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What is financial planning and how does it help me?

June 02, 2015

Ryan J. Dove, Houston bankruptcy attorney and Bryon Townsend, Certified Financial Planner, have teamed up to write a few informative blog posts about financial planning. We hope you find this information educational and helpful.

The first blog post in this series is Ryan and Bryon’s response to the question: What is financial planning? How does it help me?
Ryan J. Dove’s response:

Financial planning includes not only planning for anticipated long-term goals such as a college fund for your children, buying a home or retirement but also includes planning for unanticipated situations. Planning for your financial future means developing a strategy that includes a comprehensive plan to meet your financial goals and protect your family in the case of emergencies.

For anticipated short and longer-term goals, the first step is determine what your goals and needs are. Once you’ve identified your needs, you can then choose the methods to reach those goals. For a short-term goal like buying a car or saving a down payment for a house, you might start contributing to a savings account on a regular basis. If you need help a professional can explain which plans may work for you as well as how much you should save each month so that you have the amount necessary to meet your goal. For a college fund you may consider a prepaid tuition plan or a 529 plan. Saving for retirement can involve accounts such as IRAs and a 401(k).

But what about unexpected situations? How can you plan financially for the unknown? This involves thinking in a slightly morbid way, unfortunately. Ask yourself “worst-case scenario” questions. If you or your spouse were to suddenly pass away, could the surviving spouse support the family? Could the surviving spouse afford funeral expenses? These kinds of questions may lead to inquiries about having life insurance – how much is needed and what type is best. If one spouse is injured and cannot work for a period of time, will the family be put into financial hardship? Many families get disability insurance or income replacement insurance to cover this type of situation. Setting up and contributing to a savings account can also help offset some unexpected expenses.

Proper financial planning sets you up to meet all of your planned goals and can also protect you and your loved ones financially when the unexpected strikes. Living through a hardship is never pleasant, but proper financial planning can reduce or eliminate having to worry about dollars and cents when the unexpected happens.

Bryon Townsend’s response:

A common misconception of financial planning is that it’s only for the wealthy. The reality is that financial planning is even more important for those who live pay check to pay check. Think of financial planning as simply planning your finances. You want to know where your money is going and what purpose it is serving. Financial planning is a seven step process that should be moved through one step at a time.

1. Goal Setting – It is important to sit down and identify exactly what you want financially. Write out both your long and short term goals. Long-term financial goals are things like I want to retire at age 65 or I would like to pay for my child’s college expenses in 17 years. Short-term goals could be, I want to save for a down payment on a first home or a vacation of a lifetime. There are no right or wrong, good or bad goals. They are unique to you and the next steps in your planning should use this as your base.

2. Budgeting – In this step you simply identify where you spend your money. Like most of the items in this process it best to see it in writing. A tip and easy way to figure this out is to download your online banking transactions into excel then sort it by where you spend your money. Most people are aware of what their rent or mortgage is, but are often surprised at how much is spent Starbucks or the Deli at work. Not to say that you shouldn’t spend money there, you should just know that you do.

3. Emergency Fund – A major cause to financial problems is an unforeseen financial emergency. It can be something as significant as a job layoff or medical issue, or can be as simple as an AC or auto repair. A good rule of thumb is to build a cushion of 3-6 months base expenses. Also, check deductibles on health and home insurance and make sure you have at minimum that set aside.

4. Debt Pay-Off – Having your debt eliminated or reduced, not only gives you financial peace of mind, but will give you more monthly cash flow in order to move you closer to your goals.

5. Protection & Insurance – It’s important to look at insurance not as an expense, but as a way to eliminate any hurdles that could pop up and prevent you from reaching your goals. This includes life insurance, disability insurance, health and home owners. This basic coverage will help keep you on track in case of tragedy.

6. Investments – Trying to invest tends to be were most people start their financial planning process. However, if you haven’t gone through the rest of the steps, you could be making series mistakes. It is not uncommon to see people investing to aggressive or conservative for their goals or aren’t saving enough to meet their goals. Knowing what you want your money for will make selecting appropriate investments less complicated.

7. Estate Planning – Estate planning is thought of as something that is only for the very wealthy. The truth is, if you have $1 when you die, you need estate planning. Your estate is anything that you own. When you die, who do you want it to go to and how? It’s also important to create powers of attorney to handle medical wishes should you be unable to make them yourself. It seems simple, but can prevent increased stress and emotions for your loved ones during already stressful and emotional times.

The financial planning process doesn't need to be overwhelming and if broken down and walked through in these simple steps can eliminate much of the anxiety that many feel when thinking about their finances.
Ryan J. Dove graduated from the University of Houston Law Center in May of 2008. Ryan has been a Houston bankruptcy attorney for over 6 years and handles most matters debt-related.

Bryon Townsend, CFP® is Managing Director & Investment Advisor Representative at Houston based W.R. Anderson & Co. Securities offered through Cetera Advisors, LLC Member FINRA/SIPC. W.R. Anderson & Co is not an affiliate of Cetera Advisors.

Ryan J. Dove is not affiliated or registered with Cetera Advisors LLC. Any information provided by (name) is in no way related to Cetera Advisors LLC or its registered representatives.

The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.