What Is Financial Planning?
Financial planning is the process of:
Understanding your financial goals; knowing when you will need to use your money, and what you will be using it for. Then laying out a plan of action with specific steps you need to take to achieve those goals.
To give good advice a financial planner, also called a financial advisor, must gather personal and financial data about you.
They use this data to create projections that show you when and how you might accomplish your goals.
What Does A Good Financial Planner Do?
A good financial planner will give advice as to all of the following:
- What you need to differently
- How much you need to save
- What types of retirement accounts to use (IRA, ROTH, 401(k), etc.),
- What type of mortgage you should have
- What type and how much insurance you need (this would include life insurance, long term care insurance, disability, and some planners also give advice on property and casualty and health insurance)
- How much to keep in your emergency fund
- What changes might improve your tax situation
- What rate of return you will need to earn to achieve your goals over a given time frame
- Whether it makes sense for you to pay off your house
In addition, many financial planners provide estate planning advice and tax planning services.
How Do I Know What Areas A Financial Planner Will Give Advice On?
Ask a financial planner which of the above questions they address, and if they put their advice in writing.
How Do Financial Planners Charge?
Financial planners may charge in any of the following ways:
- An hourly rate
- A flat fee to complete a specified project
- A quarterly or annual retainer fee
- A fee charged as a percentage of assets that they manage on your behalf (Typically anywhere from 2.0% per year to .50% per year. The more assets you have, the lower the fee usually is.)
- Commissions paid to them from financial or insurance products you buy through them
- A combination of fees and commissions
Read 6 Ways Financial Advisors Charge Fees for additional details on all of the above fees.
How Can I Know How My Financial Planner Will Be Paid?
Always ask a financial planner for a clear explanation of how they are compensated.
A Good Financial Planner Will Not:
Make recommendations until they understand your goals, and have run a long term financial plan for you.
A Good Financial Planner Will:
Want to gather account statements and data on all aspects of your financial life.
Do Financial Planners Also Offer Investment Advice?
Some financial planners also offer investment advice. Investment advice is very different than financial planning. To understand the differences, read, What Does An Investment Advisor Do?
Ask a potential financial planner if they give specific investment advice.