A Roadmap for Launching a Successful Financial Plan

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Creating a financial plan can help you navigate any unexpected bumps on the road to retirement or wherever you want your plan to take you.

creating a financial plan advisor meeting

By Matt Mormino, CFP®

Whether you are saving for retirement, looking to adopt more sustainable spending habits, or just want to make smart decisions with your money, creating a financial plan is essential to achieving your goals. Plans are based on personal ambitions, future expectations, and individual priorities. Each must be tailored to the individual.

Regardless of your current tax bracket, age, or income level, there is a savings strategy and a plan for you. In most cases, plans are designed to be rolled out over long periods, allowing your money to compound and accumulate higher returns. Wherever you find yourself, there is no better time to start planning than right now!

Step 1: Manage Your Cash

Managing your cash flow is critical in creating a financial plan. The golden rule in money management is to spend less than you make. While this may seem like a simple concept, it can be hard to stick to. Every time you buy something, you are making a choice. Each choice falls under one of the following categories:

  1. Future choices, such as investing in a 401(k) plan.
  2. Society choices, such as paying your taxes. It may not be a choice without consequences, but it remains a choice.
  3. Past choices, such as paying the loan on a car you decided to buy the previous year.
  4. Compassionate choices, such as donating to a local charity or a family member in need.
  5. Present choices, such as paying the rent or buying a cup of coffee or a new pair of shoes.

Be mindful of each choice and learn when to direct cash into each category. Automation can help you stay disciplined. For example, setting up recurring payments into a savings account or 401(k) can help you stick to smart choices more effectively. Similarly, opening a separate checking account for discretionary expenses can help highlight the amount of money you can spend freely, allowing you to make more responsible choices with your cash.

Step 2: Tackle Your Debt

There is good debt and bad debt. Generally, debt allows you to acquire items you may not have otherwise been able to buy. This is not an inherently bad thing, and in fact it can be financially beneficial. For example, mortgages allow you to purchase homes and investment properties. Those properties may increase in value over time, resulting in returns that ultimately outweigh the cost of the debt.

Bad debt is not planned and does not serve you. Credit card debt is typically considered bad debt and must be dealt with as soon as possible. The accumulation of bad debt may impact long-term financial goals, such as purchasing a house or applying for a business loan. In addition, clearing bad debt can improve your credit score, which can help you purchase good debt in the future. Prioritize your payments and make sure you tackle any bad debt first.

Step 3: Decide on an Investment Strategy

The power of compounding growth is at the heart of most investment strategies. By investing as little as $5 per day for 30 years, you could generate as much as $340,000 by the time you retire. However, if you spend that $5 on coffee each day, you will have spent $55,000 over 30 years and have zero retirement funds.

The key to staying disciplined in your investment strategy is not about quitting caffeine. This author wouldn’t have that. It’s about mindfully spending and saving—maybe brewing your coffee at home instead of buying it from a local coffee shop will free up funds to invest and drive long-term investment growth. Understanding how your money can work for you and how you must stay mindful of the decisions you make each day can help you formulate a lasting strategy.

How much should I save?

There is no right answer to this question. Individuals have different long-term goals, needs, and financial restrictions. However, two tips apply pretty much universally:

  • Get out of credit card debt; and
  • Take advantage of employer-matched retirement funds.

The amount you can save depends on your income and spending habits. Seeking professional advice can help you analyze your cash flow and find the best savings plan for you. A good plan is one that drives towards your goals, not a prescribed “retirement” built into an online calculator.

Investment Approaches

Broadly speaking, there are two types of investment approaches: active and passive. Active investments are more volatile, incur higher fees, and are considered riskier. However, they have the potential to garner more lucrative returns. Passive investments are less risky and typically incur lower fees, and despite having a lower ceiling for returns, they have been shown to outperform most active strategies over long periods.

While you cannot control the market, you can control the types of investments you make, the fees you pay, and the length of time you wish to invest. These factors can help you choose the best approach for you.

What to Buy

Your personal long-term financial goals will inform your investment plan. If you are facing a 30-year career and want to save for retirement, passive investments that compound over time might serve your purpose quite well. Alternatively, if your financial goals require a quicker return, you can consider riskier, short-term investments. Whatever the goal, there are three main types of market investments to consider:

  • Single stocks or bonds, such as one share of Apple or Amazon or one Treasury bond. These avoid fees. However, a stock may rise or fall dramatically, making it riskier, and one bond can carry substantial credit and interest rate risk.
  • Active Mutual funds or ETFs are more diversified than single stocks or bonds. Professionals manage the funds and invest your money in many underlying stocks or bonds. These funds are considered less risky than placing all of your eggs in one basket (or one stock). However, there are fees associated with fund management, and the strategies can still expose you to significant risk.
  • Passive (a.k.a. Index) mutual funds or ETFs are more diversified and incur lower fees. Performance is based on the overall success of the market and therefore these investments are considered less risky.

Step 4: Identify and Address Risk

What is your capacity for risk? You must ask yourself this question before settling on a plan. If you do not have the time horizon or do not feel comfortable putting your money in riskier ventures, then choose ones that suit your risk level.

There are tools to ‘stress-test’ your plan before you start. These tests generate estimated forecasts based on past events and anticipated averages. They are not crystal balls that can predict the future. Still, they can help you understand what your plan can achieve over time, allowing you to adjust variables so you can embark confidently on a sustainable path to reach your goals.

Creating a financial plan can help you navigate any unexpected bumps on the road to retirement or wherever you want your plan to take you. Regardless of your age or income, you can start planning for a more secure financial future today.

Matt Mormino, CFP® serves as an advisor at Brighton Jones.

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