Financial Planning Tools
GOALS & OBJECTIVES - Identifying the components of lifestyle activities which are desired at certain points in time or over a lifetime. These can range from buying a car, a house or a business or practice; funding the cost of education, a wedding or travel plans; maintaining acceptable level of income both before and after retirement; funding a charitable bequest; and many other important and desired life-cycle targeted events.
While these goals and objectives may change over time, they are directly related to the future costs associated with the event or activity. A financial plan provides the best chance for an individual or family to achieve them.
RISK ASSESSMENT - The value of a financial plan in humanistic terms is measured in part by the individual's comfort level with the plan itself. This qualitative aspect measures both the willingness to take a risk on the expectation of achieving higher returns and the concerns which exist as a result of the potential risks involved. While it is not an exact science, the objective is to locate the "comfort zone" within which the individual can feel that the implementation of the financial plan is not reaching beyond the limits of the individual's risk tolerance thresholds.
PORTFOLIO ANALYSIS - An assessment of the existing assets which are the resources to which an individual contributes during the accumulation phase to fund the stated goals and objectives and from which the individual draws down those accumulated assets in order to fund those goals and objectives. At times, an individual can be in both an accumulation and distribution phase (funding a special event during the accumulation phase is an example).
Assets can consist of investment portfolios, bank accounts, 401k's and other retirement plans, the residence and other real estate holdings, collectibles, current or future benefits (like Social Security), life and health insurance, current or future interests in trusts, ownership interest in a business or professional practice, as well as other types of assets or income.
A portfolio analysis takes into account the current holdings and planned contributions and attempts to determine how well they are positioned to help the individual achieve the stated goals and objectives.
DIVERSIFICATION - Because there are many factors which determine the outcome of a event, no one can say for certain whether or not a specific event will occur or how it might occur. As a result seasoned professionals will advise individuals "Not to put all their eggs in one basket".
When translated into an analysis and action plan, it means that the guiding principal is to make sure that no single component of an individual's portfolio of assets is so concentrated that its outcome would overwhelm the outcome of the other assets owned by the individual. Creating the appropriate balance of assets helps to provide a better chance of success.
BUILDING A FINANCIAL PLAN - Taking into account all of the components of financial planning, the plan must be capable of achieving the stated goals and objectives in a manner which is responsive to the individual's willingness and concern for taking risk while recognizing the individual's current income and asset holdings. Given the components of time, the current and future value of assets, current and projected income, planned contributions and the expected return on the investments, the financial plan must account for all of these issues in order to have the potential for success, otherwise it is not truly doable.
A financial plan is not capable of success if it does not meet all of the stated criteria, and will not succeed if the individual is unwilling to follow through with the components as presented.
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