Welcome to today's special edition episode of Sequoia Investments and Insights podcast. In this miniseries, you'll hear from our female advisors, team members, partners, and colleagues on relevant financial planning topics and opportunities to help you take control of your finances and your future.
Heather Welsh:
I'm Heather Welsh, Vice President of Wealth Planning with Sequoia Financial Group. On today's episode, we'll be discussing taking control of your finances. And joining me is Laura Springer, Director of Private Client Services at Sequoia. Laura, thanks for joining me today.
Laura Springer:
Thanks for having me, Heather.
Heather Welsh:
Each of us has financial needs that are unique to our situation in life. Perhaps you would like to buy your first home, maybe you need to start saving for your child's college education, or you might be concerned about planning for retirement. Likely, you have several different goals that overlap and wonder how the many components of your financial life might fit together to achieve them. Whatever your circumstances may be, it's important to have a clear understanding of your overall financial position. That means constructing and implementing a plan. With a financial plan in place, you'll be better able to focus on your financial goals and understand what it will take to reach them. Today, we'll talk through the three main steps in creating and implementing an effective financial plan in order to take control of your finances. Laura, you have a lot of experience helping individuals and families through the planning process. Where do you begin?
Laura Springer:
Thanks, Heather. We do find many people are hesitant to take that first step in understanding their financial picture because there are so many pieces of their financial lives they're just not sure where to start. We suggest beginning with understanding your cashflow. This provides a base for us to meeting your ongoing spending plan and will help in solving how much you need to save each month to maintain it for the long term. You'll want to start by tracking your income and monthly expenses for a few months.
Heather Welsh:
Laura, we find that many people don't have a strategy for tracking spending, especially if they carry several credit cards or have multiple bank accounts. Do you have suggestions for how to streamline this?
Laura Springer:
Yep. That's a commonly asked question, Heather. There are a few ways to do this. If you enjoy using technology, maybe use an app on your phone from one of your bank or credit card companies, or you find a template online that allows you to create your own file and save and update it on your computer. Some of these tools allow you to pull multiple outside accounts into one place, which is a big help. If you prefer using pen and paper, you can also simply review banking and credit card activity and write it down monthly on a chart you create yourself. You should choose whichever method is most comfortable for you. Most important step is keeping track. As we know, the events in our daily lives are fluid and constantly changing so many people are surprised at the end results of this exercise.
Laura Springer:
Because of this, we do recommend minimizing the number of credit cards and bank accounts to make it easier to track and stay within a spending plan. After a few months, you'll want to bring the information together. Try to create categories for frequent expenses. And, yes, it is okay to have a miscellaneous category. We all do. What did you notice? Do you have more leftover each month than you anticipated, or was it the opposite perhaps? Regardless, at the conclusion, you will create your own budgeting and spending plan.
Heather Welsh:
Creating your spending plan sounds like a great first step in understanding your financial situation. Is there anything else you'd recommend considering at this stage?
Laura Springer:
As important as understanding your cashflow is creating an inventory of all your assets and liabilities. People typically refer to this as their balance sheet or a personal net worth statement. Be sure to include all bank and investment accounts as well as any savings accounts you might hold through your employer. If you own a home, list the estimated current value of the home not what you paid to purchase it. After listing assets, you'll also want to account for liabilities. This includes your home's mortgage, auto loans, student loans, and any other evolving liability of balances, including credit cards, that you do not pay off monthly. Some people list the value of their cars, jewelry, or other personal items in a balance sheet. This is up to you, but with the exception of a car, most personal items are never sold. So their value is less meaningful to understanding your financial picture.
Finally, beyond considering your income, expenses, assets, and liabilities, you'll also want to keep insurance policies in mind. Some of us have life insurance through our employer, others purchase it independently, and many people have both. The primary purpose of life insurance is often to protect our future income, but there are other purposes you may hold it that we won't explore in this session. Everyone should have auto insurance, and if you're a homeowner, you'll also have homeowners and perhaps umbrella coverage. Just go ahead and list out those policies so they're in one place for your reference.
Heather Welsh:
With an inventory of cashflow, assets, liabilities, and insurance coverage, as you pointed out, Laura, that would bring us to step two in the planning process, setting and prioritizing financial goals. There are three key areas to consider when setting financial and investment goals. You'll need to think about each, not only in terms of an individual goal, but in terms of your overall finances. The first question you should ask in setting your financial and investment goals is, what is my time horizon? In other words, when will you need the money? Are you investing for your young child's college education or for your retirement 30 years in the future? Or do you hope to achieve your goal in a shorter timeframe? For example, do you want to buy a house in three years or start your own business in five years?
