Developing a Financial Plan

One thing The Wife and I have realized that as much as we’ve focused on finances over the life of our marriage, neither of us had ever suggested actually making a step-by-step plan for financial freedom — until this past weekend.

The problem with most people is that they never actually set up any sort of financial action plan, at least not a stable one. What I mean is this: too many times I’ve met people who focus so strongly on one strategy (owning a business, owning real estate, investing in stocks and mutual funds) that they forget to actually set a plan in motion that will protect them in case things don’t work out as they’d expect.

Here’s an example: suppose you start a business and in two years find yourself making $150,000 a year. Awesome, right? You buy yourself a nice house, a nice car, and stick some in savings just in case. ($10,000 is enough, right? I mean, it’s more than most people have.) So what if you have a little debt, you can take care of it!

A year later a shift in the market causes your business to tank. (Make up a reason for this: real estate? Market turns sour; Network marketing? Company goes out of business; Franchise? new road construction takes all your traffic somewhere else.) Your income goes bye bye, your Cloud Bookkeeper in North Sydney calls you to inform you of terrible news. Your debts amass and the bill collectors come calling, and your only option seems to be using a trust deed to clear your debt. What’s your financial picture like now?

The sad part is that most people, even those making a lot of money, don’t have a proper financial plan, mostly because they somehow rationalize they won’t need one. “My business is going great,” or “I don’t make enough money to need a financial plan,” or “That couldn’t possibly happen in this market, or in my business” are some possible excuses. Yet all of us know that one event outside our control — a stock market crash, a hurricane, a drop in the value of the dollar, another Enron — can take everything and wipe it out. Depressing thought, no? No wonder people don’t like thinking about it.

Instead, most people put their faith in specific products or procedures, like investing in stock, real estate, municipal bonds, mutual funds, 401K’s/403B’s, tax lien certificates, network marketing, franchises, businesses, gold, currency trading, life insurance… the list goes on. The problem is that all of these have down sides. Not one is 100% guaranteed! And unless there’s a financial plan in place to account for the various “what ifs” then the risk to the person relying on these products and procedures is multiplied by a factor of their ignorance.

Feel insecure yet? You should. I certainly did when I started to realize all this, when fiscal common sense (or what should be common sense) finally started to dawn on me.

With all this in mind, this past weekend The Wife and I finally got together and sketched out a financial plan. (We actually started by going out to the Davie Ale House and doing it there while splitting one of the huge appetizers they give there. Total time required: about 2 hours, although we still have a little work to do.) Until now, believe it or not, we didn’t really have one! Our “plan” — or what we called a plan — was to make money, put it in savings and our 401K’s, pay off our loans and any credit card debt, maybe invest in buying a home (or some rental property), and starting a business that could develop us passive income so that we could go from where we are to being wealthy, if not rich. (Remember: rich is measured by money in comparison to others; wealth is measured by time, or how long you could live at your lifestyle if you couldn’t draw an income from your own efforts. You can be rich and be broke. You can’t be both wealthy and broke.) Needless to say this plan needed re-tooling. Badly.

Our new plan, while not yet finished, is a lot more comprehensive, and it’s something which we’re confident will give us the footing we need to feel first and foremost safe and secure. Why “safe and secure”? Why not comfortable, wealthy, or rich?!

The simple answer is this: if I’m rich and something happens to my income at that level, do I have a safety net? More than just a big savings account, I mean. Or am I always going to be scared of something happening? A “safe and secure” plan is that safety net. In case all else fails, this plan will ensure that you and your family are taken care of. You may not be comfortable, but you’ll never go without food and shelter, no matter what. After a “safe and secure” plan has been created and put in motion, then should you create a plan for comfort, wealth, and eventually riches.

