Wealth Blog Post

Financial Planning in 5 Steps

George Grombacher July 7, 2023

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Financial Planning in 5 Steps

Financial planning has been made a lot more complicated than it needs to be. You’re perfectly capable of creating your own financial plans; in fact, you’re already doing it.   

George talks about the five steps to follow to create a financial plan. 


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Episode Transcript

but actually planning is a lot simpler, a lot more straightforward, a lot more basic than I think most people realize what to just take a couple of minutes and go through the five essential steps for putting together a financial plan, whatever it is that you’re trying to plan for. My wife and I just welcomed our third child not too long ago, and we were at the pediatrician for one of the many checkups that happen. And we’re asking about an allergic reaction that my wife had had. And Doctor pediatrician told us a funny story about when she was in medical school, she had this horrible allergic reaction, and she went down to the emergency room. And knowing full well that she was going to get different opinions from every single doctor that she asked. And she made the joke that, you know, if you want five different opinions on the best way to handle an allergic reaction, just ask five different emergency room doctors, and you’ll get five different opinions. I thought that was funny, because I have long known that if you want to have a frustrating experience, you will ask 100 different financial advisors how to design retirement income, and you’ll get 100 different answers. So as with everything, there is not necessarily a right or wrong way to do things. But when it comes to financial planning, because money is so time sensitive, the wrong thing to do is to procrastinate and to hold off and to not be making plans and to not be working towards your long term financial success or your short term financial success or whatever time horizon or timeframe that you’re thinking about. Really, simply put, started saving for your retirement when you were 25, it’d be, you have to save a lot less than if you waited till you’re 55. But you already intellectually know that. So just wanted to go through these five quick steps. And before I do that one a bag on the industry a little bit more. It’s gentleman named Daniel Kahneman goes by Danny, he was a psychologist who won the Nobel Prize in economics. And his seminal work is a book called Thinking Fast and Slow, Danny became fascinated by why it is that we make financial decisions that we that we do. And one of the big takeaways was that vast majority, like upwards of 90% of the decisions we make around money are based on emotion. One of the other keys that he talked about one of the takeaways that I took away from him talking about his research into the industry was that the financial services industry is an entire industry built on an illusion of skill. Like, wow, that is a damning statement right there. But I think it’s really true. So that’s why there’s so much complexity around financial stuff around planning around investing all this stuff, because there’s all these layers of people who are interested in making money. So not saying that there aren’t great financial people out there, because there are so many great financial people out there. And you are fully capable of creating financial plans. On your own fact, I bet that you already have Are you in the process of doing it every time you try to come up with what your plan for your summer vacation is going to be. You’re making a financial plan, you’re making a decision on where it is that we’re want to go this year, as a family, maybe we’re gonna go to the beach, and we’re going to the mountains, okay? Figure out how you’re going to get there as part of a financial plan where you’re going to stay where you’re going to get your food, all the entertainment things. That is a absolute financial plan. Other really common examples of financial plans are, you know, I’m interested in getting out of credit card debt. So I’ll make a financial plan for doing that I want to buy a home. So we want to put a financial plan together for saving up a down payment and actually buying it and how much we want the payment to be all the insurance that goes along with it. You have kids, you want to help them with education. So you realize you need to save a trillion dollars to cover the cost of their education. It’s a little bit tongue in cheek. Obviously, retirement planning is one of the big ones. Maybe you want to give money to nonprofits or charity. These are all simple examples or examples of things that we want to be planning for. So let’s get into these five steps. Step number one is just figuring out what it is that you want. What are your main objectives? And in this example, we’ll just talk about one will say that we want to be able to retire. People tell me Well, I’m just going to work forever. I’m never going to stop working. Well. That may be true, but what Wouldn’t it be nice to have the freedom and flexibility to be able to step away from work if you want it to do that? And that’s really what planning for retirement will give you the opportunity to become financially independent. And therefore, if you want to keep working, you’re certainly able to do that. But you don’t have to, because you need to earn money. So figuring out what it is that you want. Number one, pretty, pretty obvious. Number two, is when do you want to do this? So what is your time horizon? And for many of us, retirement planning is what falls into our long term bucket of financial goals. So perhaps you want to retire. Now, maybe you want to retire at age 60? Or 70? Whatever it might be. It’s, there’s no right or wrong answer. We need an answer because we need to create a plan for it. So once we

