe they have a higher risk tolerance than they do or should. An investor easily can get swept up into chasing returns. We recommend only buying high quality common stocks or mutual funds that invest in common stocks by setting basic criteria for any stocks you wish to purchase. We recommend purchasing stock in companies that are at least rated “A” by Value Line for financial strength, at least “2” by Value Line for safety, or at least “A-” by Standard & Poor’s for quality.
Pitfalls of Do-It-Yourself Financial Planning
Failure to implement a plan
The main pitfall is that most people do not have the time it takes to create a comprehensive financial plan. They simply cannot devote the time it will take to become an expert on tax strategies, estate law or portfolio direction. Without the time to devote to financial planning, many arrive at retirement age with no plan at all.
Failure to begin planning early
The sooner you start planning, the easier it will be to achieve the financial goals that you set. Many couples make the mistake of focusing on their family and home, and put off saving for retirement until their children are grown. When you begin to save early, your investments have more time to grow through the power of compounding.
Failure to monitor investments
The market can change very quickly. By the time do-it-yourself investors hear about a shift on the news, it may be too late to make changes in their portfolio. Likewise, they may overreact to sensational news about normal market fluctuations.
Fear of capital gains
Some people avoid selling an investment because they do not want to recognize the capital gain. In the long run, this might harm your portfolio. You also risk investing in assets that cannot be liquefied easily when the funds are needed.
Emotional attachments to investments
If you have made a healthy profit from one investment, will you be able to let it go when it is no longer appropriate for your portfolio?
Failure to organize records
Investments are often left “idle” for several years. In those years, paperwork can be lost or misplaced making it difficult to keep up with taxes, splits or sales.
Financial planning is a critical element in your financial success. Tackling it on your own can be overwhelming for most investors. Because there are so many variables with every situation, there are no “one-size-fits-all” do-it-yourself plans. Proper planning takes time, effort and knowledge that many people cannot fit into their daily lives. A professional financial planner can keep you on track with your plan and can objectively make decisions that are in the best interest for your situation.
If you would prefer to talk to a professional financial planner about your unique situation, you can contact the Associates at Henssler Financial at 770-429-9166 or [email protected].