Financial plans are helpful, but financial planning is essential.

7 mins read

By Fred Gaskin

Without a doubt, the current market environment has created considerable anxiety among investors. Many are having second thoughts about their futures, and whether they can, or should, make adjustments to their portfolios based on recent events. Pursuing good financial planning requires a thoughtful process that correctly identifies both resources and needs, but also balances goals, objectives, and alternatives.

According to recent Schwab research, those who put pen to paper with written financial plans are more confident, more engaged with their wealth and demonstrate more positive saving and investing behaviors. Of course merely having a financial plan doesn’t cut it. It needs to be complete, realistic and actionable. At Schwab, we believe there are five key factors to consider as you plan for your financial life:

  1. 1. Create a list of goals that that include how much you’ll need and a deadline. If you write down your goals, you’re more likely to achieve them. Think of them as a road map to where you want to go—and make them practical and attainable. Here’s a simple two-step approach:Step 1: Divide your goals into three categories: short term (less than one year); medium term (one to five years) and long term (more than five years).
  2. Step 2: Attach a dollar amount to each goal. For instance, a short-term goal might be your next vacation. How much will it cost? The more specific you can be, the more motivated you’ll be to work toward that goal.

2. Review your current situation. Total up the amount of money you have already accumulated toward each of your goals and how it is being invested. Be sure that your allocation between stocks, bonds and cash investments is appropriate to help reach your short-term and long-term financial goals. Also consider your investment vehicles. Make use of tax-advantaged accounts for retirement savings. But avoid tapping those for non-retirement purposes, like the down payment on a home. Instead, use taxable accounts for these types of major purchase goals.

3. Make assumptions about your future. For longer-term goals like retirement, consider how much you’ll be contributing towards each of your goals over time. You may decide to include your partner in this plan or plan for each separately depending on your financial arrangement. The earlier you start saving, the less you’ll have to set aside each year. If you start saving in your 20s, 10mpercent of your salary before taxes each year is a good goal. If you wait until your 30s, that number should bump up to 15 percent. Wait until your 40s, and you may have to put away 30-35 percent each year. No matter when you begin, the important thing is to stay on course.

4. Assess your risk tolerance. Evaluate the amount of risk you’re willing to stomach with your investments to help inform how you should allocate your portfolio between stocks, bond and cash investments. This is key to staying the course toward your goals during the inevitable ups and downs in the market. Your willingness to take on risk will and should vary depending on your various savings goals. For example, if you’re nearing or entering retirement, you probably don’t want to risk significant losses in your portfolio. Rather, you might be aiming to grow the value of your investments but also have current income needs and want relative stability. Just as an example, for those types of needs, Schwab’s moderately conservative model portfolio has 40 percent allocated to equities, 50 percent in fixed income and 10 percent in cash or cash investments. A more long-term goal may allow you to be a bit more aggressive in your allocation, but always stay diversified.

5. Analyze return expectations. Based on your risk tolerance, a sound investment plan contains some sort of expectation regarding the portfolio returns. These return expectations aren’t year-by-year forecasts, but represent long-term averages used in the planning process. It’s important to stay realistic. If your return estimates are too optimistic, you run the risk of not being able to retire on time or pay for a child’s education. If they’re too pessimistic, you may needlessly sacrifice some of your current lifestyle. To reap the most reward from your investments, try to avoid unnecessary fees and taxes.

Experience tells me, the hardest part for most investors is just getting started. Once you’ve jumped into the process, you realize it’s a terrific learning exercise. You can always update or make changes as necessary, but importantly, you have begun anchoring your expectations.

By establishing a plan, you’ll quickly realize that you have more investing confidence, a better understanding of what you need to do manage your future, and are generally less anxious about your future.

Fred Gaskin is the branch leader at the Charles Schwab Independent Branch in Bluffton. He has over 35 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.

Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

For more information on the Schwab study referenced above, visit: https://www.aboutschwab.com/modernwealth2019

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