Q: I hear people talking about financial planners and having a financial plan. What exactly is a financial plan?
A: That is a very good question and the type and scope of a plan depends on the complexity of a person’s financial affairs. I feel that there are certain components that can be applied to the financial life of all individuals no matter their wealth level. The first thing that I would like to clarify is a couple of terms. We hear a lot about “wealth.” When I ask people to define wealth I generally get answers that revolve around money and material possessions. I encourage people to think about the things that are really important to them and to start the planning process by setting goals around these areas rather than simply seeing who can accumulate the most “toys.” In the planning process I feel that there are four key areas that you should focus on. These areas are accumulation, protection, distribution and transfer.
n Accumulation deals with reviewing your financial picture and determining where your money comes from and how it is spent. Basically the old budgeting process! It is important that you structure your lifestyle in a manner that allows you to meet your obligations and still have funds available to enjoy and to “accumulate.” Once this is done you can then decide how your “accumulating” funds will be invested and in what type of accounts.
n Protection is the area that keeps things on track when unforeseen things happen. You need to protect against premature death (life insurance), you need to protect against loss of income (disability insurance), you need protection from casualties against or caused by you (property and casualty, as well as liability coverage) and you need to protect against health care and elder care issues (health insurance and long-term care insurance).
n Distribution involves having a sustainable strategy for how you spend your assets for your lifetime goals and for your retirement years.
n Finally, it is important to have a plan for how you will transfer your assets during your lifetime and at death. These issues include how assets are titled; preparation of wills, trusts, etc; charitable inclinations that you may have and having a vision of how you want to be remembered.
Using these four areas as a framework, you will cover most of the areas that you will need to cover in your plan. A lot of the work can be done by you. You know your goals and values. Don’t be so concerned with planning for the next 20-30 years. Focus on five-year segments and remember that the process is ongoing. Things change and you must continue to tweak your plan throughout your life. I suspect that most of us do not look at things the same way when we are 50 as we did when we were 25. Our lives, values and goals are constantly evolving. With this in hand, you then can start to implement your plan. Don’t try to go it alone. Bring on a team to help you. Your team might consist of an attorney, an insurance professional, a tax and accounting professional, and a financial professional to coordinate all the efforts. An old saying that “a goal without a plan is just a wish” holds especially true when you are preparing for your future.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Greg Epps is a registered representative and Certified Financial Planner with Epps Financial Partners. Securities are offered through NEXT Financial Group Inc., member FINRA/SIPC. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.