Broker Check

What Is A Financial Plan And Why You Need One?

| November 18, 2020

By Kristi De Rycke, Registered Assistant

I want to start with the second part of this. Why do you want a financial plan? How would I know that? We have never met to discuss your personal goals. Why do I want a financial plan? That is easy. Here are my top three:

  1. I want the confidence of knowing that if I get sick or lose my job, then my family will still be taken care of.
  2. I also want the option of retiring early if I still want to at that time.
  3. I want to take several big trips including Italy, England and possibly China.

Keep in mind that the goals were smaller when I was younger and just starting out. They included things like:

  1. Pay 1 extra month towards my mortgage per year.
  2. Increase 401k contributions by at least 1% every year timed with raises.
  3. Save the money from car payments after the car was paid off for at least 1 additional year prior to purchasing another car.
  4. Put aside 2 months of living expenses for an emergency fund.
  5. And at this time in my life, I had no desire to retire as I had just gotten started.

Why do you want a financial plan? Often, I hear people say they want to save $1,000,000. Sorry, that is not good enough. Why do you want that set amount of money saved? Remember that money is just made from cotton and linen. Very germy cotton and linen. Did you know that a $1 bill passes hands an average of 110x per year? (1) New York University did a research study. They examined a random 80 bills and found 3,000 kinds of bacteria! (2) Anyways, the point is that you may or may not need $1,000,000 or whatever amount you might have said. You need to look at your individual goals and determine how many of those germy bucks you need saved to meet them.

There are 2 options for setting up your financial plan. You can do it yourself with the steps laid out below. The second option is that we have a program called Money Guide Pro Elite to help you determine your plan if you are on track and how to get to the goals. Let us look at the do-it-yourself option first.


Step 1: Figure out where your money is currently going. Look back over your bank and credit card statements for the past couple months. Figure out what you spend on things and how much money monthly you need for living. Pay attention to expenses like house insurance, vacations or car registrations that may occur only 1x annually. Determine how these expenses might change down the road. Will your mortgage be paid off prior to retirement? Will you want to retire early and need to pay for medical insurance out of pocket prior to your Medicare kicking in? What will your out of pocket expenses be in addition to Medicare Part A even after 65. Consider the impact of inflation which on average is 3.2% per year. (3)

Step 2:  Write down some of your goals. They can be big lofty goals that will take years to accomplish down to smaller goals like the second set above. 

Step 3:  Use an online calculator to determine how much your current savings and investments will be worth in 10, 20 and 50 years down based on what percentage return you are currently earning on them.

Step 4:  Look at your social security statement and/or pension statements to see what you will get monthly in fixed amounts. Determine the difference in what you will have coming in and what expenses you expect to have. 

Step 5:  Determine if you can commit to saving any additional amount at this time and figure that into your calculator for either faster reduction of debt or increasing contributions to savings.

Step 6:  Keep in mind taxes. If you are currently contributing to a traditional 401K or IRA, you will be taxed on that money when you withdraw it. You are getting a reduction in your income now for taxes but will have to pay the tax bill as ordinary income when withdrawing it. If you are contributing to a Roth 401K or Roth IRA, you will not be taxed on that amount at withdrawal. Talk with your tax professional to determine which is the better strategy based on your own tax situation. 

Step 7:  Expect the unexpected. What happens if you or your spouse is injured or dies unexpectedly? Would one income cover your needs? Look into any necessary insurance to cover these shortfalls. Do you have short term disability and long-term disability insurance? If so, what percentage of your income would be covered and after what amount of time? For instance, you may have a waiting period of 2 weeks prior to short term disability kicking in and it may cover 60% of your income for so many weeks.  Long term disability may not kick in for 3 or 6 months and cover 60% of your income. Check into your human resources department to determine your benefits. If you do not have these benefits through your employer or think you will need to replace more than 60% of your income, consider taking out private short- and long-term care insurance. Also, do you have enough life insurance to cover a sudden reduction to one income in your household.

Step 8:  Determine your risk level and make certain your investments match it. If you are conservative, you will have more investments in fixed income. If you are an aggressive investor, you will have more in stocks or stock funds. Make certain you are properly diversified. Look at the big picture of your investments to determine if you are diversified between small cap, mid cap and large cap growth and value stocks. Consider international exposure. What is your diversification between short, intermediate, and long-term bonds?

Step 9:  Your life dreams, goals and situation may change over the years as mine did in the illustration above. It is important to figure those variations into your financial plan. It is not a one-and-done approach. You should revisit your retirement plan on an annual or biannual basis.


Does this process sound overwhelming to you? We can offer some assistance with the Money Guide Pro Elite program. We gather personalized information from you. The program allows us to take your current income, savings, fears, and financial goals to determine if you are on track. These goals may include saving for college, paying down debt, saving for big purchases or retirement planning. We take in all the information needed and the program runs 1000 scenarios to determine how things would go based on many different market conditions. Money Guide Pro Elite figures in growth on your current savings and investments as well as any future planned contributions, pensions, and social security benefits. It is very personalized. The results will provide you with the probability from 0-100% of you meeting your goals. The program then allows us to manipulate things and immediately see the anticipated outcome. We can adjust things like expected retirement age, social security strategies, increasing contributions or changing risk in portfolios. This is helpful if you are just starting your career, 5 years away from retirement or anywhere in between.   

This service can provide you direction and confidence. If the program determines that you have a high probability of success, then you gain confidence that you are on track to meet your goals and to enjoy a financially independent retirement. If the probability of meeting your goals is lower, recommendations will be provided to increase your success rate. You can visually see the impact those changes could have on your outlook of success. There will be no commitment to making any changes. We can go in and update your Money Guide Pro Elite plan anytime to determine how you do as you go forward. The report and plan can be something that you save, refer back to and adjust as you move forward. 

Regardless of if you are planning to do it alone or get help from an advisor, when should you do a financial plan? A common misperception is that you do this after you have investments squirreled away or after you decide when you are going to retire. This is not the best time to start the plan. This would be the equivalent of buying a road map after you realized you traveled to the wrong state. The earlier that you start your financial plan and the more often you revisit this plan, the higher your chance of staying on track to reach your goals. 


By Greg Johnson, Financial Advisor

Financial planning can seem overwhelming for most, but it really is not as complicated as it sounds. The key ingredient is having some goals in mind like Kristi described above and then finding an advocate who can help you reach those goals over a period of time. It is no different than hiring an athletic trainer to help you get in shape or lose weight or hiring a travel agent to help you plan a trip of a lifetime. Working with a professional can help you reach your goals. Money Guide Pro Elite is the science and math of your plan and your advisor is your artist who helps develop the plan to best suite your needs.