Another factor to consider is your individual risk tolerance. How comfortable are you with seeing the value of your investments fluctuate? Before making any investment, you should try to get a sense of what circumstances might cause you to sell that investment if it began to experience a loss. After all, an investing game plan only works if you're able to stick to it and having an accurate sense of your risk tolerance will help you develop a plan you can stay with. The final question you should ask when setting your financial and investment goals is, what are my liquidity needs? Liquidity refers to how quickly an investment can be converted into cash. Real estate, for example, tends not to be very liquid. It can take a long time to sell either commercial or residential real estate. Publicly traded stock, on the other hand, tends to be relatively liquid, though you might suffer a loss if you need to sell when the market is down.
Cash and cash alternatives are extremely liquid, though even here, some types of cash alternatives may be more liquid than others, such as CDs that could carry a penalty if you take the funds out prior to maturity. Having spent the time to track your income and expenses will go a long way in determining your liquidity needs.
Laura Springer:
Having considered those factors. Heather, how do you suggest prioritizing your financial goals?
Heather Welsh:
That's a great question, Laura. We all have limited resources, so it's important to consider how to best allocate them. In the context of your financial plan, you can evaluate the impact that allocating resources to one area might have on another. There are sometimes trade offs. For example, while you may have a goal to be debt free, it may be more advantageous to allocate dollars to investing for some other future goal if your expected return on the investment is higher than the interest rate on your mortgage or other debt. Ultimately, the peace of mind that being debt free brings may mean more to you than that opportunity cost, and planning can account for both the qualitative and quantitative aspects of making financial decisions and prioritizing your financial goals. One question we often get is whether to save more for retirement or get a head start saving for children's college costs?
Heather Welsh:
While everyone's situation is unique, we generally suggest that you consider allocating dollars to retirement before college savings. Shortfalls in college funding can be met with student loans or perhaps attending a less expensive school. There aren't loans to fund your own retirement. Some savings vehicles such as Roth IRAs might be an option to provide some flexibility and saving for both retirement and college. When paired with your other goals in your financial plan, you can find the optimal balance for you and your family. Once goals have been set and prioritized, we move to the third and final step of the planning process, implementing appropriate savings and investment strategies. Laura, what do you do to put a plan into action?
Laura Springer:
So, at this point, you've done a lot of work and it's time to bring it all together, right? Here at Sequoia, we would call this "creating your financial plan". Some people ask, "Why create a plan at all? Life is always changing." That's true, but by creating a plan, you're placing a stake in the ground to define where you are today. This is going to help you understand if your longer term goals are attainable given your current course of action. Does it look like your existing savings and spending plan will get you there? Or do you think you need to make some adjustments? It also allows you to map the timeframe for each goal and see how changing the timeframe might affect the likelihood of reaching them.
In addition to timeframe, you can also adjust the likelihood of achieving goals by creating an investment plan. For the nearer term goals, it's usually best to save cash in a bank savings account. But for goals further away, retirement being the easiest example, creating an investment strategy of buying stocks and bonds on a regular basis has a better chance of generating higher returns in the long run. Ultimately, the ideal mix of stocks and bonds to get you there is a puzzle for many. An advisor can help you evaluate your options. You can decide of taking on more or less risk is right for you as you understand what to expect from market conditions and determine their impact on the goals you're striving to achieve. By focusing on your longterm goals, the inevitable short term volatility in the investment markets becomes less important.
In the end, a financial plan helps you answer questions like, how much cash should I keep in an emergency savings account? How much do I need to save for my children's college education or retirement? Or, how much can I afford to spend on vacation each year? The planning process also determines if there are planning strategies that might be a fit for you. For example, Roth conversions, donating stock directly to a charity, or intra-family loans, just to name a few.
Heather Welsh:
Those are great insights. Thanks, Laura. By developing a clear picture of your financial situation, setting and prioritizing your financial goals, and implementing an appropriate savings and investment strategy, you'll be well on your way to taking control of your finances. The Sequoia team is available to support you as you take control of your finances through the financial planning process. Thanks for joining us for today's episode. If you would like to dive further into our discussion, please visit our Talk To An Advisor page on our website to schedule a meeting at sequoia-financial.com/talk.
Outro:
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Disclosure:
Founded in Ohio in 1991, Sequoia Financial Group, LLC takes a truly client centered approach to providing comprehensive financial planning and wealth management services, including asset management, estate and retirement planning, and family wealth services. Today's Sequoia has more than 90 employees in offices throughout Ohio, Florida, and Michigan. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC registered investment advisor. Registration as an investment advisor does not imply a certain level of skill or training.