so let’s be determined, when it is that you want to do it, then it’s question of how much money will you need? How much will be required? How much money do you want? That’s the thing about what we’re talking specifically about retirement planning. a down payment for a home is, is more straightforward, because you say, Okay, I want to buy a house and put 10% down, I need to save $50,000. Okay, I know how much that number is. But then the second layer is, okay, I want to save a million dollars for retirement, well, you don’t really want a million dollars, you want the income, that that asset, that amount of money, that investment is going to be able to provide for you. So you can go about this in a couple of different ways we can figure out, okay, I want to be able to save this much money for retirement, and or I want to have this much money coming in, when I eventually step away from work. So at age 60, I want to have $50,000 coming in, and I want to make sure that that money is going to last as long as I need it to so let’s just use round numbers, I need to save money up until age 60. And I want to, I want to then at age 61, start having $50,000 come in every year. And I want that money to last for at least 30 years. So until age 90. Okay, fair enough. So now we can back into how much I actually need to be saving. So that is the really, really important thing is making a plan. So step number four is make a plan. So want to retire, need to find, figure out what that number is. And the good news is, with any place that you go and open an account, say that you decide to open up an IRA, or you decide to utilize your 401k. Through your work. That company will provide you with wonderful tools and resources that will be based on you, your time horizon, your objectives. So you say well, I’m 35 years old today, I want to be able to retire at 65. So you have 30 years to be able to save money. What if I be What if I’m putting in this much money, and I get this rate of return, that’s going to help you to figure out how much you need to be saving. So perhaps you need to be moving, you need to be saving more than you expected. Or maybe you need to be saving a little bit less than expected. But he’s wonderful financial calculators and tools will be able to answer all of those questions for you. And you should have access to those for free if for whatever reason the company that you’re working with does not provide you those tools. There’s lots of wonderful free financial calculators on the interwebs that you’ll be able to take advantage of such as, say the you need to start saving $500 a month. Okay? Are we going to need to be able to find that money? Are you going to need to find that money meaning you don’t just have 500 extra dollars a month sitting around? Okay, well, that’s, that’s an important part of the plants we’ll need to review our cash flow, we’ll need to review our budget figure out if we need to start living on less money if we need to earn some more money to be able to come up with that $500 a month. If you have money that you are looking to invest? Well, that’s going to be a little bit easier. But fundamentally, key to this part of the plan when we’re talking about retirement is figuring out how much money I need to be saving today in order to have it at age 60 or whatever it is you want to retire and to have it last for as long as you need the money to last for in terms of retirement planning when we’re selecting the right account because that’s a really important thing. For our financial planning. Whatever plan that we’re trying to make is we need the right account to be saved and investing in and IRAs individual retirement accounts and 401 ks are examples of qualified plans. And that means that these are accounts that are just specially designed for retirement Planning. So they give us tax incentives in the form of tax deferred growth, oftentimes, and then tax benefits, potentially where we make contributions, tax benefits, potentially when we take the money out. So having an IRA, having a 401k, these are wonderful tools, wonderful accounts, to be saving and investing for our retirements. And the next part of that is figuring out, do I want to take advantage of traditional IRA, traditional 401 K, or a Roth IRA or a Roth 401 K. And the simple difference there is just the taxation. In one, you get a tax break on the money when you make the contribution. So you get a tax break this year, this tax year, on any money you put in, when it sits inside the account, it’s going to grow tax deferred, which means you’re not paying tax on the growth, which is awesome. Dude, he take it out, when you take money out of a traditional IRA or traditional 401k. That’s when you will pay income tax on that money. Why? Because the government hasn’t gotten to tax the income yet, you got the tax break on the money, when you made the contribution, you got the tax break, as the money was growing. So when you take it out, that’s when the government’s going to tax your income, they’re