There is a lot of confusion around what a financial planner does.
Some think they just manage investments (some do).
Some think they just sell insurances (some do).
And some think they help on everything that has to do with money, like me (some do).
The best financial planners don’t just do one thing. They help you manage your entire financial life. I like to think of myself as a personal CFO for my clients.
I love the picture of above from Max Pashman as it does a really great job of showing all that a GREAT financial planner does.
For some clients we are helping mostly on cash flow, debt payoff, and foundational work. For others, it is estate planning, tax planning, and helping them sell their business.
To help you better understand what a good financial planner specifically does, we will go through each topic of financial planning and what we look at and think about.
1. Identifying Goals
This is by far the most important part to start with. There is no way to know what to do if we do not know where we are going.
We have found that very few truly know and have thought out there goals and what it takes to get there, but you have to do this. Lay it all out there.
We help our clients map out their goals, refine them, put dollars and time frames behind them, etc. It is a crucial first step to financial planning. And honestly, for the group I work with, many times their goals are not set in stone. They have the house, the cars, the income, etc. This is where planning for flexibility to pursue what you don’t even know you want down the road matters!
2. Personal Cash Flow
Great financial planning starts with nailing down your cash flow. It does not matter how much income you make, if there is no money leftover for savings and investments, you are not going to build wealth.
To nail down your cash flow, you need to get all the important numbers. This includes:
- Your take home pay (find this number pre you doing any to your 401(k), hsa, etc. We need to make sure those are the right choices for you first).
- Your average monthly spend
- Your surplus (what is leftover after subtracting the two)
The goal is that you have around 20% or more available here to help plan for you goals. The higher the percentage, the faster you will become financially free.
If you do not have much of a surplus, then you need to focus on increasing your income, cutting costs, or both. There is so much power in increasing your income!
3. Cash Reserves
A good financial plan includes an emergency fund as the foundation. If you get in a car accident, have a major medical expense, the furnace goes out, or you lose your job, you need cash on the sidelines for it. This could be anywhere from 3-12 months worth of expenses based on your situation.
We fine tune these numbers with each person based on their life, job, goals, risk tolerance, savings rate, dollars in an HSA or taxable account, etc.
Here’s a simple way I think about it:
- 3 months = dual income, safe jobs, lots of assets built up, rent or have newer car
- 6 months = 1 income in a safer job. Or 2 incomes that are less safe, have kids, old house, older car, etc.
- 9-12 months = 1 income, commission based, business owner, high risk lifestyle
- 12 months+ = New business owner or commission salesman where it can take a long time to build. Or it requires capital to get going.
Fine tune the right number for you and make sure you are getting a yield on these dollars.
Debt can be both good or bad. It is totally fine to leverage low interest debt for a mortgage, car loan, student loan, business loan, etc.
It is not good to have credit card debt, personal loans, etc.
We take a look at the entire debt picture with our clients and come up with a plan. Based on the type of debt, their feelings towards debt, their investments, their goals, etc. changes how aggressive we are vs paying the minimum.
There is no perfect answer here on how to pick which strategy you do. It has to be tailored to you and your life.
How you approach it may be entirely different than someone else and that is okay!
Insurance is a core part of a financial plan. As you build wealth, the fastest way to destroy it is from huge outlays of cash.
This could be from:
- Health emergencies
- Car accidents
- Spouse dying early
- Becoming disabled
- Being sued
These are all things that can and do happen. And on top of that, they also come with very large dollar amounts behind them. Getting the right insurances in place can be the difference between maintaining wealth and losing it.
We take a look at all our clients insurances or lack of insurances and help them protect their wealth!
6. Retirement/Financial Independence
A core part of a good financial plan is retirement planning. No matter how far away it may feel, the earlier you prep the better. For most of my clients, we are preparing for financial independence. They are not sure if they will ever want to retire, let alone at 45,50,55, etc. But they want to set themselves up to have the choice to pursue what they want regardless of the pay behind it.
The hard part is figuring out what you have to do to get there.
We all have seen how valuable time in the market is, which is why I always advocate for starting to invest early and often, even if it is only a small amount. Building that habit of always using some portion of your income for wealth building is key.
