Monthly Archives: August 2016

Financial Plan and Checklist for You

“What’s in your wallet?” Most everyone has heard the question posed in commercials for Capital One credit cards. It’s pretty catchy, but perhaps an even more important question is this: What’s in your financial plan?

There is no one-size-fits-all answer to this question. Generally speaking, the reason to have a financial plan is to better balance your current needs with your future needs and goals. And everyone has different goals and needs.

Unfortunately, few individuals have a comprehensive financial plan, one that brings together all elements of their financial life. This inability to see the complete picture can lead people to make very costly mistakes. The bottom line is that many folks will fail to achieve the financial life that they want simply because they failed to create and follow a plan to get them there.

What goes into a plan

In general, a financial plan has two halves: what we call “defensive elements” and “offensive elements.” Below is a checklist you can use. Print it out and put a check mark next to each item that would be appropriate to address in your own financial plan

Defensive elements of a financial plan may include:

  • Understanding where your money goes (also known as cash flow analysis).
  • Maintaining and reviewing estate planning documents. (This may include a power of attorney, trusts, a will, a heath care directive, the HIPAA release form and other documents.)
  • Risk mitigation. (Do you have appropriate insurance policies that sufficiently protect you from financial loss? And are you overpaying for the coverage?)
  • Getting debt issues under control.
  • Tax planning. (Are you paying the least income tax possible?)


Offensive elements of a financial plan may include:

  • Home purchase planning.
  • Children’s education planning.
  • Retirement planning.
  • Analysis of your current investment portfolio.
  • Assessment of investing risk tolerance.
  • Determining ideal asset allocation.
  • Creating an investment policy statement.
  • Getting specific investment recommendations.
  • Stock options planning.
  • Charitable giving.
  • Legacy planning.
  • Other topics specific to your goals and situation.

Most people get advice on just a portion of their financial lives. Many individuals have an estate planning attorney, for example, or a tax professional or someone to handle insurance matters or provide investment advice. This advice they get is often incomplete and disjointed, because no one is taking the whole financial picture into account.

As a result, a lot can fall through the cracks. You might overspend on a big house, for instance, not realizing that it could mean your kids will have to borrow money for their education, or that you will have to delay retirement. Your financial goals are interconnected, but often the advice people get is not.

Finding a planner to help

So where do you go to develop a plan that incorporates every element of your financial life? You would be well served by an advisor who has the Certified Financial Planner (CFP) designation. This is reserved for experienced professionals who are trained in all areas of financial planning, have passed a comprehensive test, abide by a code of ethics and complete regular continuing education. To find a CFP professional go to

When choosing an advisor, be aware how he or she gets paid. “Fee-only” advisors charge you for their work on your behalf, based on how much time is involved. What’s important is that your advisor shouldn’t be receiving compensation from any source other than you.

Some people call themselves advisors, but in reality they’re just salespeople. They earn a commission when they sell you a product such as insurance or investments. The problem with this approach is that you never know if the recommendation is in your interests or the salesperson’s.

A hybrid or dually registered advisor can both charge a fee and collect a commission. This makes it very difficult to differentiate unbiased advice from what is essentially a sales pitch.

Save More on Your Student Loans

Already high, student loan debt creeps higher each year. In 2013, the average borrower who had taken out student loans graduated from college with $28,400 in debt, according to the Institute for College Access and Success. New estimates for the class of 2015 put that figure even higher, at $35,000.

Meanwhile, the average starting salary for new graduates with a bachelor’s degree is $48,127, according to the Society for Human Resources Management.

That’s a tough way to start your professional career. And if that’s what your situation looks like, it’s probably tempting to just make your minimum monthly payments and know that your debt will be gone in 10 years.

But that’s not the only way to go — and not necessarily the best way. Paying just a little more than the minimum each month can get you debt-free a whole lot sooner and save you a lot of money. To see just how big of a difference it can make, let’s crunch the numbers.

