What is financial planning? If you asked the senior management at Pasadena-based Western International Securities, you would probably get a very comprehensive answer complete with plenty of industry jargon. If you asked one of their independent financial advisors, you might get a similar answer but with less detail. If you asked the average consumer, you might get a blank stare.
Financial planning means different things to different people. Professionals see it one way, consumers see it another. Even the financial media and their many experts have different ways of looking at financial planning. In the end though, every definition of financial planning includes some common components.
Considering how Western International might explain financial planning, there are six pillars that make up a solid financial plan. Advisors and clients may approach these pillars differently, but they will be the same in nearly every case.
1. Cash Flow Planning
Every solid financial plan relies on a certain amount of cash flow to make investing possible. Therefore, the first and most important pillar is cash flow planning. In more simple terms, this means budgeting. Financial advisors work with their clients to establish and maintain a reasonable budget that sets money aside for investing without compromising the client’s ability to meet daily expenses.
2. Income Tax Planning
Income taxes put considerable strain on middle-class Americans. A solid financial plan accounts for income taxes by finding ways to legally reduce an individual’s tax liability. Hand-in-hand with that is also planning for capital gains taxes. Returns on investments are usually taxed as capital gains rather than income.
3. Planning for College Costs
American parents are now saving for the future college educations of their children as a matter of course. Some even consider saving for college part of the regular budget. College expenses should be included in the financial plan for two reasons: helping clients achieve their financial goals and reducing the amount of future debt they subject their children to.
4. Retirement Planning
Of the six pillars, retirement planning is the one most people think about when the thought of financial advice comes to mind. There is good reason for that. The bulk of existing savings for the average American are tied up in retirement funds. It would be impossible to create a solid financial plan without considering retirement goals.
5. Elder Care Planning
Planning for the later stages of life that may require professional care was not something we paid much attention to several decades ago. But things have changed along with the skyrocketing cost of elder care. It is now more important than ever to plan for elder care in order to protect client wealth.
6. Estate Planning
The sixth and final pillar is estate planning. It is also the one pillar that younger investors have trouble making a connection to. Young people can barely imagine their lives at 65 or 70 years old, let alone imagining having an estate to pass on to children or grandchildren when they die. Nonetheless, estate planning has to be part of the equation if client wealth is to be preserved beyond death.
Whether a financial advisor works for Western International Securities or goes it alone as an independent advisor, the six pillars of a solid financial plan remain intact. The best financial advisors are fully aware that their clients do not truly understand the magnitude of what goes into growing and managing wealth, and they compensate accordingly. They introduce clients to the six pillars and then lead them through the process of developing a solid plan for the future.