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How to Create a Financial Plan

Listen as we discuss the importance of creating a proper financial plan, critical areas of concern in your finances and how to put together a great financial plan for your family.

Michael Carlin

Hi this is Michael Carlin, President of Henry+Horne Wealth Management with your Manage the Funds podcast and today we’re going to be answering questions from listeners. We want to talk about how do you make a financial plan in that you know we spend years crafting, you know, the best plans that we can for clients. What we want to try to do today is give you all the elements that you need in order for you to have a successful financial plan for yourself.

So let’s start with step 1. And there’s a lot of different places where you can get all of this information put together for you. The first thing you want to do is you want to have a really nice snapshot of your finances. There are web sites like Mint or many others that if you put in your username and password it will automatically update your account balances no matter where your accounts are. Every single day it’s something that’s critical to do because we find that people don’t often enough understand where their money is.

How much do we have in the bank? How much do we have in my company retirement plan? How much do I have in all these different accounts? You need to know this information. You need to review it periodically. Everyone asks how often.  Well I would love it if you did it once a month at least. But really, ultimately once a week would be perfect and what you’re trying to get a sense of is how my account balances doing. How are my cash balances doing and how am I managing my finances on a very frequent basis.

So once a week is what I would love, once a month is the minimum. But go ahead find that Web site, put all of your accounts in there and get all your information aggregated. That’s the first step to having a successful financial plan. Step two is you’re going to want to make sure that you have all of your finances from all aspects of your life aggregated. It’s more than just accounts and account balances. Let me explain. You’re going to want to go through and when you’re creating your plan you’re going to want to make some assumptions. You’re going to want to make sure your taxes are entered incorrectly.

Your children are entered incorrectly. You’re going to want to make sure that your deductions are set up correctly for you. You’re going to want to have all your different insurance policies. Let’s just take a step back and talk about what that is. It’s not just your insurance that you have. You probably have some kind of life insurance through work. So we want to get that listed. We want to get any other outside life insurance policies that you have listed. You have variables you have whole life.

What kind of policy do you have. Grab the information grab the premium amounts grab the death benefit amount that will get paid to your beneficiaries in the event that you pass. It’s a great opportunity to review your beneficiaries to make sure they’re set up correctly when you’re going through that information and make sure your software allows you to enter in all aspects all pieces of that data. This is a good opportunity if you have long term care insurance if you don’t have long term care insurance if you’re thinking about it.

This is the opportunity that you start to ponder these things. But we want one web site to have all your policies listed in your group policy through work your individual policy I don’t care if it’s term whole life or elsewhere. I don’t care if it’s a long-term care. All of it with all the policy numbers listed and with a lot of people then forget what insurance is. We want your property casualty coverage there. You know how hard it is to find your property casualty information sometimes especially if you’re in a pinch when you’re doing your financial plan and you’re entering this information.

It’s again a great opportunity to review it put your policy numbers in there and a lot of these places where you’re going to be storing and putting together your financial plan. It will be stored for you so that if you need it it’s all available in one spot. Incredibly important you’re going to put your liabilities your mortgages your loans your car payments all of that kind of stuff you’re going to want all on one screen. It’s important to note when you’re getting your liabilities you’re going to want to know a few things one. When did that liability when did that mortgage start.

When did that car loan start. And what is your rate of interest that you’re paying. How long is the term of the loan. The reason why is when you enter and all that information you’re creating little amortization schedules or how that loan forecasts over time. You want to put that information in there as well in the software should do some of that work for you. You’re going to go through all aspects of your complex financial situation. You’re going to take a look at if you’re getting particularly for getting closer to retirement it’s more important but certainly grab a Social Security statement.

The Social Security statement grab the information or write off your Social Security statement you can enter that right in the future income source so your salaries. Your bonuses for both you if you have a spouse partner Social Security any kind of pension, if you’re a firefighter or a police officer or work for a company that still has a pension congratulations or aren’t many of those. Put all that information together as a deferred income source and you’re really starting to see a clearer picture. Then you get to one of the most difficult hurdles that we run into so often that you’ll probably find yourself when you’re creating your financial plan and that is the expenses are hard because a good financial planning program and I’m sure the one that you’re using we’ll do it.

Is that all the mortgages and all the loans it will automatically tell you what those payments are. By virtue of putting the information in but the real living expenses is a little bit more difficult because if you’re not talking about mortgage and you’re not talking about car payments because the system’s already figured those out and you’re really looking at things like it’s you’re dining out your travel your entertainment it is all other aspects of living that most people just don’t know off the top of their head. There are great programs out there.

Quicken is one and there are other financial planning software tools that will automatically help you figure that out when you connect your bank accounts. It will take a look into the past to see what you have been spending but getting your arms around what is going out the door is critical because it’s also the best indicator not only for today what’s going out the door but also for the future. So get your arms around your expenses. My hope is that when you’re doing again your financial planning to or you’re putting your bank accounts in there it’s going to pull in and hopefully extract a couple of years worth of spending data for you.

That’s a great quick way for you to figure out what you’re really spending if you don’t do that you’re going to have to go through the process of going through months and months and months of bank statements to see what’s really going out the door. All of that is key and critical step of creating your plan. Then once you have this data put in you’re going to be able to start to get some forecasts and there’s a whole bunch of different ones and we want you to make sure that you’re looking at your balance sheet and that is where what are my assets look like.

Who owns them. Are they joint assets of a separate assets are. Do I need to have a trust. These are going to be the kinds of things that you’ll be thinking about and what are my liabilities you know my mortgages my loans things like that and you’re going to get a sense for assets on one side, liabilities on another and what’s my total net worth. Kind of the sum total of both of those two figures both positive and negative. That’s an important thing to not just have now but also be able to forecast into the future because it’s going to help us figure out what loan should I pay off first and why.

