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Everything Starts with Planning
Every journey needs a destination. How can we track our progress or know our direction if we don't have one? Financial planning is about determining that destination. Once a destination is determined it doesn't mean we can't change it in the future. Your annual financial planning meeting is our way of calibrating your personal finances with your preferred lifestyle.
Key Financial Planning Concepts
Each concept below is important to understand as you navigate your own financial planning process.
The Personal Finance Equation
Savings(1 + Return) + Income - Expenses (1 + Inflation) = Savings Next Year
Or Simplified
S (1+R) + I - E(1+Inf) = S
2
1
Don't worry! We'll handle the math for you! We simply want to make sure you understand the broad strokes of the personal finance equation. Here's the concept. Each year financial solvency is determined through this equation. It takes your existing savings and adjusts it for any return you've earned. We then add any income you've received throughout the year. We subtract your living expenses adjusted for the year's inflation rate. What's left over is our savings for the next year. If this number is positive then you were solvent! If it's negative....well we've got some issues to address. This is NOT the same as your net worth. Net worth involves assets and liabilities. This is focused on cash flow.
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Long term financial planning is us running this equation over and over for 30+ years. Each year financial firms should be adjusting and projecting each variable in the equation and more. Notice we said "should be".
What most firms are actually doing is just adjusting your return assumption over the life of your financial plan. They hold all other variables constant. All this is really going to tell you is if your assumptions from today can survive market volatility...we don't think that's enough.
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At PWM we test each variable independently to determine the "guardrail" values of each one. What if there's an opportunity to spend more in retirement? What if we learn you don't need to take as much risk as you're comfortable with? These are the details our firm is analyzing on your behalf. A complete picture gives us the best information we need to achieve your financial goals. You deserve a complete picture.
Work
Longer
Spend
Less
Earn
More
The Levers You Control
When it comes to personal finance you really only have three elements you control. You can work longer. You can spend less. Or, you can earn more (second job or higher investment risk). Most people when they read those options have an immediate negative reaction towards one specifically. That is an important thing for us to know! Maybe it's the first time you've thought about it yourself.
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Knowing which option you are most comfortable with allows us to better personalize your financial plan. It also allows us to cater our recommendations to your preferences. If we know you'd rather work longer to maintain your lifestyle, then we can analyze those options. It also helps us make positive adjustments. Maybe we see an opportunity to retire earlier. We could evaluate how much earlier you can retire without effecting your desired lifestyle. Knowing which levers you prefer to use can helps us translate your financial goals into your retirement reality.
Compass or Map?
This is one of the most crucial concepts to understand when it comes to personal finances. You need to treat your financial analysis as a compass, not a map. The reason you should treat it as a compass is because life is always changing. Think of it this way. You're driving through a city you've never been to. No cell phone or GPS. All you have is good old fashion Mapquest printed directions (I've dated myself). You've followed the first few steps. You've turned on all of the right streets. As you make your next turn you see road closure signs. What do you do? Your printed directions aren't going to help you now. Most people would end up wandering aimlessly hoping they find a street on their directions. Hope is never a strategy.
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Same concept but you have a compass with you. You know the general direction of your destination. Now when an obstacle gets in your way, you can orient yourself in the direction of your final destination. That is how the financial analysis should be used. Obstacles will pop up from time to time. That's life. The analysis is our way of adjusting to these obstacles while making sure we're still pointed towards our end goal.
Annual Recalibration
The journey to, and through, retirement is a long one. It's a marathon not a sprint. And like a marathon you'll need to take moments to reassess your progress. Do you need to adjust your pace? Does your pace match the terrain? Is it time to take a breather? Taking a moment every year to gauge your financial progress and evaluate if any updates need to be made to your current strategy is essential for your financial well being.
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Ask yourself this question, "How often are you able to predict where your life is 12 months into the future?". Most of the time things come up, relationships change, opportunities we didn't expect present themselves. That's life. It wouldn't be reasonable for us to create a prediction for our financial lives and never recalibrate it to our updated realities.
