A financial plan is a personalized strategy that outlines where someone’s money goes and how to finance their needs and goals. Who needs a financial plan? Everyone should have a financial plan. They do not all have to be complex. Many are simple.  

Basic financial plans may include the following tools: 

• Budgeting 

• Debt management plan 

• Retirement investment strategy 

• Tax Guidance 

Complex, or more comprehensive, financial plans can include the above but also add things like: 

• Real estate investing 

• Business advice 

• Estate Planning 

• Philanthropic pursuits  

Financial Planning is the process of a client working with a financial advisor (like a CPA or a CFP®) to help establish their financial plan. Our firm focuses on developing and implementing comprehensive financial plans for well-rounded advice and coordination with other professionals to help clients accomplish their goals per their distinct values. 

Anyone can create a financial plan

If you have a simple financial situation, you may not necessarily need a professional to help you set up a plan. We do recommend working with a financial advisor to take the complexity out and optimize it for the benefit of the investor and their family.

Here are some steps to help kickstart your financial plan.

STEP 1: Define your Goals

A financial plan is centered on your financial goals. You may categorize your goals into short-term, medium-term, and long-term periods.

Short-term goals can range from a few months to 1 year time. This could be things like going on a trip, buying a car, or paying off debt.

Mid-term goals range from 1-5 years. These goals may include paying off debt, pursuing higher education, saving up for a down payment on a house, planning a wedding, or starting a business.

Long-term goals are goals with periods from 5+ years. Usually, these goals are stretched even further from 10, 20, or 30+ years.  Here are some common long-term examples: investing in college for a dependent, retirement, or paying off your mortgage.  

STEP 2: Create a budget

A solid budget will give you an idea of your monthly cash flow. This means tracking your take-home pay and your expenses every month.

There are many ways to do this like the 50/30/20 budgeting rule, the zero-based method, or the envelop system. The key here is to see where you are overspending and see where you can save more as you work towards your goals.

STEP 3: Build an emergency fund

According to the Federal Reserve, most Americans cannot afford a $400 - $500 emergency bill. As the emergency cost increases, fewer Americans can afford it. As a general rule of thumb, a family should have three to six months of living expenses saved in an emergency fund to protect against the unexpected. We advise that people create a Starter Emergency Fund of $1,000 first.

STEP 4: Pay off consumer debt

This would include credit cards, auto loans, personal loans, and student loans . These debts can often be the most burdensome for Americans and if you find yourself struggling to make ends meet, make an effort to pay these off after you’ve completed the steps above.  

STEP 5: Invest in your retirement

A great place to start is by investing in your company’s 401(k) or 403(b) plan. If they have a match, take advantage of this. Make sure you are getting the match. 

Don’t have access to a 401(k) ? Open a Traditional or Roth Individual Retirement Account (IRA). You have 100% control over where the money goes and how it’s invested. 

Open a Health Savings Account (HSA) for future medical expenses. Contributions, investment growth, and withdrawals are all tax-free (assuming the withdrawals are used for eligible medical expenses). 

Max out contributions to all your accounts if you can. You can have a 401(k) ,IRA, and HSA open at the same time. In 2023, IRA contributions are capped at $6,500.  

If this seems like a lot to handle, it can be. We can assure you, It’s worth the work and the extra effort to have a financial advisor help you and your family throughly address these topics. These are some basic steps to help you get started today. If your life grows more complex, it will be important to monitor your plan on a more consistent basis.

Whom should I hire if I need help with my financial plan?

It is wise to seek counsel from experts in any area of life. Financial advisors can help you choose investments that align with your goals, give you a strategy to pay off debt, lower your tax burden, and so much more. 

Here at Human Investing, we are fiduciaries which means we are legally bound to always act in our client’s best interest. That means no commissions or selling pressure. Professor Kent Smetters of the Wharton School of Business notes fewer than 2% of all financial advisors are fiduciaries.  

Fee structures and fiduciary standards

Before you hire a financial advisor, make sure to ask for their fee structure.

Some advisors charge hourly or a flat rate depending on the service. Many advisors will charge a percentage of all of your assets under management (AUM) and others still will get paid a commission depending on the product you purchase from them. You will want to ensure that the firm you choose to go with is working in your best interest and you are getting the most out of what you are paying them for.  

