The Five-Point Financial Plan

If I am going to tout the idea of wealth advice being made simple, I decided I should sit down and try to distill a financial plan down to the most basic actionable ideas. Keep in mind, these are not 5 principles one should follow, such as “never spend so much that credit card debt has to roll from one month to the next accumulating interest charges.”  This is a principle you should follow, but not necessarily an action that can be taken today. This post focuses on 5 actions that I believe if implemented early (and often) can result in building a strong foundation for your financial future.

  1. Emergency Reserves: Build an emergency reserve cushion at the bank so you can be prepared for the inevitable surprises (and opportunities) that come up in life, and abide by that credit card principle listed above. How much is enough? That depends on a series of factors that I reviewed in an earlier post.
  2. Invest in low-cost index investments set for the long-term: These investments almost assure you of getting market level returns, which historically have been pretty good. They are also very tax-efficient, will enhance your wealth over time by saving you money on fund-related expenses, and create immediate diversification thus mitigating (if not almost eliminating) the risk of total loss! My favorite company to purchase these from – Vanguard. Most company-sponsored retirement plans, such as a 401(k) now offer choices that include broad-based index funds. Definitely be sure to check out why fees matter!
  3. Make sure you have insured your income: Insure your ability to pay the bills by having the proper amount of disability income insurance. Imagine if you could not work due to an injury or illness? According to the Social Security Administration, more than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age. How would you pay your bills? How would you continue to save for retirement? Many employers offer group long-term disability which you likely were automatically enrolled in. I would recommend finding out if you are eligible to purchase some individual coverage to supplement that.
  4. Buy the right type of life insurance: I often tell prospects and clients who have purchased cash value life insurance as an investment over the years – “No one buys cash value life insurance, it’s only sold.” Permanent life insurance (typically that does not focus on building cash value) is a great tool used in estate planning, but there are countless better ways to invest your money and build wealth over the long-term than putting gross amounts of money in a life insurance contract. When I first got into this business, I was trained on the “merits” of cash value life insurance. I can tell you from the inside, this is an absolute fallacy. Want some proof? Seek out the most wealthy people you know and ask them how much of their wealth is tied up in a cash value life insurance policy. Term life insurance, or guaranteed universal life policies are the most appropriate in nearly every instance. Buy more than enough death benefit at the lowest possible cost from a high quality carrier – that’s the goal. Anything more complex than that for your personal needs is in my opinion a bad idea.
  5. Save 15-20% of your gross income: Yes, your gross income. It doesn’t have to, and probably shouldn’t be all in your retirement plans, but you should have a goal of saving that much to help you manage the unexpected moments in life, the high cost of healthcare during retirement, and longer life expectancy. If you couple this action with #2 above, the compound effect over time should take you far in terms of reaching your retirement goals. Does 15 or 20% sound like a lot? You don’t have to start there today. Find a more reasonable starting point, maybe 5%. Imagine a 25 year old who starts at 5% of their pay and increases that savings level each year by 1%. They would hardly notice the change in their paycheck. Set that task for each birthday, or the time of year you get a raise. Also, employer contributions count towards this objective. If your employer matches 50% of the first 6% of pay you defer into the retirement plan, that would be another 3%. In our example, our saver is putting away 17% by age 37 and coupled with the employer match is at their 20% goal, with another 30 years until their reach Full Retirement Age to collect Social Security.

Do these 5 actions take care of everything? No, but if implemented, they will be the foundation by which you can address everything else. Look at the 5 action labels in bold again. Be honest, isn’t this just WealthAdviceMadeSimple? The financial planning industry, of which I am part, focuses on the complexity of these things. Certain circumstances are complex and there are instances in which it is a good idea to hire a planner, but for most folks, following some basic principles will get you where you need to be. Looking for a more detailed road map? I enjoyed reading Carl Richard’s One Page Financial Plan.

Hope you are enjoying your start to summer!


One thought on “The Five-Point Financial Plan

  1. This is helpful, Jamie. Thank you!


    Brittany M. Pace | Attorney | Carlile Patchen & Murphy LLP | 366 E. Broad Street | Columbus, Ohio 43215
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