And it’s a really good starting point for you to figure out. How you can prioritize your cashflow for the future.

And speaking of cash flow, when you’re doing your financial plan all that information you’re putting in really feeds through this cash flow report. The cash flow report is what if I were to guess because it’s where I spend the most of my time. I’m sure it’s where you’ll spend the most of your time to going through year by year by year the sum of what comes in what goes out. What are my taxes. All of my savings are my saving and my retirement plans and falling okay. How does this all come together and what do my assets look like over time.

And essentially when can I slow down and or retire that cash flow report when you’re doing that when you’re putting together your financial plan is the sum total that’s going to tell you whether or not you’re on the right track. It’s the reason why you’ve spent a whole bunch of time putting this information together as you want to get that cash flow report absolutely as accurate as you can. We’re also going to want you to do a couple of other reports. Take a look at your income tax which you’re really trying to get a sense for there is.

What’s my gross income. Are there things that I could or should be doing maybe like saving more and my company retirement plan or other options that can help reduce my taxes you’re going to want to look there you’re going to want to see if there is some kind of if the software you’re using is some kind of Monte Carlo simulation because when you connect all of your accounts the tool should automatically then forecast how much growth should you be getting in your accounts as you’re contributing to them and as are growing over time. But it’s also going to assess risk and the Monte Carlo will let you know how much risk you’re taking.

And it’s also going to give you as a likelihood of whether or not you’re going to achieve financial success. Those are critical key reports that we’re going to want you to have certainly again relying heavily on that cash flow tool we’re going to want to see a nice steep growing mountain chart of net worth steadily climbing and then hopefully the sum total of this experience you’ll be able to figure out in that cash flow report will what is my number. You probably remember or have seen a commercial for IAG very famously put together what is your No campaign.

And they were trying to encourage people to very quickly figure out how much do I need to have save in order to live the lifestyle that I need. A good financial plan is going to provide you a comprehensive tool that’s going to help you arrive at what your number is your number one million two million 10 million. I don’t know it’s different for everyone has a lot to do with what you plan on spending has a lot to do with how long you plan on working has lots of what you plan on earning and how you invest it which makes it different for every single individual again want to make sure that you’re reviewing your life insurance needs analysis there.

I expect you to see a tool in there when you’re doing your financial plan that will indicate whether or not you have enough life insurance. So how do you know there’s a whole other how to that we’ll do later which talks about how to figure out how much life insurance you need or hopefully your software that you’re using will help you indicate how much total insurance coverage you need. But real quick you’re going to want to make sure you have enough life insurance to pay off any liabilities. Should you not be here and you leave a surviving spouse.

That would be a good rule of thumb There’s a few things. Number one we want you to know where everything is having money spread out all over the place isn’t going to help you it’s not going to help you long term. It’s going to make it impossible for you to manage your money. You got to know where everything is and we prefer that you check it weekly at least monthly to you’ll have peace of mind not quite often people and people survive on not knowing.

They just say I don’t know. I don’t know where my money is I don’t know when I can retire. And this is kind of like this head in the sand approach. We don’t want you to have that we want you have the peace of mind that you’ve taken time to review it to plan for it and to figure out a path forward. It’s amazing when you start to help people plan and when you plan for yourself the peace of mind that you’ll get knowing that you’re doing something proactive for your future a good financial plan will give you a lasting plan that you can follow.

Again every single year you should know how much should I be saving. What should my assets be at the end of the year. And where do I need to be every subsequent year. So you’ll know if you stay on track again a good plan a lasting plan to follow cash flow management. You got to pay attention to what’s coming in the door and income what’s going out the door. You may discover that you don’t like the numbers that are in your plan. You thought you would have more. Well if that’s the case then you look no further than cash flow management.

It’s not always about cutting expenses as some other financial experts would have you believe it is about in many cases earning more. We’ll do a whole other how to on how to earn more. But for cash flow management you’re going to want to know what do I need to bring in every year in income. And if it’s not enough because you already have a sense what your expenses are now and if you’re not saving enough you’re not reaching your goals and you know you need to earn more which means you know you have bring other skills to your job.

You need to get more education. You maybe need to do something different. We’re going to want you to make sure you confirm your life insurance plan. We want to talk a little bit about that but that’s a critical component for how to have a good quality plan. And the other is understand your market risks. You know it’s so often that people have portfolios or have money and they say I don’t they hardly even know what they’re invested in. And if you don’t know what you’re investing in you certainly don’t know the risks.

A good financial plan will help you understand how much risk you’re taking in your portfolio because he may find out you don’t need to. If you do your plan and find out that you only need a 4 or 5 percent rate of return to achieve success you don’t need to be investing your money super aggressively. You’ve got to understand your market risk. So with that that’s the how to on how to do your financial plan. Good luck if you have any questions certainly feel free to e-mail us. This is your managed funds podcast.

I’m Michael Carlin. Take care and have a great day.

Material on this program is intended for general information only and should not be taken a specific investment tax or legal advice. None of the information contained in this broadcast is intended by the host to be a solicitation for sale of any security. Further information is available by contacting Henry Einhorn Wealth Management securities offered through independent Financial Group member of FINRA SIPC advisory services offer through Wealth Management LLC DPA Henry Einhorn Wealth Management a registered investment advisor. Henry and wealth management IFC or separate and unrelated entities Henry Einhorn and Henry Einhorn wealth management are separate entities. Member of FINRA and SIPC.

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