Financial planners and advisors that abide by a fiduciary standard look out for your best interests first. Financial managers that are not fiduciaries may be highly experienced and skillful, but they can put the interests of their company over the interests of their client. The National Association of Personal Financial Advisors (NAPFA) or Broker Check are great places to start researching Financial Advisors in your area.  

 If you are interested in learning more about Human Investing and our financial planning services, check out our website.  

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Not sure what questions to ask when you meet with an advisor?

Here are six questions we commonly get asked with some advice from our team.

1. I want to support my child through college. When should I start saving?

The earlier you save, the more time your money has to grow.

The benefits of saving early are dramatic, but there's still value in starting now—even if your child is in high school. The dollars you save will not have as much time to grow, but they are dollars you will not be borrowing. You’ll also be in a better situation if you choose an account that gives you tax benefits, such as immediate tax deductions or tax-free withdrawals.

Still not sure if saving for college is right for you? Check out this article by Peter Fisher, co-founder and managing partner of Human Investing.

2. Should I spend my cash paying off high interest loans, or invest it?

Historically, the average rate of return for stock market investments is approximately 10%, while on average, the APR on credit cards has been hovering just above 20%. So, if you are investing when you have credit card debt, you are likely paying a higher interest rate on your debt than you are earning via your investments. Unless you have a huge amount in investments, you end up losing money overall.

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3. When do I start saving for retirement?

Again, start saving as early as possible to give your money maximum time to grow. Depending on your employer, you may already have some form of retirement benefits accruing. There are various ways of saving for retirement, including employer sponsored plans like 401(k) and 457b plans, or personal retirement savings like Roth and Traditional IRA’s. A mix of the two is the best way to ensure ample savings for retirement, but deciding which is best for you requires some analysis of your current and expected employment and income status.

4. Is my investment portfolio right for me?

As you age and get closer to retirement, you want to make sure the risk level of your investment portfolio is balanced to match your growth and maintenance needs. While having all of your investments allocated in the stock market may result in a high return on investment, it can also result in high losses. This can be catastrophic for a person planning on retiring soon. On the other hand, if a young person has a few decades before they are planning to retire, but they are only investing their money in bonds, they are losing out on the potential growth of higher risk investment options.

 Investment in both bonds and stocks allows for a mix of potential income and growth, and the best fitting ratio is different for everyone. Reach out to us to speak with our retirement planning team to discuss your current allocations. We care here to help better prepare you for a comfortable retirement.

5. What should my emergency savings look like?

The most common numbers suggested for an emergency fund is 3-6 months’ worth of your current living expenses. These include expenses such as housing, food, healthcare, debts, and so on. You do not need to include things like entertainment, nonessential shopping, or vacation expenses. If you are, you have too much going into your emergency savings fund that could be invested elsewhere. Below is a chart showing example savings amounts and how they compound over the course of two years.  

6. When should I begin utilizing expert tax services?

You may be at a point where using your preferred e-file service to do your taxes is still getting the job done just fine, but at what point do they get too complicated for you to be doing them on your own? Once you begin to deal with things like property taxes, retirement plans, and investments, it may be best to have an expert handle the numbers for you.

Luke Schultz, the Director of Tax at Human Investing, has over 12 years of experience in the areas of tax compliance and planning. With a heavy focus on planning, he spends much of his time working closely with individuals, putting emphasis on proactive planning to help clients make the best decisions for them and their families.

Want to get started?

Schedule an appointment with an advisor here or feel free to call us at 503-905-3108.

Sources:
Vanguard, When should you start saving for college?
The Balance, Rule of Thumb: Should I Pay Off Debt or Invest?
Money Under 30, Should You Pay Off Student Loans Early?

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A fiduciary is defined as an individual or a legal entity, such as a financial advisor. The fiduciary takes on the responsibility and has the power to act in the interest of another. This other person is called a beneficiary or principal—we call them member, human, or client.

A fiduciary financial advisor (which is all we have at Human Investing) cannot sell products that charge or pay commissions.

When a member works with a Human Investing financial advisor, the client gives the advisor their trust and expects recommendations to be made with honesty and good faith in keeping with their best interests. This may not always be the case with a non-fiduciary advisor.

The Fiduciary Standard

All Human Investing employees are required to abide by the fiduciary standard. When a financial advisor has a fiduciary duty, they must always act in the beneficiary's best interest.

