We all know that there are basic organizational needs in our financial lives: making sure bills are paid on time or setting budgets for living expenses so we don’t overspend. These are valuable concepts without question, but these measures are largely reactionary. And while they can offer a day-to-day sense of stability, they are only part of a true financial plan.
A broader plan not only helps you work toward larger goals, it can offer confidence and peace of mind that a balanced checkbook simply cannot. Although many people already know the importance of making a long-term plan based on their own unique situation, the pace of life often leads to immediate priorities taking center stage. Since it is never too early to make a personal financial plan, and it never gets easier the longer you wait, there’s no reason not to make organizing your financial life a top priority. (For more, see: 5 Financial Planning Decisions You Won't Regret.)
For such an important process, the fundamentals of understanding your current financial situation and planning to meet your goals are relatively direct and straightforward. Although there are many variables, at its essence the process can be distilled to three high-level steps: knowing the present, defining the future and planning the path between.
The part that many people get the most enjoyment from is defining goals. Your ideal retirement age is the one that most people tend to have in mind, but it is important to take into consideration anything else that will have a financial impact on your family. Being prepared for your children is a big factor—not just their education, but events like weddings for which you may also be contributing. Bucket list items are important to plan for as well. Things like overseas travel or the purchase of a vacation home are a major step closer to coming to fruition simply by making them a defined part of your plan and setting realistic goals now. (For related reading, see: The Top Tip for Financial Success: 'Start Planning Early.")
Understanding your present situation sounds simple enough. Many people believe that knowing their earnings (and those of their spouses), their savings, their hard assets and investments comprise the sum total of this step. While those numbers are all important, there is another figure everyone should know when making a detailed financial plan. Knowing that figure now is crucial to filling in the step between your present and your future. (For related reading, see: 6 Life Events That Call for Professional Financial Advice.)
That number is your risk tolerance score—the real, calculated value that represents your true disposition in approaching investments, purchases and other financial decisions. By calculating your true risk tolerance, you gain an invaluable key to viewing your finances through a critical lens. Your risk score can help alert you to anything about your present situation that you may wish to adjust, and it can allow you to manage your future financial decisions such that your overall plan is in keeping with both your goals and your comfort level. (For more, see: What is Your Risk Tolerance?)
For example, if your goals are modest and you plan well early in a great career, your risk score can help you decide if moderately aggressive investments early on would fit with both your financial needs and your comfort level. This could indeed be the case if you tolerate moderate risk, but if you have a low risk tolerance, such a strategy may well cause you undue stress regardless of the performance of your investments. (For related reading, see: Why You Should Diversify and Rebalance.)
Benefits of an Organized Financial Life
This is the point where the less tangible value of proper financial organization becomes more real for many people. While a rudimentary approach can give you some basic figures to work with, a comprehensive financial plan can not only give you analytical insight and the flexibility to adjust your strategy as time progresses, it can give you the satisfaction of knowing that your plan is thorough, suited to you personally and best of all, already in motion. That’s the motivation behind so many of our resolutions each new year—making our lives, and those of our loved ones, better.
Not only does having a comprehensive financial plan offer you the ability to feel confident, both about your future and on a day-to-day basis, it can eliminate a source of hidden stress while energizing you with the knowledge that you are on your way toward achieving the milestones you work so hard to reach. Momentum brings us closer to success as we define it for ourselves, and by creating a comprehensive plan for your organized financial life, you’ve taken a very meaningful first step toward realizing your vision for your future.
If you want to learn more about organizing your finances, understanding your risk tolerance and how to apply it to your investment strategy, or the value of objective insight in managing your financial life, speak with a financial advisor who works as a true fiduciary, legally bound to only offer advice that serves your best interests. (For more, see: An Introduction to Fiduciary Advisors.)