financial planning needs

Closing Financial Planning Gaps

Analyzing a personal financial plan usually uncovers some financial planning gaps. These weaknesses in a financial plan can range from being under-insured to overspending relative to savings and investments.

The most challenging part of the financial planning process, is not identifying gaps, but making the life changes necessary to fix them. This is due to the fact that many of our budgets are rather fragile; meaning we do not have enough cushion to recover from a significant financial setback. There are three main parts to closing financial planning gaps: determining financial planning needs, adjusting budget to increase cash flow and using addition cash flow to strengthen the financial plan.

Determining Financial Planning Needs

Determining financial planning needs is only a matter of assessing your current financial situation and finding the strengths and weaknesses within it. Personally, I evaluate a financial plan based on its ability to get a client from where they are today to where they want to be while protecting assets from risks.

So review your current financial plan and determine if you can accomplish your goals and objectives while maintaining your current path. If its not realistically feasible that you can accomplish your goals, you should focus on fixing what you can.

Adjust Budget to Accommodate New Expenses

Once the financial planning gaps have been discovered, its time to determine how we can fund these needs. Normally, closing financial planning gaps involves the requirement to save and invest more money, purchase more insurance and one time expenses such as drafting a will for estate planning purposes.

The difficulty comes when determining where this additional cash is going to come from. In light of the fact that it is usually easier to control our expenses than our income, finding the cash needed to fund these goals is usually a matter of reducing current discretionary spending. Finding expenses to cut is a matter of creating a new budget and sticking to it.

Close Financial Planning Gaps

Once the new budget has been implemented, assuming it was needed to increase cash flow, its time to start closing the financial planning gaps. In this last step you will have to find the products and services needed to reduce the weaknesses in your financial plan.

In example you may need to determine which investments is best for your additional retirement contributions, what type of account to stash your additional savings or emergency fund. In addition you may need to find a good Estate Planner of Certified Public Accountant to work with. You may only have the opportunity to strengthen a few areas of your plan. So accomplish as much as you can as a little can go a long way.

Finding the cash to close financial planning gaps is not an easy task. Chances are you will have to make some sacrifices or trade offs in order to fully fund your financial planning needs. However, making the decision to strengthen your financial plan now, rather than later, is an sound investment in your future.

Financial Planning Needs Analysis

Once all of the financial planning data has been collected and financial statements created, its time to determine your financial planning needs. There are a few different names to this part of the process including “gap analysis” and “SWOT analysis”.

Regardless of what you wish to call it, the outcome is still determining where your current financial plan is strong and weak. The strengths and weaknesses of a financial plan are measured relative to general and specific financial goals and objectives. In other words, this is the step in the planning process when you determine the gaps between where you are and where you want to be.

Financial Planning Gap Analysis

The first step in determining your financial planning needs is to quantify your goals and objectives. This includes calculating how much money you will need to save before you retire, determining how much insurance you need, evaluating your investments and estate planning needs. Each one of these financial planning elements are complex on their own, let alone analyzed together. However the following highlights will help you with the most common financial planning gaps.

Budget Analysis

Cash Flows - When reviewing your budget measure the margin between your income and expenses. If you are spending almost as much as you make that’s a signal that your budget needs a little work.

Consumer Debt - One of the most common issues found during the budget assessment is discovering a trend of high consumer debt expenditures. This is a weakness that can have a negative impact on your long-term financial health.

Insurance and Risk Management

Life and Disability Insurance - Ensure that you have enough life insurance coverage to provide for your family’s expenses in case there is a loss of income due to injury or passing.

Home Owners Insurance - Most of us have a lot of capital tied up in our homes, in addition it is where we live. Its important to protect this important asset. Ensure that your Home Owners policy covers the replacement value of your home.

Investment Analysis

Diversification - When reviewing your investments, ensure that you are well diversified. This entails holding a variety of assets which could include a mix of stocks, bonds, options, futures, etc. Remember all assets classes might not be the right fit for you; invest in only the assets that you understand.

Risk to Reward - As our lives mature and we get closer to retirement, we cannot risk as much as we could when we were young. Ensure that you increase your allocation of low risk assets (such as bonds) the older you get.

Retirement Gaps

Retirement Income - Once you have calculated how much money you will need to retire, determine if your current savings and investment strategy gets you there. If not you may need to reduce expenses in order to increase savings.

Lifestyle Assumptions - If there are any potential retirement gaps in your financial plan your lifestyle goals may need a little adjustment. This includes changing your expected retirement date, travel plans or other funding objectives.

Estate Planning Needs

Updated Will - Estate planning is often overlooked as part of the financial planning process. At the bare minimum, ensure that you have an updated will to reduce the probability that your assets will get tied up in probate.

Power of Attorney - Laws, as they are currently written, leaves much to chance in the event that one loses the ability to make decisions on their own. Granting the legal authority for someone to make decisions on your behalf can ensure that your intentions will be carried out in the event that anything happens to you.

Determining the gaps within your current financial plan is the most complex portion of the financial planning process. Explaining how to complete a comprehensive review is too much for one post, however I will post more later. If you have any questions, don't hesitate to ask.