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Strategy - 2nd Pillar of Your Complete Financial House

As you may have read in our previous post, our first pillar discussed attaining the right Mindset by visualizing your goals & objectives, determining your purpose, and applying discipline. Now for our second pillar, we must create a strategy, and creating different strategies is necessary to accomplish your financial goals. To create a strategy for achieving those goals, we must first assess your current circumstances and financial situation.

Assessing Your Circumstances

1. Expenses

It’s crucial to know how much you are spending and what your projected spending will be in the future. People think they’re going to spend less in retirement, but it’s actually quite the opposite. During the first 10 years of retirement, many are surprised that expenses tend to go up! This is because more time means more money is used on Lifestyle Expenses, such as entertainment and travel. It usually starts to level out in the next 10 years when people are less active. Then after that, expenses tend to go up back up due to medical expenses. These common factors must be taken into account when developing a financial plan.

2. Income

Secondly, it’s important to know your income. Many people have income based on commissions and bonuses. How much income will your investments produce? Current income needs to be determined so that we know how much we can save before achieving our goal. No matter the source, we should account for that.  Future income such as Social Security and any pension amounts should also be determined. There are strategies for Social Security and Pension options to determine when you should start collection, and the best option to select.

3. Savings

What are your savings? Saving is difficult for many, but once a person has a goal or dream in mind, they are more readily able to commit to it. This results in the person becoming more realistic with their savings. It is important to know income and expenses first, to determine how much can be saved. As a financial planner, we can run an analysis of these items and then create a saving strategy to help clients reach financial goals.

Things to consider when saving are maximizing plans such as a 401k in order take advantage of tax laws and benefits. It’s not so much about saving in a retirement plan, it’s more about strategizing when and where to save. There are times when the money is best saved outside of a retirement plan.

4. Assets

Now you need to determine what assets you have and which assets have taxes. If you are saving in IRAs or 401ks, then you’re going to pay tax eventually because it is tax deferred. If a retirement plan is the goal, then it’s good because you’re not getting the money until later. If your goal is for a second home or college plan, there are other saving plans you may want to consider. Part of creating the strategy is using the right means to match your financial goals.

For many people, their home is a significant asset. When planning for retirement, you need determine if you want to stay in home or if you would want to sell your home to downsize and use the money as an asset that fuels financial goals.

5. Obligations/Liabilities

You’re going to want to consider money that you’ll put away for other obligations such as college funding. You can estimate the cost now and then make a projection based on the time the children will be going to college, taking into account inflation.

Paying down your mortgage is another thing to consider. If you finish paying mortgage early then you’ll have additional money available for savings, or just one less expense later in life.

6. Investments

It’s important to be aware of risk in your investments and your expected rate of return.

People have different risk tolerances. A study showed that 90 percent of investment returns are determined by overall asset allocation. It’s not about a specific stock or mutual fund. Having proper asset allocation means you can determine an expected rate of return. You want to make sure that you can sleep at night and not make a rash decision during a market down turn.

If you’ve determined the risk, then putting money in various investment classes will help lessen the chances of any surprises. Knowing the expected rate of returns of your investment portfolio over various time horizons will help in understanding your investment performance.

Bridging Your Vision

Now we take all the information that we gathered, and create a step-by-step strategy to reach each of your financial goals.  We create an overall financial plan, matching the vision with execution. Of course, in order to make a proper plan, we have to set priorities. There are multiple goals you may want to reach and if we have priorities, we can have specific requirements for each year to reach those priorities.

We also need to review the plan annually because life happens and the plan may be altered to reflect any changes. We want to see if we’re still on track and if the goals are still important each year. It’s a very rewarding experience to see your financial dream fulfilled. It’s also a lot of work, which is why it’s very important to have a professional at your side to help reduce the burden.


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Larry Heller, Not Your Average Advisor.

 

A CFP® (Certified Financial Planner) and a former CPA.

Has helped solve complex financial planning for 20+ yrs.

Member of Wealth Management Think Tank.

A financial advisor think tank that meets monthly to discuss investment strategies and planning opportunities.

Larry is approached regularly by the respected journals.

“Journal of Financial Planning”, and “The Wall Street Journal”.