A few assumptions first

Here are the assumptions I made when analyzing the numbers for a typical graduate:

  • Total debt of $35,000, all of which was a federal student loan disbursed in 2011 with an interest rate of 5%.
  • A minimum monthly payment of $363 on a standard 10-year repayment plan (obtained using the Federal Student Aid repayment estimator).
  • Annual income of $48,000 per year, with take-home pay of $3,500 a month (obtained using TurboTax’s TaxCaster).


How much money could you save?

Using these numbers, I ran three different scenarios through PowerPay (a great tool if you want to check things yourself). Here’s how it played out.

Scenario 1: Pay the minimums

The minimum monthly payment is $363, which is about 10% of take-home pay.

If you made every single one of those monthly payments, you would be debt-free in 10 years after having paid more than $8,500 in interest.

Scenario 2: Pay more

Say you found some creative ways to save money and increased your monthly payment to $500, about 14% of take-home pay.

You would be debt-free in just under seven years and you would save yourself $2,853 in interest. All of that — just for finding an extra $137 to put toward your debt each month.

Scenario 3: Pay a lot more

But what if you want to get really serious? What if you feel like your debt is an emergency and you want to get rid of it as soon as possible?

Well, if you could bump your monthly payment up to $1,000 per month, you would be debt-free in just over three years and you would save yourself $5,938 in interest.

And if you wanted to get really crazy and put 50% of your take-home pay toward your student loans ($1,750 per month), you’d be debt-free in under two years and save yourself more than $7,000 in interest!

Invest Your Way out of Not Saving Enough

If your primary focus when it comes to investing is how to find a better strategy with a better return, you’re doing it wrong. The truth is that until you’ve built up a sizable portfolio, your investment return, surprisingly, doesn’t matter that much.

What really matters is your savings rate. It may not be sexy, but no amount of return can make up for not saving enough. You don’t have to take my word for it. Let’s look at a simple example.

Meet Jim and Olivia

Jim and Olivia are both 35. They both make $100,000 per year, have $30,000 in retirement savings, and want to retire at 65 with $2,000,000.

Jim takes the exciting approach of trying to maximize his investment return, and it turns out he’s really good at it! He’s able to earn a 12% return year after year, well above current market expectations.

Olivia’s approach isn’t quite as exciting. She goes the tried-and-true route of choosing low-cost index funds, which earn her a steady 7% return per year.

But there’s one other difference.Because Jim is so focused on his investment strategy, he never finds the time to save more than $3,000 per year. So even with his other-worldly (and, frankly, unlikely) returns, he only ends up with just over $1.6 million. That’s $400,000 short of his goal.

On the other hand, Olivia is a savings rockstar. She carves out enough room in her budget to save 20% of her income, or $20,000 per year. And even with her average returns she ends up with over $2.1 million.

By focusing on saving instead of returns, Olivia met her retirement goal and ended up with $500,000 more than Jim.

When Do Returns Start to Matter?

Wade Pfau, one of the leading retirement researchers, has shown that for the first DECADE of your investment life your annual return has less than a 1% impact on the success or failure of your retirement goal.

In other words, it’s a long time before your returns really start to have an impact on your final outcome. It’s your savings rate that matters most. So when do your returns become more important? Here’s a simple formula you can use to figure it out.

Let’s assume that a reasonable savings goal is 15% of your annual income. And let’s also assume that you will get a 7% investment return per year.

With those assumptions, the amount you save each year will be greater than the amount you earn from returns until your investment portfolio is 2.14 times greater than your annual income (15% divided by 7%). If you earn $100,000, that means that the amount you save every year will have a bigger impact than the amount you earn in returns until your investment portfolio reaches $214,000.

Save more!

Beyond following some simple rules and creating a “good enough” investment plan, your returns are largely out of your control. And the impact of getting better returns would be relatively small anyways. On the other hand, the amount you save is not only directly in your control but it has a BIG impact on whether you reach your retirement goal.