You probably own some funds and a policy or two. This week: why that is not a plan, and what one actually covers.
Most people think they have a financial plan. They have a pile of products.
InvestBetter™ episode 2 is about the difference, and the six areas a real financial plan has to cover.
You have a 401(k). You have some insurance. Maybe a few funds someone sold you years ago. So you have a financial plan, right? Not quite. When I ask people to explain their plan out loud, it is often the first time they have said it to anyone. Most of them hear it and say, that sounds reactive. This week Wendell Moon and I walk through what a real plan looks like, so you know what you are aiming for.
What is a financial plan?
A financial plan is a strategy that covers every part of your financial life and tells you what to do next. It is not the account your employer opened for you or the policy your college roommate sold you. Those are products, and products are fine. But part of why so many plans are really product piles is that the industry pays people to sell. I started out at an insurance company, and the honest truth was that the way to win the trip was to sell more of that one thing than anyone else in the office. Good advisors overcome that. You still need to know the pull exists.
What should a financial plan cover?
Six categories for everyone. A seventh if you own a business. This is the picture I show people. Whoever you work with, this should be your goal.
Cash flow
A reserve number you chose on purpose, with a plan for every dollar above it. You can say what you spent last month. Debt is a strategy question, not a yes-or-no question.
Tax strategy
Your CPA gets the return out on time. Strategy is a different job. Know your rates and which bucket your money lives in: tax deferred, tax free, or taxable.
Investment planning
Bigger than money in the market. A business and real estate count. Look under the hood: fifteen funds that hold the same things is not diversification.
Retirement
Retirement means you could stop, whether or not you do. Give your advisor a target to reverse engineer from, and stress test it with bad years.
Estate planning
A basic will is step one. Most people have more vision than that once someone asks: staged gifts, trustees, terms you chose.
Risk management
Not just insurance. Covered risks are obvious. Ask what you think will never happen, and whether you could survive it.
Business strength
IF YOU OWN A BUSINESSOperating and buy-sell agreements in writing. Clean, current data to make decisions from. And focus, because your level of focus is directly connected to the outcome.
Do this week
- Rate yourself 1 to 10 in each of the six categories (seven if you own a business).
- Be honest about the categories where you’d score a 2.
- Pick the one you can move fastest and set a goal for it.
You will not take every category from a two to a five overnight. That is fine. From today, if you own mutual funds, great. If you bought insurance, awesome. But you would not say you have a complete financial plan, because now you know what one is. You would say, I do not have one yet, and I am moving toward it. That is a win.
New here? Episode 1 covers the four checks to run before any investment.
Two pages: the big idea, the four moves from products to a plan, a category self check, and three questions to ask your advisor.
See where you stand across the core areas of a plan. It is not a financial plan, but it is a clear first step.
One short note a week with the new episode. Nothing else.
FAQs
What is a financial plan?
A strategy that covers cash flow, tax strategy, investments, retirement, estate planning, and risk management, and tells you what to do next. Owning a 401(k), funds, or insurance is not a plan by itself.
Do I need a certain amount of money to have a financial plan?
No. The plan is what frees up the money for everything else. Start by rating yourself in each category and working on one.
What if I own a business?
Add a seventh category, business strength: agreements in writing, clean data to decide from, and focus. There are enough financial decisions in running a business that they do not fit the other six.
