Bear Mountain Capital Inc.

Have a Plan

| December 11, 2012

Budgeting | Planning Perspectives

It is around this time of year, starting in October, I sit with my clients to review their long-term financial plans. Planning is tedious, often frustrating, but one of the most important elements to a person’s long-term financial security. Financial security is different for everyone, some want to only plan for retirement, some want to have funds set aside for emergency or a rainy day fund. Others would like to do all of the above and then some.

The right plan will be tailored to you, addressing your concerns, priorities and unique financial situation. However, financial planning in and of itself won’t provide security. It must be followed-up by an execution strategy that becomes clear toward the end of the planning process. Once you define a plan, determine the actionable-steps to implement the plan and then execute, you’ll start reaping the rewards. Below, I’ve listed 5 steps that make-up the planning process. While not all-inclusive, this should provide you insight into the primary components of a successful financial plan.

5 Steps to a Successful Plan

1. Define Your Goals – One should not begin investing, without determining specific goals for why they are investing in the first place. Without the goal, investing is a guessing game of risk and reward. How much are you willing to risk? How much do you want/need to gain in return? It can be very unclear without understanding what you are trying to accomplish. Goals should have the following characteristics:

  • Finite:  each goal should have a date or time associated with it, so that you know when this goal will be achieved
  • Quantified:  financial goals must be defined by a specific dollar amount and adjusted for inflation over time. When the time comes to meet that goal, the dollar amount should reflect the increased costs associated with inflationary pressures that tend to drive the cost of meeting goals higher over time.
  • Achievable:  whether its a high-priority goal or a low priority goal, it much be achievable. Nothing is more frustrating then setting unachievable goals (based on the reality of your situation) and failing to achieve them over an over again. By no means does this dictate you set the bar low for your goal setting, but be sure to be realistic in meeting a specific goal.

2. Itemize Your Current Assets – After the goals have been established, you must assess your current financial picture by listing all of your current assets/investments. This list should include cash/savings, retirement accounts (401k’s, IRA’s, Roth IRA’s, pensions, etc), non-retirement investment accounts (individual or joint brokerage accounts, ESPP’s, etc.), real estate, business assets, and future expected assets (inheritance, stock grants, sale of a business, etc.)

3. Review Your Savings Habits – I often tell people it does not matter how much money you make, it only matters how much money you save. If you currently make $600k a year, but spend nearly that amount on mortgages, car payments, boat payments and travel, it will be extremely difficult for you to save enough money over time to live a similar lifestyle in retirement. People who make more money are not always better equipped to save more, nor are they likely to be more financially secure over the long-term. Reviewing your savings habits and establishing better savings habits means taking the following steps:

  • Tally up how much you are currently saving, automatically, through programs like 401k deductions, auto-savings plans, etc.
  • List your monthly after-tax income that is being deposited into your accounts (income from ALL sources, including employment, annuities, trusts, etc.)
  • List your current fixed and variable expenses that are going out (including expenses put on credit cards), and be sure to account for expenses that may come out quarterly, bi-annually or annually.
  • Determine if there is a surplus or deficit between what you earn after-tax and what you save.

4. Determine The Gap – A well defined financial plan should allow you to determine if there is a “gap” between your long-term goals, current financial assets and current savings habits. Often, the right plan, will establish a percentage probability of you meeting your long-term objectives. The right plan, should show you the following:

  • Probability of meeting your goals if your current situation stays the same
  • Probability of meeting your goals if you change one or many variables, such as savings rate, return rate, inflation or tax assumptions, retirement date, life expectancy, etc.
  • A spreadsheet that shows how your current assets will change year after year, based on what you save, earn in investment returns, pay in taxes and spend (based on inflation-adjusted values)

5. Create an Action Plan – After determining your “gap”, you must act, if you want to find ways to reduce or eliminate that act. An action plan may include maxing out 401(k)’s, establishing 529 college savings plans and adding to them monthly, it may include adjusting expectations by pushing out retreiment, while also saving more in non-retirement investment or money market accounts. A plan is useless if you don’t act on it, so the right plan should give you a clear idea of what you need to do to successfully achieve your goals.

Once the right plan has been established, you’ll find yourself more confident in your savings and investment strategy. If you would like to review your plan, or if you have yet to establish one and would like to begin the process, let me know.


Joe Day