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What Do You Get In A Financial Plan? Financial plans used to be forbidding and lengthy. These days, a plan tends to be more of an outline, spelling out goals and the means for achieving them. But whatever a plan looks like, its purpose is the same. It is the connection between the parts of your financial life. It coordinates short-term needs with long-term goals, and when a change in one part of your life puts other things out of whack, the financial plan restores the balance. One way to think about a financial plan is by holding up your hand in front of you; your fingers represent retirement, tax, and estate planning, investment management, and insurance. Your financial plan is like the space between your fingers. It's what makes each finger work together with the next one. Each part of your financial plan can help you get where you want to go, and each can operate separately. You could create a college savings account, for instance, without looking at how that would affect your retirement plan, or use a simple rule of thumb to decide how much life insurance to buy rather than considering what would be needed to replace your income, pay for your children's education, and help your spouse retire comfortably. But it makes sense to use the whole hand, because all of these things are interrelated. Suppose, for example, that you struck it rich during the 1990s' bull market. Maybe you used some of your gains to pay off your mortgage, and that freed up more of your earnings to put into your retirement plan. But your income taxes went up because you lost your mortgage interest deduction, and your expanding net worth meant that estate taxes could also become a problem. To create a financial plan, an advisor first must probe the details of your financial situation. What are your objectives? How do you feel about risk? If stock investments plummet, will you stay the course or sell out? How old are your children, and where do they want to go to college? What kind of pension or 401(k) plan do you have at work? Are you hoping to leave an inheritance for your children, or are you willing to exhaust your savings in retirement? And so on. Once your needs are understood, a plan is put together that connects the dots. Your investment plan takes into account your risk tolerance and is designed to fund your current and long-range goals. Those objectives, in turn, are based on what it will cost for college, the income you'll need in retirement, the amount you want to leave to your children. The plan stipulates how much insurance will be required to protect your family if you die prematurely, and whether insurance should be part of your estate plan. But no financial plan is a once-and-done document. It's part of an ongoing process of checking progress, making adjustments, and getting back on track when life derails your best-laid plans. If you have another child, receive an inheritance, lose your job, or get divorced, a good financial plan, like a helping hand, should be able to pull things back together again.
Thomas B. Horton, RFC, is an independent, fee-only financial planner in Shelby Township. He accepts no commissions and offers objective advice on an hourly, as-needed basis. His practice specializes in holistic family financial planning. Visit his web site at www.HortonFinancialPlanning.com or call (586) 997-3717. © 2005 All Rights Reserved. No part of this article may be published without advance written approval.
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