7 Important Questions a Financial Plan Can Help You Answer

7 Important Questions a Financial Plan Can Help You Answer
(David Schwarzenberg/Pixabay)
Carrie Schwab-Pomerantz

Dear Readers: October is the month for fall colors, a chill in the air, Halloween—and financial planning. Yes, October is National Financial Planning Month. And while that might not stir your senses in quite the same way, it really could make a significant difference in your ability to enjoy every season to the fullest. So even though you may believe that financial planning isn’t important for you, I ask you to hear me out.

A lot of people think they don’t have enough money to need a financial plan or that it costs too much. They’re putting the emphasis on “financial.” To me, the emphasis should be on “planning,” because having a financial plan simply means knowing where you want to go and figuring out how best to harness your resources to get there. And it’s not just about money. It’s about your aspirations, your priorities for you and your family, and how to protect yourself both now and in the future.

Real Questions for Real People

I can’t emphasize enough that a financial plan isn’t something esoteric or only for wealthy investors. It doesn’t have to be complicated or take a lot of time. And nowadays, it doesn’t have to be expensive. There are many ways of getting a financial plan—from DIY to online to in person.
At its essence, a financial plan answers real questions for real people, whatever their stage of life or how much money they have. So, to pique your interest and perhaps get you thinking differently, here are seven questions a financial plan can help you answer and why each one is important—for everyone.

1. How Realistic Is It to Reach All of My Dreams and Goals?

You may have a general idea of what you want to accomplish—buy a home, send your kids to college, take annual vacations or retire early. But the only way to make any of that happen is to get specific. A financial plan starts with helping you zero in on what you own and what you owe, and clarifies how your income can cover essentials as well as savings and discretionary expenses. It will help you focus on your goals, put a dollar amount on each, and create a realistic timeline for achieving them.

2. What Should I Do First?

Trying to save, invest, and pay off debt all at once can be overwhelming. A basic plan helps you prioritize, whether you’re creating a savings strategy, trying to reduce debt or both. It can give you a blueprint for taking action; for example, getting a 401(k) match first, paying off nondeductible high-interest debt next and then contributing to your child’s education. These aren’t high finance issues; these are everyday issues.

3. How Should I Invest for Retirement as Well as Shorter-Term Goals Like a Down Payment or Kids’ Education?

How you invest has a lot to do with when you need the money. The longer the timeframe, the more risk you can afford to take, depending on your own feelings about risk. Generally speaking, money you’ll need within the next six to 18 months, like an emergency fund or a vacation, should be in cash. Money for intermediate goals that you may need in 2 to 4 years, like a home down payment, might be conservatively invested in bonds. Savings for more long-term goals more than 5 to 7 years out, for instance retirement or college, could reasonably be invested in stocks. Once you’ve answered questions one and two, you’ll more easily be able to pinpoint how to invest for your various goals.

4. What’s the Best Way to Protect My Family and Myself?

A financial plan can also help you focus on crucial issues like emergency preparation and insurance. Do you have enough cash to cover at least three to six months’ essential living expenses? When was the last time you reviewed your health insurance coverage? Do you need life or disability insurance, and how much? These are the deeper questions a plan can help you answer to protect your family from the unexpected.

5. When Will I Be Able to Retire, and How Much Will I Need?

As you prioritize your savings goals, retirement should be high on your list, because the earlier you start planning, the better. But planning for when you’ll be able to retire isn’t about saving blindly; it’s about projecting your needs with some degree of accuracy. So back to question one. Your current expenses provide a reasonable starting point to estimate a retirement budget. This will give you an idea of how much you need to save, when you can realistically retire, and if you’re on track.

6. What If Something Should Happen to Me?

This is the key reason for estate planning—another concept that many people feel doesn’t apply to them. But we all need to think about who will take care of our children, who will make financial and medical decisions if we can’t do it for ourselves, and how we want our assets and personal property distributed. Again, it’s not about how much but rather how we want these decisions to be made. A financial plan helps keep you in charge so someone else doesn’t make decisions for you.

7. What Am I Overlooking?

There are a lot of pieces to our financial lives. And sometimes it’s hard to see them all, let alone how they fit together. A financial plan lays them out for you so you can see if something is missing. If you can work with a financial planning professional, so much the better. A set of trained eyes can help you address any savings shortfalls, improve your budget, and save on taxes.

Answers That Go Beyond Money

The process of creating a financial plan can be just as important as the plan itself. It can help you think through and more confidently make life decisions; it can give you the assurance that your family is covered in the face of an uncertain world; and it can help couples be on the same page as they deal with present worries and future hopes. In other words, financial planning can be liberating—not just for you personally but for your entire family.
Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.”
Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty."