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By Michael J Garry
Many of us were not taught how to manage money, so the concept of financial planning is unfamiliar and even daunting. Or maybe we want to have a plan, but we’ve gotten ourselves into a difficult financial situation that is painful to face. We think, “Yes, I need to do that”, but because of emotions such as fear, we put off planning for our financial stability for yet another day. Or we allow the daily grind to get in the way of securing our future.
Financial planning is for everyone, not just the wealthy. It is important, and it is urgent. And it is up to you to take the first step. You can do this on your own, by studying online content or in partnership with a financial advisor. Whichever method suits you best, I urge you to start now.
In February 2022, Schroders surveyed 1,000 U.S. investors to understand their retirement readiness. Only 23 percent of respondents reported having a written retirement plan that guides their decisions. Of these respondents, more than 90 percent of them stated that their financial planning has been useful as a guide. Among the respondents who reported not having a plan, more than 75 percent reported that the thought of doing financial planning was overwhelming.
Yes, financial planning can feel overwhelming. But from my experience as an independent financial advisor, nearly all of my clients have found the process of financial planning to be positive and liberating. Knowing that you will be glad you went through this process, let this motivate you to create your financial plan now. Considering the current economic environment, there is no better time than the present.
The Financial Planning Journey Starts with Knowing Where You Are
On any journey, you have a starting point and a destination. Your path is determined by the endpoints. By knowing your starting point, you can avoid wandering without direction and getting lost. Financial planning begins with knowing where you are.
Determining where you are requires knowing four things:
1. Income: How much money you have coming in
2. Expenses: How much money you spend
3. Assets: What you own (savings, investments, business, real estate, etc.)
4. Liabilities: What you owe (credit card, mortgage, student loan, car note, etc.)
The most critical of these two is knowing your monthly income and expenses. Is your monthly income sufficient to cover your expenses? Your income minus your expenses equals your cash flow. If you bring in more money than you spend each month, you have positive cash flow. If you are trying to save and invest or pay down your debt, you need positive cash flow.
If you spend more money than you earn or receive each month, you have negative cash flow. To cover your expenses, you need to make up the difference by dipping into your savings or financing it by carrying a balance on your credit card.
When you calculate your monthly cash flow, financial decisions become easier to make. You can answer the most basic financial question, “Can I afford this?” And when you define your goals with a financial plan that supports achieving them, you have the roadmap on what to do with your positive cash flow. You know to apply it to the credit card balance, to boost your emergency fund, to increase your retirement investments, to add to your kids’ education account, to save for the down payment for your first (or second) home, to pay for your bucket list African safari, or to fund whatever your goals are.
An Example of Financial Planning in Action: Informed Decision-Making on College
The overwhelming majority of my clients find financial planning to be a liberating, positive exercise. While they may feel regret or disappointment about past financial decisions, they are buoyed by learning what they need to do. Their clear vision makes money decisions more straightforward. Here is an example of how financial planning helped a middle-class Pennsylvania couple decide the extent to which they could help their children with college expenses. In turn, their planning enabled their oldest child to make an informed decision about which school to attend.
Heather and Rob are in their early 50s, and through creating a financial plan, know that they are on track financially to retire in their mid-60s. They have three children, including their eldest, 17-year-old Abby, a senior in high school. She is an exceptional student and wants to become a teacher. She has been accepted at three schools in her state: University of Pittsburgh, Penn State, and University of Pennsylvania. Abby has received some scholarship money but received minimal financial aid due to her parents’ income.
As part of their consultation with a financial advisor, Heather and Rob wanted to understand what they could contribute to their children’s college educations without derailing their retirement plans. They learned what they could afford, enabling Heather and Rob to tell their children that they will receive $20,000 per year for four years toward tuition and living expenses for college or trade school.
Because Heather and Rob know what they can pay toward college expenses, Abby understands that she will be responsible for approximately $50,000 per year if she attends the University of Pennsylvania. And if she chooses in-state schools Penn State or Pitt, her expense will be significantly less, around $10,000 per year. Abby (with help from Heather and Rob) can determine the impact of her student loans after graduation. She estimates she will pay $2,100 per month for ten years to repay the $200,000 debt to attend University of Pennsylvania. She will pay $425 monthly for ten years on her $40,000 debt to attend Penn State or Pitt. Because Heather and Rob did their financial planning, Abby is now armed with information to guide her college choice.
As a result of financial planning, Heather and Rob gained the confidence to commit to an annual dollar figure for each child, enabling their children to understand what college will cost them. Heather and Rob understood from their financial planning that they could not provide their children with blank checks or say, “We’ll figure it out” without negative impact on their financial future. Because they knew their goals and where they stood financially, they could confidently commit to contributing to their children’s college educations while also staying on track to retire in their mid-60s.
Some parents cannot contribute to their child’s education. Others can write blank checks. And some people who are in situations like Heather and Rob will choose to work additional years to pay for more of their children’s educations. There is no judgment on this personal decision; I share this example to illustrate the power of financial planning. Understanding your financial situation shows you what is possible, what tradeoffs you can make, and what they will cost. Financial planning enables you to make important decisions that have long-term impact from an informed, deliberate, and confident stance.
Whether you have $10,000 or $1+ million in assets, financial planning is for everyone. If the thought of financial planning induces anxiety or fear, the easiest way to overcome these feelings is to increase your knowledge. Make personal finance less daunting by becoming familiar with the basics.
When waiting in line at the store or drinking your coffee, read a short article on personal finance, budgeting, or saving money from one of the sites I mentioned above. Sign up for a continuing education course on personal finance at your local community college or online. Ask people you trust for recommendations if they could recommend a financial advisor to help put your plan in place.
Use the power of financial planning to gain clarity and be informed when making financial and life decisions. When you take the first step toward creating your financial plan, you place yourself on a path to achieve what you want for yourself, your family, and even the next generations. The time is now.
MICHAEL J. GARRY is a Certified Financial Planner who heads Yardley Wealth Management, LLC in Yardley, Pa. He is author of two books, The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances and Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.