going to tax all the money inside, you’re going to tax them when you put in and the interest that you earned. The opposite is a Roth IRA or a Roth type 401k. So I say the opposite because you do not get any kind of a tax break or tax benefit. When you make the contribution somebody put money in, you get to enjoy the same tax deferred growth. So as the money is grown, you’re not paying tax. When you take the money out of a Roth style account or Roth account, you do not pay income tax. Why? Well, because the government already got to tax your income in the year that you made your contribution. Okay, so you get the money you put in, and all the interest out income tax free. So that is a matter of personal preference. And there is a little bit more thought that goes into that. But I’ll do I’ll do a little bit more work on that for you in the future to help you make that decision help you better understand that. But fundamentally, that’s it. And then we need to figure out what kind of investment we’re actually interested in making. So rather, the vehicle that you’re interested in investing in, really the most common way that we make, that we invest within a 401k is something called a mutual fund. But oftentimes, with an IRA, and eventually, probably with most mutual funds, you’re going to have access to an exchange traded fund as well. And what these are is these are just diversified investment options that allow us to buy shares of the mutual fund or the exchange traded fund, and have access to a broad number of investments within it. So instead of me putting all my money for retirement in one stock, even if it’s a wonderful company, like Apple or Google, that’s too concentrated, from my perspective, we want to have money in a lot of different companies not say that Google or Apple is going to go into business because they probably aren’t. But you just never know, we never know how one company is going to perform. Strange things can happen. So a mutual fund or an exchange traded fund allows us to be making investments in one or a couple of different options. But having a very, very diversified approach to our investing now which exchange traded fund or which mutual fund we want we’re going to invest in, that’s going to be based on something called your risk tolerance. And that simply means how comfortable are you with the investments. So if you are an aggressive person, well, you will probably be investing a little bit more aggressively. If you’re somebody who is very conservative and you don’t like market fluctuation, then you probably take a more conservative approach with whatever company that you are deciding to do business with, again, for your IRA or your 401 K, they will be able to give you a risk tolerance or risk profile. And the whole goal is trying to match you up with the right investment that will help you to be comfortable with how your money is being invested. The last thing I want is for you to develop an ulcer because you’re worried about the stock market, you’re worried about your investment, and going up or down, you’re not able to sleep, that’s not a healthy thing. And I also don’t want you to be too conservative, where you’re not going to be able to enjoy a lot of interest or a lot of growth with the investment that just will make actually achieving your financial planning goals a lot harder. So those are some of the keys and then step number five, the final step is simply to monitor and to revisit all of your financial plans once you do it at least once a year. I would love for you to do it on a quarterly basis and just check in and make sure Everything is doing what it is that you are expecting it to do. And when changes are required or necessary that you’re able to make those necessary or those required changes. So that is what it is all about. So five simple steps, what is it that you want to make a plan for? When do you want to use the money that you’re saving and investing How much are you going to need and make a plan number four, so figuring out where the money is going to come from, what kind of an account it should be invested in the types of investments and make sure that you’re comfortable doing it, making sure that you’re checking in on everything at least once a year, ideally a little bit more frequently than that. So you are fully capable of creating your own financial plans that are a lot more straightforward than you potentially thought that they were and you are 100% You are worthy and you are

deserving of the financial success that you’re looking for but you’re not entitled to it. So you need to take the steps you need to take the action. If you want a little bit of support. We are certainly here for you you can access we have a free goals course a free values course and a free get out of debt course money alignment academy.com and I’ll link all those in the notes and and there it is. So, first step is getting started to begin begin. Remember, do your part doing your best

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