Like most people, you have hopes, dreams, and goals for yourself and your family. You might want to buy a house, start a business, save for your children’s education, or retire comfortably.
Whatever your goal is, comprehensive financial planning is about making the most of your financial resources to make your dreams happen.
How Does Comprehensive Financial Planning Work?
To create a comprehensive financial plan, we start by taking a look at your entire financial picture. That means we look at:
- Managing your cash flow
- Investing for retirement
- Preparing your estate
- Protecting your assets and your dependents with insurance
- Minimizing your taxes
- Funding education
A comprehensive plan also prepares for unexpected and unpleasant events like divorce, disability, and long term illness to minimize their financial impact. You can consider this plan a living document that needs periodic updates and changes.
As your life and goals change, so does that financial plan you set.
A Comprehensive Financial Plan Provides Clarity
Even though we’d all like to make progress towards our financial goals, it can be tough to figure out what’s the right move. It’s complicated; every aspect of your personal financial life impacts another.
Take contributing to your 401(k) as an example. It helps build your nest egg for retirement, but it also lowers your tax liability.
But what if you’d like to buy a home so you can build equity? Eventually, you’d like to pay off that mortgage so you’ll have less to worry about in retirement. What’s the right decision when you only have so much money to save?
With so many pieces of the puzzle, it can be tough to understand all the consequences of a financial decision. A comprehensive financial plan brings clarity to your financial situation so it’s easier to make the right decision. It helps to identify the gaps between your current financial situation and what you’d like to accomplish so you can move forward in the right direction.
A Real Life Example
Let’s take a real life example of a couple preparing to buy a larger home that was a better fit for their family. They didn’t have enough money for the down payment in savings, so they considered withdrawing money from their 401(k)
It sounds nice to move in sooner rather than later, but withdrawing from a 401(k) before retirement age means paying income taxes and a 10% penalty on top of that. It’s costly, and not worth it.
After setting aside taxes and the penalty, the amount of money available would be severely reduced. With this, they’d only be able to put down 10% of the purchase price as a down payment. This means they’d need to buy private mortgage insurance, or PMI.
All of this increased the mortgage payment. It’d be a bit of a strain on their monthly finances. This means it’d be much more difficult to make progress on goals like paying down student loans, saving for retirement, and saving for the kids’ college.
When taking into account the full picture, this couple decided to wait a year to buy a new home. We created a savings plan so they’ll be able to put down a larger down payment. They’ll be able to buy the home they want, and still meet their other financial goals.
Could they have bought the house? Yes. But as you can see, there were many consequences to buying the larger house. It would have significantly altered their lifestyles and impacted other financial goals.
The Bottom Line
When it comes to making your financial decisions, create a comprehensive financial plan to take a look at the entire picture. By understanding your whole financial situation and where you want to go and what you want to achieve, you can make better decisions to help you create the life you want.