With this in mind, our new plan involves the following:

  • First, we make sure that no matter what happens we’re both financially secure, that we’ll never be without, no matter what happens during our life or after it. (A good financial plan should take into account such details as what happens in the event of your death.) We call this the protection phase of our plan. It includes stuff which protects what we have now. This includes car and home insurance (neither of which is particularly inexpensive in Florida), including a liability umbrella to protect us in case of lawsuits (not planning to get sued any time soon, but with our sue-happy culture, one never knows; this is really in the grounds of the insurance, however, and the various deductibles); disability and health insurance (we’re covered here, for the most part, though I think we could be a bit safer), and finally life insurance appropriate to our needs (there are a bunch of these out there — term, variable, full-life, universal, etc ad nauseam).
  • Second, we begin working on our savings. This also includes paying down our consumer debt, such as any credit cards we may have balances on and our car payment. (Not every debt needs to be paid off, but the fewer the liabilities, the easier things will be.) Additionally, this also includes putting at least 3 (though preferably 6) months worth of expenses in a very safe, ultra-low-risk account, such as a money market account. Low yield, true, but the purpose of this account is to have liquid funds, just in case. Finally, we have to maximize our forced savings, meaning our 401K’s. (For the record, the 401K and 403B accounts are savings accounts, although you may invest the funds in mutual funds, stock, and even real-estate. Yes, you can buy real-estate with your 401K.)
  • Third, there’s the growth component. This is where we begin investing in things such as property (like, say, buying our first house, or buying a small multifamily rental property) mutual funds and stocks, and municipal bonds. (Tax liens and purchasing debt can also go into this part of the equation, since they give you a better rate of return, backed by real estate.)

Once all this is in place, once we’re “secure” — and we expect it to take about a year to put everything in place like we want it — we are ready to step into the comfortable planning stage. The only difference in this versus the previous is the way we deal with the various products I just mentioned.

For example, in the Protection phase we can move from Term life insurance to whole life, variable, or universal. In the savings phase, we move from 3 months to 6 months and even 1 year of expenses in the bank. Additionally we’ll be able to put more into money markets and retirement plans. Finally, for the growth component, we can begin investing in more properties, buying businesses, and individual stocks. (Note that you can start a business in any stage of the game, but what’s available to you changes according to where you find yourself.)

Now, you may be wondering why I mentioned the products I mentioned. Here are some of the advantages and disadvantages (from what I’ve learned) of the items I’ve mentioned here:

  • Stocks: This is usually the first think people think of when talking about investing. It’s also one of the most volatile of investments, since you don’t really control it (unless you’re buying millions of dollars worth of shares.) On the up side, these can have some of the biggest gains thanks to things like speculation and buzz. Rule of thumb: never put anything into the stock market unless you’re prepared to lose it. Of course, seasoned day traders are another breed entirely, but I’m talking about me here, and seasoned day trader I am not.
  • Mutual Funds: Think of these as beginners kits for people getting into stocks. They aren’t as risky as stocks, but because of the almost complete lack of control you have over what the fund buys, these are also fairly risky, almost gambles. Overall, a well researched fund will likely give even a beginning investor some return.
  • Real Estate: The great think about real estate is that it usually goes up. The bad part is that an uninformed person can lose a lot of money very quickly. Someone who’s studied market cycles, however, and can call up on the appropriate strategies at the right time will usually be able to make money in any market, so real estate actually offers a great deal of control, even if the market in your area tanks.
  • Network Marketing: This is probably one of the safest investments out there. The problem is that because they’re usually so easy and cheap to start, most people don’t take network marketing businesses seriously. Big mistake. The down side here comes in the area of control: if the company you’re working with tanks, what are you left with? What are your customers left with? The thing with these companies is that it’s not the product which really matters, it’s the education system. Find a good system and a good mentor within that system and you’ll be able to learn more about business quicker than most any other way, and with far less risk than any other business venture. The Wife and I are involved in a network marketing business for that very reason: the system we’re involved with is great. In fact, I count that association as one of the best moves I ever made.
  • Franchises: Like network marketing, franchises are more valuable for their system than their actual product. Ever see a McDonald’s go out of business? Not many, right? Why do yo think that is, because they have the best burgers and milkshakes in the world? Hardly. It’s because they have one of the best training systems in all of business.
  • Municipal Bonds: These are good because they’re pretty much guaranteed. The only downside is how long they take to mature, and how much money you’re actually making in these.
  • 401K/403B’s: These are actually savings bonds, but for employees these are also the last real tax-free shelters available. (Self employed persons and business owners have a lot more in the way of tax advantages and can move their money around quicker.) The biggest bright side with these is the fact that they’re essentially forced savings, and as such call for a certain level of discipline. They’re also fairly flexible, since money here can be used in various forms of investments with taxes deferred until the point where money is withdrawn. Not bad, eh? And for most employees there’s also the “free money” aspect: many employers match dollar-for-dollar what employees put in. Not a bad way to give yourself a 3% or 6% raise (since that’s usually what’s matched). The biggest disadvantage is that you can’t actually draw anything from this fund until you’re almost 60 years old, not without penalty at any rate, except under very specific conditions, and even then you have to pay that money back. At least you’re paying yourself, right?
  • Gold: I don’t know enough about gold or other precious metals to say why they’re bad, save maybe for value fluctuations and requiring a lot of study. Of course, there’s what whole “history” thing which puts Gold as being a fairly steady investment. That is, until someone does what they did for aluminum in the mid-1800’s. That’s when synthetic aluminum was created and the metal went from being worth more than gold to being worth almost nothing overnight.
  • Currency Trading: Same issue as gold: lots of studying required, and an event like war could take whatever reserves you have and drop them like a rock int he ocean. Imagine if you had bought Iraqi Dinars in the mid 80’s, what would they be worth now? They were almost on par with the dollar at one point, if I recall correctly.

