Your guide to financial planning: How to get started and what to consider

What is financial planning?

There are many myths about financial planning. A common one is that financial planning is only for wealthy individuals and families – which is simply untrue. No matter the size of your bank account, financial planning can be used as a tool to help you reach your financial goals. Other myths suggest financial planning is an intimidating process, and you don’t need a plan because things will “work out” on their own. These thoughts lead many people to avoid financial planning, but without a set plan, you’re less likely to stay motivated on your financial journey.

The first step in the financial planning process is defining your priorities and objectives. What are you are trying to accomplish? What are your aspirations? When do you want to reach your goals? Your goal could be retirement or saving for your kids’ college. Once you have identified your goals you can develop a timeframe for achieving them. Using retirement as an example, one way to determine the timeframe is to ask yourself, “It is important for me/us to be in a position to retire at 65, with an annual income of $X because of X.” You are essentially asking yourself if you are taking the steps required to achieve that goal. Many of us have multiple goals as we formulate our financial plan, and those goals guide the strategies and next steps.

Consider your life stage

Financial planning can start at any age, but your approach may differ based on your circumstances. Certain life events can influence your financial strategy.

• New to planning: If you’re just getting started, consider opening a savings account and set aside whatever you can from each paycheck. With most banks, you can set up an automatic transfer from your checking account to a savings account, so you won’t even have to think about it. Also consider a retirement fund—either a 401(k)‡  or similar employer-sponsored plan, or an individual retirement account (IRA)‡ .
• Personal milestones: If you are ready to start a family and want to eventually help your children with their college expenses, start acting on that goal as soon as you know they are on the way. Planning allows you to tackle expenses as they arise.
• Nearing retirement: If you are approaching retirement, it’s crucial to meet with your financial partners to understand when you can retire and feel comfortable with the results of your long-term financial planning and finances.
• Retired: During retirement, it is more important than ever to monitor your finances. At this stage, your long-term financial plan should be focused on having a fixed income and stable expenses to help ensure financial security for the rest of your life.

Budgeting and balancing

Once you have goals outlined and an approach that aligns with your current life stage, it’s time to start taking stock of what you have: assets, debts, expenses, income – everything. You may already have a budget, so it can be simple to start there to review your current expenses and income, current account balances and debt totals. Once you know your financial picture, rebalance your budget to include your financial goals and priorities.

If paying down debt is your goal, whether it’s student loans, a mortgage, credit cards or other type of debt, you can use two different approaches: interest first or small balance first. While the principal (the amount borrowed) is set in stone, the interest is not, so paying off your highest interest loans first is a smart strategy to save in the long term. If achieving goals faster is motivating, you can approach debt payoffs by tacking the smallest balance first. Identify your smallest debt and dedicate any extra money to paying it off. Once you’ve finished, move onto the next smallest debt.

During this review, it’s also important to look at your credit score and credit reports because they are critical elements of your financial picture. Your credit score plays a major role in determining if you will be able to receive a loan or be approved for a credit card, which has impacts on any financial goals you have. According to FICO‡ , your payment history makes up 35% of your credit score, so stay focused on making your debt payments on time. Setting up automatic payments—whether to pay debts, allocate funds to savings or pay bills—can help you stay on track.

Retirement and health

If you want to make the most impact on your future with financial planning, you may want to consider saving for retirement and health expenses beyond contributing to an IRA or 401K. First, do you know “your number”? Once you estimate your average monthly healthcare, tax, charitable giving and general living expenses, you should be able to see how much you’ll need to maintain your desired lifestyle. Discovering this number helps establish priorities when planning for your retirement date. If you find it difficult to pick a retirement date, you can also try to retire in stages or semi-retire to maintain supplemental income and ease into the newest chapter of your life. While it may take some soul searching and number crunching, at the end of it you’ll be able to see if and when you might be ready for retirement.

A helpful tool when planning for retirement is a health savings account (HSA). Unlike a traditional retirement account, you can withdraw money tax-free for qualified medical expenses. An HSA allows you to roll over your entire unspent amount year after year and calculates, compounds and credits interest monthly based on the applicable rate for different tiers of the account balance. The money sitting in an HSA isn’t taxed at any point during the account’s life and neither are your gains if some of the money in the HSA is invested. Because of these advantages, an HSA is a powerful way to shore up finances in preparation for any health expenses you may have in your golden years.

Legacy planning

Considering what will happen to your assets after you are gone is an important part of your financial plan. Understanding the difference between a will, a probate and a trust can help you decide how you want to handle your finances when you pass away. A will documents who should inherit what, and ensures your possessions are distributed according to your wishes rather than state laws. Depending on your situation, there are many ways that a will can be constructed to account for marriages, children, charitable giving and debt.

A living trust is an option that provides excellent control, flexibility and privacy over your overall estate plan. With a living trust, you can be your own trustee during your lifetime and then name a successor trustee (such as a bank) to serve after you cannot or do not wish to serve. The terms of such a trust are flexible while you are living, so if you become disabled, your successor trustee can step in and pay your bills, manage your investments and allow you to avoid “living probate” where a court appointed conservator might need to manage your affairs. Trusts can be established for minor children or grandchildren to be created after your death, hold assets in further trust for disabled or disadvantaged beneficiaries, and even charities.

Legacy and estate planning is not a set-and-forget activity. Be sure to revisit your plans at least annually to see if updates need to be made. Events that can impact estate plans are tax and marital law updates, family changes, moving residences, income/expense changes and other factors.

Consult with financial professionals

Once you’ve taken the time to review your finances, set long-term goals and taken steps to achieve them, you’re off to a great start. With more assets, ambitious goals, or complex legacy needs, it makes sense to connect with a financial professional to help set your strategies for success and provide guidance and experience. Consulting with professionals also helps you feel confident in your plan, next steps and financial foundation.

No matter what life stage you’re in or financial goals you have, financial planning is a valuable process with the power to change your future.

 Interested in learning more about Private Wealth Management? With UMB, you have a guiding partner from financial advising and investment portfolio management, to wealth-building strategies and retirement and legacy preservation plans.

Financial planning services are offered by UMB Private Wealth Management and UMB Financial Services, Inc. UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for individuals, fiduciary accounts, employee benefit plans, endowments and foundations. UMB Bank, n.a., is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc.is a wholly-owned subsidiary of UMB Financial Corporation and an affiliate of UMB Bank, n.a.

This material is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities or engage in any specific investment strategy. Statements in the presentation are based on the opinions of the author and are subject to change at any time without notice. You should not use this presentation as a substitute for your own judgment, and you should consult the appropriate financial professional before making any tax, legal, financial planning or investment decisions.