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Creating a Financial Plan

Published January 28, 2020

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Financial Insights
Healthcare Banking
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There are too many stories about dentists who have had successful careers professionally but struggled financially. The key to avoid becoming one of these stories is to be intentional and deliberate about your finances. And this means you need a strategic financial plan.

This article will walk you through the fundamentals of that financial plan, including goal setting and the details on how to achieve those goals.

Be SMART

We’re big fans of goals that are SMART – Specific, Measurable, Attainable, Relevant, and Time-Based. Your goals can be short-term or long-term. And oftentimes, your short-term goals can morph into longer-term ones.

Consider this example:

“My goal is to pay off my $10,000 in credit card debt by January 1, 2022.” This, of course, is a short-term goal. But it may lead to a longer-term goal you want to achieve, such as,” I will retire on my 55th birthday with $2.5M in investments and no debt.”

Notice how specific and measurable the goal is, and that it also includes a time component.

Best Practice: Goals can compete with each other. Ruthlessly prioritize them so you’re focused on the things that are the most important to you.

Setting your goals is step 1. Next, you’ll want to define how you’ll achieve them and measure your progress along the way.

To stay with our example of credit card debt, you might decide to explore how much extra cash you’d need to apply to your monthly balance to pay it off within the timeframe you’re aiming for.

The big question is: Does that fit into your budget?

Goals must be attainable, so adjust accordingly and measure your progress regularly.

Feeling a sense of accomplishment is really important to staying on track. If your goal is to save $2.5M by age 55, for example, you should set benchmarks as to how much you want to save this month, this year and in intervals along the way.

Over time, your goals will change. That’s to be expected. So be sure to revisit your goals at least once a year and adjust your plan accordingly.

Best practice: Put goal and financial plan reviews on your calendar annually. Consider doing this in February when you have all your tax documents and are thinking about finances. 

Need some inspiration as you create your list of goals? Here are a few ideas to get you started:

  • Pay off your debt
  • Build an emergency savings
  • Protect your income and family through disability insurance and life insurance
  • Save for retirement
  • Save for a home purchase
  • Plan for college

Ruthlessly prioritize these goals to suit your needs, and you’ll be off to a good start in building your financial plan.

Make lifestyle choices

Now that you’ve laid out your goals and know what it takes monthly to achieve them, you may come to realize that allocating an extra $300 to your credit card and an extra $500 toward retirement has started to put a strain on your budget.

If you don’t have the resources to keep making these payments, you’ll have to make some difficult choices. Think about what you’re spending your money on today and prioritize that against the goals you’ve set. If you decide to prioritize eating out a few times a week over paying off more of your credit card debt for example, just make sure that choice is intentional.

Reaching your goals. Doing the math

By now, you should have a list that defines your goals and when you want to reach them. Let’s do the math to see if your assumptions are correct.

Debt

There are a number of extra payment calculators that can help you project how quickly you’ll pay off your debt. Use your favorite calculator to validate that the extra payments you’ve budgeted will pay off the debt within the timeframe you want.

Remember that some of your debts, like credit cards, may have variable interest rates, so build in a buffer to make sure you reach your goal.

As you start down this path, it’s a good idea to check if your rates are competitive. You may find that for some of your debts, it may make sense to refinance or consolidate.

Best Practice: As soon as you pay off a debt, immediately apply that payment to another goal. You’ve already built your lifestyle around what you’re spending, so you won’t miss it.

Savings

The cash portion of your savings goals are fairly easy to measure. If you want to save up $10,000 in emergency savings and have budgeted $300 a month to that goal, it will take you 34 months to achieve it.

Simple enough, right?

While the interest you earn on your savings will help you get to your goal faster, calculate your payments without that in mind. It will just make things simpler for you.

Best Practice: On your way toward 3-to-6 months of emergency savings, start with smaller obtainable increments to build a sense of accomplishment. We recommend focusing on growing your savings in $1,000 increments.

Investing

Achieving your investment goals can be complicated to calculate. With growth and dividends, you’ll have to make some assumptions on whether you’ll be able to reach your objective. Here are three ways to validate the likelihood of achieving your goal based on how much you’ve saved and how much you contribute.

  • The rule of 72. This principal tells you how long it will take for your money to double given a specific rate of return. This is necessary because if you invest $1,000 and you’re earning 8%, for example, at the end of year 1, it will be $1,080. But in year 2, you’ll be earning 8% on $1,080 not on $1,000. In our 8% example, 72/8 = 9, which means if you consistently earn an 8% return, it will take 9 years for your money to double. However, this does not take into consideration dividends or additional contributions.
  • You can use Microsoft Excel, or a similar program, to write a simple formula. Let’s say you’re starting with $1,000, making monthly contributions of $100, and assuming an 8% return. In the first cell the formula would be =((1000)*(0.08/12))+1000. Dividing the rate of return by 12 is needed as that is an annual rate and this formula is built for monthly contributions. In the cell below it, enter =SUM((B2)*(0.08/12))+B2+100. In this case the original formula was in cell B2, adjust accordingly.
  • It’s absolutely fine to get a little help with this. A financial planner can run what is called a Monte Carlo simulation where they take your assumptions and apply 1,000 or so market simulations. Based on what you’re doing, they can tell you how likely you are to achieve your goal by factoring in historical market performance.

Takeaways

  • Your financial plan should include short- and long-term SMART goals.
  • Start with (5) one year goals, (3) five year goals, (2) retirement oriented goals and sprinkle in specific life-stage goals that are important to you. Ruthlessly prioritize.
  • Fact check yourself. As you break these goals down into weekly and monthly steps, validate that you can achieve them by evaluating your budget.
  • Make intentional choices regarding your lifestyle today and your goals for tomorrow.
  • After making a contribution plan, automate it.
  • When you achieve a goal, immediately begin applying the payment/savings amount to the next goal.

 

In providing this information, neither Laurel Road or KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.

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