Financial advisors fall into two buckets: fiduciaries and non-fiduciaries. Surprisingly, not all financial advisors have a requirement to put member's interests first. Worse yet, some advisors and their firms can be dually registered, swapping back and forth between fiduciary and non-fiduciary roles.

Suitability Standard vs. Fiduciary Standard

Financial professionals who are not fiduciaries are held to a lesser standard known as the "suitability standard." What this means is that the recommendation from a non-fiduciary only needs to be adequate.

Other Watch Outs When selecting an Advisor

If an advisor states that they have FINRA Series 7, 6, or 63, that means they are licensed to sell products for commissions. An advisor would only have those licenses for two reasons: 1) to sell commission products or 2) collect commissions from products they (or someone else) have sold.

There are many individuals and firms that say they are financial planners and do financial planning. But did you know that many of the people that say they are financial planners are not trained in the process and profession of being a financial planner? Individuals responsible for member financial planning are CERTIFIED FINANCIAL PLANNERS™. A CERTIFIED FINANCIAL PLANNER™ certification is “the standard of excellence in financial planning. CFP® professionals meet rigorous education, training and ethical standards, and are committed to serving their clients' best interests today to prepare them for a more secure tomorrow.”

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Benjamin Franklin’s quote applies to many choices we make – including personal finances. If we don’t take his message to heart, then a lack of planning can be costly.

There are traditionally two paths one will take when purchasing a large expense. They will either build a plan ahead of time to achieve a financial goal, or—the more popular path—worry about it when the expense arises. It is important to consider the hidden cost when financing a large future expense.

NOT PLANNING AHEAD MAY cost you more than YOU THINK.

Let’s take the example of a future expense of $25,000 for any situation*.

*Fill in the blank: year of college for a child 👩‍🎓, down payment for a home🏠, wedding 👰🏻, car purchase 🚘, vacation 🌞, etc.

How do you pay for the $25,000 future expense?

In this hypothetical, an individual can choose to (A) make a monthly investment over the next 10 years or (B) borrow the $25,000 and make monthly payments to pay off debt for the next 10 years. See the cost break down here:

Note: This is for illustrative purposes only. Investment returns, interest rates, and loan periods will vary.

SO WHAT ARE YOU PLANNING FOR TOMORROW?

Building a savings plan and starting early provides 27% in savings over 10 years, with a total cost of only $18,240. Conversely, the cost of convenience by borrowing adds to the overall cost by more than 33%, raising the cost to $33,360. This example is at a 6% interest rate, but unfortunately, much consumer debt is often financed on a credit card with an average APR now above 16%. A 16% interest rate on a one-time expense would more than double the cost over 10 years.

This simple illustration provides a two-sided application. As illustrated above, building a financial plan can save someone thousands of dollars. Procrastinating and not building a plan can in turn cost someone thousands. Either way you look at it, it is important to consider the real cost of any financial endeavor in order to make a well-informed decision.

Our team at Human Investing is available if you have questions or would like help building a financial plan.

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@priscilladupreez

In order to achieve retirement readiness, financial planning should be the focus of most individuals and families. Indeed, knowing how much a household needs to save and invest in producing a suitable level of income at retirement makes much sense.  At the same time, given the recent uptick in market volatility, I have noticed additional benefits.  Clients who have gone through the financial planning process appear to be at greater peace with the stock market gyrations.  Further, when focused on executing their plan and not mentally tethered to the markets, clients are less prone to letting their behavior negatively impact their long-term performance.

Much of the time, financial planning does a great job of identifying how much an individual or family should own in both "safe" and "risk" investments to meet short-term cash and safety needs, as well as long-term growth objectives.  In the absence of a financial plan, investors are left to wonder if they have the right mix of investments.  Moreover, when market volatility increases, they are often the first to let their emotions get the best of them.  Absent a financial plan; the focus is on the stock market.  If the focus is on the stock market, and the market is temporarily going down, the pain of the volatility or what psychologists call "loss aversion bias" is too much to handle.  As a result, at exactly the wrong time and for the wrong reason, we get a call to "sell everything" locking in those temporary losses—only to see the market recover as the investor sits on the sideline wondering when to get back in.  Selling into a market that is going down is a significant reason investor returns and market returns are so different.

