River Hill Magazine: The Personal Financial Plan – An Indispensable Tool for Enhancing Long-term Financial Well-Being

The development of a personal financial plan for yourself or family provides the framework for a flexible, dynamic plan of action offering the following benefits:

1. Keeps the focus on immediate, intermediate, and long-term financial goals.

2. Potentially cuts income taxes, improves cash flow, and reduces the cost of debt service.

3. Establishes a suitable investment policy consistent with goals to balance risk and return.

4. Minimizes or eliminates the risk of unanticipated financial disaster.

5. Helps minimize the risk of prematurely depleting assets during the golden years.

A sound financial plan can have a significant impact on long-term financial well-being. The sections typically addressed in a personal financial plan are:

1. Financial Summary

2. Tax/Cash Flow/Debt Management

3. Investment Portfolio Review

4. Retirement Planning

5. Estate Planning

6. Risk Management – Insurance

7. Education Funding Analysis

It is quite common for a financial plan to contain as many as 10-20 or more specific recommendations or action items. A single page implementation checklist serves as the first page of the plan providing a bullet-point summary of the key recommendations. A “thumbprint” example of our Financial Planning Checklist is illustrated due to publication space constraints.

Personal Financial Plan Checklist

Personal Financial Plan Checklist

It is important to prioritize the action items and begin to implement the plan promptly. A plan that sits on the shelf and is not acted upon is worthless. After the initial plan has been completed, it is not necessary to go through a thorough financial planning exercise annually.

A particular section or module of the plan can be updated as major changes occur. For instance, the addition of a new family member requires an estate plan, education plan, and risk management review. Other typical life events that call for an update to a plan are a change in marital status, an employment change, a death in the family, or a special needs analysis such as when a family member becomes terminally ill.

Some people prefer to develop a financial plan one module at a time in an ad-hoc manner.  This is better than not planning at all, but has the following disadvantages:

1. Some sections of the plan may be overlooked and never addressed.

2. The sections of a financial plan are integrated.

This means that decisions made in some areas can have a significant impact on other areas.  It is for these reasons that a more comprehensive personal financial plan is recommended for those who have never been through the process.

This is article appeared in the December 2014 issue of River Hill Magazine
Copyright © by PARR Financial Solutions, 2014.
Please feel free to Contact Us if you have any questions, comments and/or wish to receive a copy of the Financial Planning Checklist.

The Business Monthly: How to Weather Stock Market Turbulence

Safe to say that with a fair amount of monumental events happening throughout 2011, investors experienced the upsides and downsides of stock market turbulence. Throughout the years I have developed a few ways to weather stock market turbulence and reduce volatility through diversification.

Weathering Stock Market Turbulence

I recommend that investors take these five steps to weather the stock market turbulence:

1. Distinguish financial resources required to meet short-term goals from long-term goals.
2. Understand your portfolio liquidity needs and cash-flow requirements.
3. Be aware of how volatile your investment portfolio has behaved in percentage terms relative to the risk of the overall stock market.
4. Modify your investment plan by reducing your exposure to stocks if your needs have changed, or you are uncomfortable with the current volatility of your portfolio.
5. Stick to your long-term investment plan if you have sufficient financial resources to meet immediate needs and you can accept a higher-degree of risk with funds targeted to fund long-term (> 3-5 years) needs.

Diversify: Reducing Volatility by Understanding Correlations

An investment strategy practicing broad diversification can pay-off with reduced downside volatility. One-way to accomplish this is by carefully selecting different types of investments (technically referred to as “asset classes”) that have low correlations. Correlation is a statistical measure of how different investments behave relative to each other. It can range from +1.00 to -1.00. A correlation of +1.00 indicates perfect correlation. For example, rain and umbrellas have a correlation close to +1.00. Rain and sun have a correlation closer to -1.00 (but not absolutely -1.00 as an analytically-minded engineer would surely be quick to point-out). The correlation between rain and a cow is perhaps 0.00 and implies that these two items are uncorrelated and have nothing to do with each other.

This is an updated post of an article that originally appeared in the May 2001 issue of The Business Monthly.

Copyright © by PARR Financial Solutions, 2011.

Please feel free to contact us if you have any questions or comments.