Financial Planning Basics

Dan Neice, president of the Financial Planning Association of Hampton Roads, has helped kids
who haven’t even graduated high school create financial plans.

“I talk to them about starting early—because early is key,” Neice says of the young adults in whom his older clients, their parents, hope financial acumen might be instilled.

Not saving early enough is a problem Tracy Shackelford, a financial representative in Williamsburg, Virginia, sees frequently. Luckily, a late start can be mitigated by the dreaded “B-word” (as Neice refers to budgets), awareness of spending habits and financial discipline.

Start from the Beginning

Neice says many people are overeager to invest. Before investing, he advises establishing an “emergency fund”—ideally, three to six months worth of income to protect against vulnerabilities like job loss and injury.

Saving isn’t always easy, which Shackelford says may be due to people’s tendency to save “what’s left” instead of saving up front and then spending.

“It’s always best to ‘pay yourself first’ and put money into savings,” she says.

Neice recommends disability insurance as another important tool for asset protection. While “relatively inexpensive,” disability insurance can save your house, car and credit history, he says.

Set Goals
When making a financial plan, consider if and when you plan to retire and the retirement lifestyle you aspire to. Think long-term; Niece says he’s seen many aging clients, especially those in high-stress careers, change their minds about never retiring.  

Also consider taxes, administrative fees and inflation, which has averaged about three percent each year for the last quarter century—meaning today’s $1 million will be worth around $640,000 in 15 years.  

Maximize Benefits of Tax-Advantaged Plans

Individual retirement accounts (IRAs) and defined contribution plans offer various tax advantages that can be especially significant when maximum contributions are made.  

Contributions to Roth IRAs are not tax-deductible, but withdrawals are tax-free starting at age 59 1/2 if the account is at least five years old; contributions to traditional IRAs may be tax-deductible, but withdrawals are taxed as income. For 2015, the combined annual contribution to IRAs is limited to the lesser of an individual’s taxable compensation for the year and $5,500 ($6,500 for those 50 and older).
Employer-based plans such as 401(k) plans and 403(b) plans offer higher contribution limits, tax-deferred growth and, often, employer-matched contributions to a certain amount. Contributions to these plans are made with pre-tax dollars, and as with traditional IRAs, withdrawals are subject to income tax.

Make an Investment Plan 

The potential return on investment offered by stocks is tempting but tempered by risk; bonds are safe but unsavory, lacking the prospective pay-off of stocks. “You want to make efficient use of those precious resources,” Neice says, but what is the best way?

Inherent to a forever-fluctuating financial landscape, there is no “one-size-fits-all” answer to the risky-but-rewarding, safe-but-slow question, though Neice says the ratios of an individual’s portfolio (“allocation”), should align with their risk tolerance and time horizon.
A stock-heavy portfolio means more volatility but potentially higher return, while bonds add stability but lower return potential, he says. Investing in a variety of companies within an asset class—diversification—also adds stabilization, something those in or nearing retirement may need.

“More often than not, the older we are, the more conservative we should be,” Shackelford says. 
Moreover, financial planning is an innately individual endeavor, dependent on unique combinations of assets, liabilities and expectations. According to Shackelford: “You can borrow your neighbor’s lawnmower, but in my view, you can’t borrow your neighbor’s financial plan.”

Invest in Professional Help, When Needed 

Despite a growing empowerment enabled by the Internet, sometimes a good old-fashioned financial adviser is helpful. Shackelford says online resources can provide “rules of thumb” but lack the tailored finesse of an in-person professional.

Neice says some people simply lack the time or desire to consistently monitor their finances, which is when a financial adviser can help. “We’re kind of like the Norton Anti-Virus in the back,” he says.