Dalbar, Inc. tracks investor return versus market returns, and the results are eye-opening. Our observation is that much of the gap between the long-term investor return and the long-term market returns are due to poor behavior and investors lacking a financial plan.  In our view, having a financial plan is paramount as it gives a leg up to investors in two ways: 1) it helps center the discussion about money around goals and 2) it allows investors to minimize their dependence on monthly, quarterly, and annual stock market swings while redirecting the discussion back to goals-based planning.  Goals-based planning is just a discussion on how many dollars will be needed and in what timeframe—this process alone will help determine the amount of safe versus risky investments.  

Finally, comprehending the odds of success or failure in the market may be a massive help in keeping nerves at bay and focused on the things that matter most.  Although the legal language would point us towards a statement about past performance being no indication of future success, we can look at the distribution of returns in the stock market going back to 1825 and feel very good about the chance of a positive outcome.  It all adds up to 71.5% of the time the stock market has been favorable, in spite of many ups and downs in between.

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As our friends at Charles Schwab post their 2018 Modern Wealth Index data[1], their research findings are eye-opening:   

1. Sixty percent of Americans live paycheck to paycheck

2. Only twenty-five percent have a written financial plan.

Ultimately, the Schwab findings point to a challenging financial future for most American.  About one-half of all American households with residents age 55 and older have no savings such as a 401(k) plan or IRA.  The latest GAO report findings make sense given the number of workers living paycheck to paycheck.

Money isn’t something a whole lot of people enjoy talking about, but at some point, the tone should change so that we can put these glaring facts on the table and work towards a flexible solution.  It seems the findings are explicit (at least with the 2018 Modern Wealth Index): if you have a written plan, you’ll be in the top decile of financial performers.  In other words, you’ll put yourself in an optimal position to have both financial peace and wellness.

[1] www.aboutschwab.come/modern-wealth-index-2018

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Exciting news from the Human Investing office:  In the year 2017 alone five babies will be born into the families of Human Investing (2 girls and 2 boys already, with 1 boy on his way)! For myself and the other new parents in our office, 2017 has already been a year of much joy, little sleep, ‘dad jokes’, cliché parenting sayings and a bunch of finance nerds trying to figure out how to care for their little ones and save for their college education. Here’s what we came up with. First the cost –

In recent years, the average rate of inflation in college costs has been about 5%.

Source: National average cost data © 2017 The College Board, “Trends in College Pricing 2016.”

Parents like my wife and I and others in the office may have different goals and philosophies on how much we would like to cover for our child’s education expenses - whether a dollar amount, like $50k, or a percent of the education expense. Whatever the philosophy, we understand the need to save. But what is the best vehicle to do so? Here are a few of the most common options and some important considerations to take into account when saving or choosing an account type:

• 529 Savings Plan: 529 accounts allow you to set aside after-tax contributions that grow tax free. The balance can be used for qualified higher education expenses, such as tuition, room and board, and books. States may offer 529 plans to residents, often with tax breaks or additional incentives - check your state here.

• Coverdell Education Savings Account (ESA): ESAs allow you to set aside after-tax contributions that grow tax free. Account value can be used for expenses not exclusive to college. Unlike 529 plans, there is flexibility to use ESAs for qualified education expenses from Kindergarten through Graduate School.

• Roth IRA: The Roth IRA can be used as a combination retirement account and educational savings vehicle. Your after-tax (Roth) contributions can be invested for retirement purposes and college expenses can be withdrawn with exemption to early withdrawal penalties. Additionally, the value of your Roth IRA will not hurt chances for financial aid eligibility as it is not considered assets on the Free Application for Federal Student Aid (FAFSA).

• Uniform Gifts to Minors Act and Uniform Transfer to Minors Act (UGMA/UTMA): The original college savings account, UGMA/UTMA assets are transferred to the child’s account and are invested on their behalf until he or she reaches age 18 – 21 (defined by state). At this time, the beneficiary can use dollars for whatever they wish. With a UGMA /UTMA you can realize $1,050 of gains tax-free per year. Note: UGMA/UTMA is in the child’s ownership for FAFSA purposes.

* This data is provided by www.savingforcollege.com and is subject to change. The numbers provided reflect 2017 regulation and will fluctuate with time. Please contact a trusted tax professional to understand exact tax implications.

The consensus: If you are looking to maximize saving for college and want to make it a family affair (any one can contribute) then the 529 is the best option. If you are not sure about college for your child but would still like to save for their future, then other great options like a UGMA/UTMA may be beneficial. Want to talk about what type of account is best for you or share baby stories? Let’s talk, Human Investing is here to help.

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