Anyway, these are some of the products. Talk to your financial adviser about these, or get online and do some research. Tons of info available to you for free.

Speaking of financial advisers, through this entire process, it will be of immense importance to us to work closely with a financial planner who is familiar with ourtype of situation. As such, we plan to interview at least 10 financial planners in the areas and ask the following questions:

  • What’s your expertise? (This will be asked up-front, before we tell him/her what we need, since the last thing we want is to say “we need A, B, and C,” then have him/her say “Well, I’m an expert in A, B, and C.”)
  • What does your typical client look like, what’s their financial situation?
  • What does your typical client make annually?
  • What type of asset base does your typical client have?
  • What’s your favorite advice to give people?
  • What do you like for people to do? (And just as important, what do you like for people to NOT do?)

This will be the first addition to our financial and planning team. After this, an accountant (or at least a bookkeeper) will likely be the next addition to our team, since they can help us leverage any assets to improve our overall situation (as well as teaching us to read and scrutinize balance sheets). Additionally, during this time we’ll also be interviewing lawyers who can help us with the asset protection side of things. Obviously, we’ll want to take advantage of vehicles such as LLC’s (Limited Liability Corporations) and Trusts, but that will depend entirely on our need(s) at the time. Finally, throughout this process we’ll be talking to people who we consider mentors in our lives, people who we’ve seen what they have in life, their relationships, and finances, and who we respect in those areas. One thing we’ve learned is that if you’re going without a mentor you should be ready for some hard bumps, because you will get them.

The more we study this, the more The Wife and I realize how much we don’t know, and how much we’ve been leaving to luck with our financial picture. With a plan in hand, we now feel like we’re on our way to ensuring our financial independence in the long run.

By the way, this plan was created using notes we took by listening to one of the CDs in Robert Kiyosaki’s “THINK IT” “LEARN IT” “DO IT” – You Can Choose to be Rich set (CD 8, I think). (For the record, I borrowed the CD from a friend — a mentor — who recommended it to us.) I plan to get the rest of the set fairly soon. The information in this one CD may have saved us months of ambling around, trying to figure things out on our own. I can only hope that this post can help you.

2 thoughts on “Developing a Financial Plan

  1. Oy! My head hurts. This is a talk my husband and I need to have. It’s not enough to have a monthly budget and stick to it. We are in obvious need of some sound financial advice and planning.

    Great post!

  2. Thanks for the complement! You may want to read the book “The Automatic Millionaire” by David Bach. While I’m not totally convinced about this guy’s strategies for becoming rich (I’ll admit, I don’t a bit more risk, and I look for bigger rewards), the fact of the matter is that this guy offers solid advice for most people. Very readable, very doable stuff.

    Finally, if you can get your hands on the CD set that I mentioned in the story (email me if you can’t and maybe I can arrange something) do it. I’ve listened to that CD a couple of times already and the more I listen to it the more I realize how completely and utterly disorganized and plainly stupid I’ve been about long-term planning.

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