In order to figure out what to do, you need to understand what retirement accounts you have at work, what the match is, if you have Roth vs traditional, what your income and tax bracket is, etc.
Then you need to come up with a goal for when you want to retire by and what you want your lifestyle to look like.
Lastly, you need to figure out how much to save and what to invest in.
This is obviously a lot, but something we help every single client on. You need to figure out:
- How much and to which accounts
- Which to prioritize first
- What to invest in
Then go from there and do it!
7. Real Estate
One of the biggest decisions people make in their life is around when to buy a house, what to put down, how much they can afford, what type of loan to take out, how much it will cost after, how much of their income they can allocate to this, etc.
We help our clients with this decision, finding the loans, understanding how much to put down, when to refinance, etc. Way too many rush into it, buy too big of a house, and are unhappy afterwards. It pays off to go slow, do the math, then pull trigger once you know it can work out well for you.
We also help our clients analyze rental properties. Should they turn their current home into a rental when they move or not? Should they buy that investment property or not? How do they best set this up in a smart way? All are super important questions that need to be answered.
8. Estate Planning
Time and time again estate planning is overlooked. So many think that they don’t need it, it’s too expensive, they don’t have enough wealth, etc. But this could not be farther from the truth.
Every adult needs to get their estate planning done. You need to make sure you have it set who makes medical decisions for you, financial decisions for you, where your kids/pets go, etc. That is the basis of good estate planning. After that, you can go and starting thinking about trusts.
Tax planning has two key parts:
- Being aware of what you owe and planning around it
- Doing planning and lowering your overall effective lifetime tax bill
Most think tax planning is just about number 2, but let’s start with part 1. I have worked with multiple clients this year that are $50k-$150k off on their estimates for their tax bill. This could be from AMT, RSU’s vesting, Net investment tax, extra business income, etc. If we did not work together and plan around this, they would have spent it, put it into a Rental, etc. and be in debt to the IRS. That is never a fun place to be.
With tax planning, the goal is to lower your total effective lifetime tax rate. Think of a high income earner who makes $1mil a year and has an effective tax rate of 30%. That means they average $300k of taxes a year (sounds wild to most, but many of our clients pay at least that much). Great tax planning could mean getting this down 5% for example. If you do that, that is a $50k difference a year. Compound out that down the line and it can have a huge impact.
This can be from great planning around real estate, equity comp and AMT, QBI, self employment taxes, using the right tax advantaged accounts, Roth conversions, estate planning, etc.
Great tax planning really pays off.
10. Equity Comp
I talked about this a little above already, but equity comp has become more and more normal over the last decade or so. And while equity comp can be amazing, a lot of planning needs to be done around it. The way RSU’s, ISO’s, NSO’s, etc. are taxed is entirely different. You also need to know how and when to exercise, when to sell, how to plan for taxes ,etc. Having a planner to come up with this strategy and combine it with your entire financial plan is key.
11. Building Your Professional Team
Great financial planning is a team game. You need a quality accountant, estate planning attorney, insurance agent, and then potentially business attorney, bookkeeper, etc.
Your financial planner should quarterback this team, help you build it out, and make sure they are all communicating and on the same page. If they aren’t, you will never get the same level of results as everyone is working in different directions.
12. Bringing It All Together With A Financial Plan
This is a lot of information above. But knowing the information and what to do on one topic is not enough. A good financial plan brings all of these parts together into a cohesive plan that is best for you and your life.
I have seen many who are in a great spot with investments, but lack the insurances and it ends up killing them
But it does not stop there. Your financial plan is a living breathing document that needs to be updated when:
- Income changes
- Benefits change
- You get married
- You have kids
- Expenses change
- You start a business
- You get an inheritance
- You lose a job
- Laws and regulations change
- Your business changes (growth, decline, new hires, new partners)
And those are only a few instances I named. Planning is a verb and a never ending process. To see a real life financial plan we use with our clients, check a sample one of ours out here.
I hope this better helps you understand what a financial planner does and what real life financial planning looks like.
If you need help on your financial planning journey, we have 2 slots left this year for new clients. Go apply to work with us using this link.