Creating a Custom Financial Plan Starts With Your Choices
How do you go about making the big decisions in life? For most of us, it's a blend of trying to be logical, weigh pros and cons, explore various outcomes, and think about the process. But when it's time to decide, the biggest factor is usually much more emotional. We go with our gut. And that's usually the right answer.
Guess what? Financial decisions aren't different. A lot of analysis goes into them, but what you want most should be the determining factor. There are no definitive right or wrong answers when it comes to your finances. It all depends on the most important factors when you make the decision, and those factors can change over time. So the best, most correct answer to any question about personal finance is to be open-ended and explore from there.
Embrace the Possibilities of “It Depends”
When our clients present us with a "should I do this or that scenario," we often respond to them with an "it depends” approach. We feel that this perspective on financial decision-making helps them understand the impact of trade-offs, so they can effectively prioritize their goals and determine what to do and when to do it.
We get into this framework of possibilities by utilizing a Good, Better, Best approach. Thinking about the different pathways you can take to reach your goal allows for a more nuanced understanding of each decision in the context of the outcomes and the impact on other parts of your plan, or on other goals. This can lead you to the most comfortable path forward for you.
Setting Goals Is the First Step, But Prioritizing Them Gets You There
Before we do any work on our client's financial plans, we first go through a process to understand their goals. These aren't vague, like "retire comfortably." We uncover specific goals separate from the financial discovery process. For example, these could be as specific as the number and type of vacations they want to take each year.
Once we have a shared understanding of goals, we perform a thorough review that uncovers the strengths, weaknesses, and unexploited opportunities in their current financial state. Using that information, we map their money to goals.
Our Good, Better, and Best plans represent various paths clients can take to achieve their goals. We spend the time creating detailed financial plans that show all the possible outcomes of the choices that need to be made. Knowing the potential outcome helps to do the work of prioritizing goals.
A very common experience for our clients is that understanding the choices they can make helps them see what is really important to them. They often increase priority for some things, and other previously deemed important goals may end up lower on the list. Understanding true priorities motivates and enables the financial behavior that will keep things moving forward.
There are trade-offs and sacrifices. We believe that successful financial plan solutions need to be both optimal and comfortable, and we keep working at it until we find the solution that meets both criteria.
The Best Plans Create Flexibility
Life can change very quickly, and these changes often result in the reordering of priorities. It's critical to create a financial plan that can adapt efficiently. The Good, Better, Best framework demonstrates that changes can be easily managed and plans can be adapted.
One way to think about the plans is that they are guardrails. They keep saving, spending, and investing strategies inside quantifiable parameters. Advance planning that demonstrates the impact of falling short in any area can be a useful tool to keep moving forward. It can also be reassuring when challenges arise to know that there is a fallback plan that will still keep goals achievable.
The Good, Better, Best Framework in Action
Let’s take a hypothetical couple that wants to retire early, send their kids to college, and travel every year. An approach that allows for different options lets this couple prioritize what's important to them while making recommendations that can get them nearer to achieving all their goals. While early retirement, college planning, and travel are prioritized in each plan option, different ways to achieve these and different levels of goals are identified. As the plans optimize, more goals are added, and other aspects of the plan are manipulated to account for them.
For example, in every scenario, opening a 401(k) plan is a critical component as it allows for tax advantages (so minimizing a threat) and boosts savings (correcting a weakness). We also recommend taking advantage of high income to build an investment account and reallocating investment assets to a strategy with a targeted return range.
As we work through Good, Better, and Best options, goals such as opening 529 accounts for college and purchasing a second home that can generate income comes into play. It's more complicated than this in action, but the result is that the scenario analysis outlines different paths to take toward goals. Each will have other impacts on cash flow analysis, taxes, and savings. But the important thing is that the resulting choice will be the one that is the most comfortable.
The Bottom Line
There is no “one-size fit’s all” approach to financial planning. Going through this analysis with a trusted partner can help clarify priorities and put you on a path to achieving your goals in a way that feels right to you.
Brandy Branstetter, CFP®