Start With the Key Financial Areas
There are six key areas to examine when building your financial life by design. I’m going to explain why they all matter and then explore each one in more detail in subsequent writing. By the way, in completing the Certified Financial Planner™ (CFP®) designation an advisor will be tested in all six areas, including a comprehensive examination over six hours.
Several financial designations require you to pass multiple exams, each one covering a subset of the complete curriculum. The CFP® has the individual topic tests and a comprehensive, which is a major reason it is regarded as the gold standard for Financial Advisors.
The Key Areas Are…
These important topics are:
- Current Financial Position
- Risk Management/Insurance/Protection Planning
- Investments
- Retirement Planning
- Taxes
- Estate Planning
The idea central to Comprehensive Planning is for us to get somewhere we need to know from where we are starting. Topics 1 is all about understanding our starting position. Topics 2, 3 and 5 examine the most crucial components of our financial picture. These are the areas we can act on and thereby shape how we use our financial resources.
Topics 4 and 6 allow us focus on the “end game”. We have no doubt heard …”begin with the end in mind…”. When we are proactive in considering goals for Retirement and Estate preservation and transfer early in our planning, we are taking important steps in building a sound and complete financial picture.
First–Current Financial Position
This is clearly the logical first step. What do we make/spend/owe/save? All our decisions come after we assess our current situation. Options for using discretionary resources for one purpose or another result from this preliminary work. We can have several goals–buying a house, saving for retirement, education, a special vacation, or others– but they are only wishes and hopes unless we understand whether we can ever PLAN on having them.
Most people know about their income; the challenge is tracking it well enough to know how it is being spent. Credit card companies and banks are getting better at providing summaries of the activity in your accounts. Even if you don’t maintain a monthly tracking, you can look at your required payments–rent, auto, food, insurances, taxes–and get a good idea as to how much you have left to allocate among all the “fun” things you want to do.
Pay Yourself First!
As you begin to decide where your income will be “spent (or invested)”, remember the old adage…”pay yourself first”. By setting aside some amount of monthly income as untouchable except for long term goals, you are establishing the mindset that accumulating wealth for bigger expenditures–homes, retirement– needs to be done a little at a time. Playing catchup from years of inactivity, is tough whether we are talking about building a strong body or a strong financial position.
My next blog completes Current Position and begins the review of Risk Management. Get that Current Position figured out!