Key insights
- A financial plan is a comprehensive, detailed document that assesses and evaluates your assets, using strategies aimed at reducing risk and improving the chances of long-term financial success.
- Taking inventory of your financial situation involves understanding your goals, assessing your status, identifying risks, planning for the future, and considering tax implications.
- Your financial advisor can work with you to prioritize and define your objectives, establish a timeline, and help categorize your goals into needs, wants, and wishes.
Empower your future with an effective financial plan.
When sitting down to create a financial plan, you may be overwhelmed by the sheer volume of information and decisions you need to make. It's easy to feel lost and unsure about where to start. The good news is that taking inventory of your finances doesn’t need to be difficult.
Your financial plan should be created around your personalized goals. A truly holistic planning approach considers all aspects of your financial life ― including investments, budgeting, education planning, retirement planning, and more.
Learn some of the building blocks to help you plan smart and live well.
Key steps in financial planning
1. Understand your financial goals
Many people have a general idea of their goals but lack a detailed plan to achieve them. Whether you're saving for retirement, planning for your children’s education, or aiming to buy a home — having a clear understanding of your objectives is crucial.
If you haven’t started your financial plan, work with a financial planner to take full inventory of your assets and develop a roadmap. A financial plan should be a clear and comprehensive document that analyzes and evaluates your assets, using sound strategies to help reduce risk and provide better odds of financial success.
What you can do:
- Write down your short- and long-term financial goals
- Prioritize these goals based on their importance and timeline
- Consider consulting with a financial advisor and other professionals (tax advisor, estate attorney) to help you create a detailed plan to achieve these goals
2. Assess your current financial status
Assessing your financial status involves taking a close look at your income, expenses, savings, and investments. Are you living within your means? Do you have an emergency fund? Are your investments aligned with your goals?
By thoroughly examining your financial situation, you can identify areas for improvement and make informed decisions.
What you can do:
- Create a budget to track your income and expenses
- Calculate your net worth by listing all of your assets and liabilities (including cash-flow from those assets)
- Review your investment portfolio to make sure that it aligns with your financial goals
3. Identify risks and mitigation strategies
Financial planning isn't just about setting goals and saving money; it's also about managing risks.
Consider these examples of financial risk management:
Portfolio concentration risk — Having a concentrated portfolio in either one asset class or stock can increase your risk. Diversification is crucial to mitigate risk and improve financial outcomes. Spreading investments across different asset classes and regions can reduce the impact of market volatility.
Insurance as a strategic tool — Insurance can help cover potential estate tax liabilities and provide financial security for loved ones. Life and long-term care insurance can help protect against unforeseen events that could otherwise have significant financial consequences.
Comprehensive approach —A well-rounded risk management strategy involves regularly reviewing and adjusting your financial plan to address changes in your goals, personal circumstances, and market conditions.
What you can do:
- Identify potential risks to your financial situation, such as job loss, health issues, or market volatility
- Evaluate your current insurance coverage and consider additional policies if necessary
- Work with your wealth advisor to diversify your investment portfolio and reduce unnecessary risk
No matter where you are in your life, a thoughtful review of your financial picture can better position you for financial wellness and tackling life’s challenges.
4. Use estate planning to protect your assets
Estate planning involves organizing and managing your assets to make sure they’re distributed according to your wishes after your death. It includes creating legal documents like wills and trusts, designating beneficiaries, and planning for taxes and debts. The goal is to reduce legal complications and protect your assets for your heirs.
Trusts can be effective tools for managing and protecting assets, particularly in blended families, offering benefits like avoiding probate, providing tax advantages, and having privacy and control over asset distribution.
Revocable trusts — These can be altered or revoked by the grantor during their lifetime, providing flexibility and control over assets.
Irrevocable trusts — These generally cannot be changed once established and are often used for estate tax planning since assets in these trusts are removed from the grantor's taxable estate.
Special needs trusts — Designed to provide for beneficiaries with disabilities without affecting their eligibility for government benefits.
Charitable Remainder Unitrusts (CRUT) — A type of irrevocable trust that provides income to one or more beneficiaries for a specified period — often for life — after which the remaining assets go to a designated charity — offering tax advantages while at the same time supporting philanthropic goals.
What you can do:
- Create or update your will to reflect your current wishes
- Review retirement plan designated beneficiaries,
- Consider setting up trusts to manage and protect your assets
- Discuss your estate planning needs with your legal, tax, and wealth advisory professionals
5. Explore tax planning strategies
Tax planning is often overlooked but plays a significant role in your overall financial strategy. A proactive approach to tax planning helps align your financial goals and preserve your wealth.
Charitable giving — Donating to qualified charitable organizations (by using cash, appreciated securities or via a Qualified Charitable Distribution (“QCD’)) can provide tax deductions, reducing overall tax liabilities while supporting philanthropic goals.
Tax-loss harvesting — Year-end strategies like tax-loss harvesting can offset capital gains by selling investments that have declined in value. This can help reduce taxable income and manage investment portfolios more effectively.
Avoid misconceptions — There are some common misconceptions around tax strategies, such as the assumption that Roth conversions are always beneficial. While converting traditional IRA funds to a Roth IRA can offer future tax-free growth, it may not be suitable for everyone. Each tax planning decision should be based on individual circumstances, including current and future tax brackets.
What you can do:
- Review your current tax situation and identify potential areas for improvement
- Consider tax-efficient investment strategies, such as tax-deferred accounts
- Consult with a tax professional to develop a comprehensive and personalized tax plan
It’s a process, not a one-time event
As life priorities change, it’s important to track your progress and adjust your goals. Financial planning isn’t a one-time event ― new opportunities, unanticipated circumstances, and volatile markets may prompt changes at any point.
Review your plan at least annually, or when a life event occurs. Consider additional scenarios where one or two variables are changed (e.g., retirement date, savings amount, asset allocation, etc.). You may be willing to retire later if you could achieve savings for a home remodeling project or your child’s education.
How CLA can help with financial planning
A successful financial journey begins with a roadmap addressing the needs and aspirations you have for yourself, your family, and your business.
Whether you need help navigating current and long-term tax implications or need an advisor to help you focus and prioritize, our tax and wealth advisory professionals offer a seamless experience with deep resources and a commitment to helping you attain your financial goals.