To do financial planning well, and be consistent, there is an order and process to follow in creating, monitoring, and maintaining a financial plan. It begins with updating your balance sheet. This document may be created in excel and lists all the assets you own. Then you list your liabilities including all items you owe on. Total the assets and minus the liabilities and you now have a clear picture of your financial house. How’s it look?
These relatively easy steps also illustrate a less obvious point that deserves your attention. Your balance sheet identifies exactly where your financial priorities are. Updating it annually is a much easier task than tracking down every expense and hoping to locate where the money goes each month. That exercise is helpful too. Most of us gained a clear picture on what it takes to run our house, financially speaking, by working and living at home earlier this year. Providing yourself time for reflection on what you see and how you feel about your finances is important. It’s in this reflection where change begins and goals start to take shape.
The next step is to give each of your accounts a job description and hold it accountable to its purpose. You don’t take your 401k with you to go shopping. That 401k account should serve a purpose that extends decades into the future so you may live comfortably for decades more. Your operational account, likely a checking account, holds cash and does a better job paying bills, filling the cars with gas, grocery shopping and covering all the other monthly expenses, with your kid’s activities included.
Finally, through open dialogue and discovery with a professional, you may determine whether or not your accounts are positioned in a manner that support your goals. Does the job description of each account move you closer to what you want to accomplish? Is it sustainable? Planning is the ongoing work in identifying your goals and setting steps in motion to achieve them. It’s also adjusting when life doesn’t play out as anticipated and refocusing your inputs. Only after you have reflected on what’s important and provided yourself a timeline can you accomplish what you want.
Back to the Lego set. You wouldn’t start with Lego bag number 5 until you completed bags 1, 2, 3, and 4 in that order. Those Danish folks are smart and there is a process to getting the infrastructure of your Lego set completed first before proceeding to the next bag. To build Lego’s successfully you have to do two things. First, follow the instruction booklet with helpful pictures. Second, start with bag one. The problem with this approach is bag one is often the boring stuff. It doesn’t have all the cool mini figures my youngest son talks about or the wings with rockets on the Star Wars Lego destroyer. That will come later once your foundation is built.
Often Lego builders want to jump ahead and build the cool stuff as it’s more fun and engaging. Guess what, it’s natural to do the same thing when it comes to financial planning. Looking at rates of return and account values is much more exciting (think mini figures and Star Wars rockets) then maintaining your balance sheet and speaking with a professional. Each day we hear a message on the results of what company is doing well and this may subconsciously alter our thinking and approach to what matters when planning. The dangerous message that grows inside our brain is that outputs and outcomes matter more than inputs. In Legos and in life, it’s the input and directions you follow that make the biggest impact on planning for tomorrow. Like Legos, a better sustainable approach to financial planning is one that allows you to follow step by step instructions and address each bag, or life event/opportunity as it happens. This builds a base of simpler blocks and provides a solid financial foundation to expand on. Understanding the hierarchy of importance in this approach can’t be emphasized enough. Goals, planning, and then your portfolio in that order increases your probability of success.
As life plays out, your Lego box and financial plan may become more complex. All Lego sets are designated by age so that the builder may slowly increase his and her confidence overtime and attempt more complex builds. As you grow in age and experience, the more pieces you have to connect. The same is true in financial planning. If you have questions on your “Financial Lego set” and want to chat with a professional on your build, while having fun and enjoying today, we’d love to hear from you.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.