How to Start a Financial Plan

Amanda Kish, a financial planner specialist with The Motley Fool, joins Motley Fool Co-Founder Tom Gardner to discuss how to build a financial plan.

In this episode, they cover:

How to understand yourself as an investor.
The key financial planning steps that new parents should take.
How often you need to revisit a financial plan.
The circumstances in which you may want professional financial planning advice.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Jan. 15, 2022.

Tom Gardner: There’s almost a dark valley that we travel through as adults from the day we graduate high school and don’t realize that we’re the CEO of our financial lives forever more, all the way through to when we have children and start to realize, wow, it’s not just me, I’ve got responsibilities and I need to have a plan.

Chris Hill: I’m Chris Hill, and that was Motley Fool’s CEO Tom Gardner. Think about how much time you spent planning your last vacation. Now, ask yourself, how much time have you spent planning your financial future? On this episode of Motley Fool Money, Amanda Kish, a financial planning specialist joins Tom Gardner to discuss one of the most important and underappreciated parts of our investing journeys, building a financial plan. They talk about the key steps you can take and how to get started.

Tom Gardner: Imagine that you’ve decided to go camping with your family or a couple of friends. Let’s suppose you’ve chosen Grand Teton National Park in Jackson, Wyoming. It’s a sunny day in April, and you park your car and you meet up together at the Craig Thomas Discovery and Visitor Center. You’ve got the entire week ahead. You make your way up Taggart Lake Trail with the dream of seeing the world from a top Grand Teton at more than 13,000 feet in the air. There’s one problem; you don’t have a plan, no maps, no tents, no bear spray. You got a couple of water bottles. You’re in flip-flops, you have a Frisbee, but there’s no reliable cell-service. Oh, and in April, in Grand Teton National Park, in the evening, the temperature falls below freezing. You probably wouldn’t want to take that trip. But unfortunately, that’s how many people begin their investment journey, without a plan. That’s why in our second Saturday class, we’ve invited the financial planning team lead of all Fools universally, Amanda Kish. Amanda, welcome.

Amanda Kish: Thank you very much. I’m thrilled to be here.

Tom Gardner: How prepared are most people today to make smart investments for the long-term?

Amanda Kish: That depends. There are some folks who have really done their due diligence and have a plan in place. Unfortunately, it’s really not as many as I think any of us would like to see. There is a study I like to reference that Charles Schwab did recently, that only about a third of Americans actually has a written financial plan. That’s really not what we would like to see. If that’s many people are going camping without a plan, that’d be a problem. If that many people are preparing for their financial future without a plan, that can be a problem as well.

Tom Gardner: I want to give you a chance here at the beginning of this class to encourage everyone to stick with this next 30-minute challenge, to really think together about why to plan when planning is something closer to, hey, this Saturday, we’re all going to clean out the entire basement, or and after that, we’re going to work on our taxes and then we’re going to go to the DMV if it’s open on a Saturday. We’re going to do all of these things that nobody wants to do. How can you persuade us, Amanda, that this can actually be enjoyable and fun along with being necessary?

Amanda Kish: What I found is that if you look at it as planning and having a financial plan, what that can really do is optimize your investing plans. If you’re always looking for ways to find that 10 bagger, to optimize your returns, to squeeze a little bit more out, really having a plan and making sure that your portfolio is in line with what is right for you, that’s going to have an effect of potentially increasing your returns and getting you closer to your goals. That’s really moving you along those lines. It’s one of the easiest things that you can do to really increase your odds of success. Why wouldn’t you do that? Why wouldn’t you take a little bit of time and really anything that you can do along this spectrum of planning? Even just moving a little bit is going to help you. If that’ll get you one step closer to boosting those returns, to minimizing volatility, to achieving those goals, I think that’s more than worthwhile to spend the time on.

Tom Gardner: I’d offer out there for all of us Motley Fool stock investors that we probably wouldn’t want to invest in a company that didn’t have a good plan. There’s a certain amount of spontaneity and innovation and discovery, but when you’re talk about capital allocation, all of the recruiting, all of the talent development, new product development, customer service, a 401k plan, you wouldn’t want to invest in a company that didn’t have a plan. Therefore, The Motley Fool wouldn’t want you to go forward in your investment life without a plan. I’d like to talk now, Amanda, about the key information that somebody needs, the essentials. Maybe we all know that a plan could fit nicely in an Excel spreadsheet with 3,000 different cells filled out. But how about the essentials? What are the core bits of information we need to know that we have the ingredients for a good plan?

Amanda Kish: I think one of the most important things that you really need before you even get into the plan is really learning to know yourself, know who you are as a human being, and who you are as an investor. Here. I’m talking about getting an idea of what your goals are. We’re investing, sure, but we really need to know what’s the point behind the investing. Planning, when we think of it through a financial planning lens, investing is only a small part of that, there is a whole other slew of things that really this financial planning concept encompasses. We need to get those in place as well. Part of that is having an idea of what your goals and your objectives are. What are you looking to do? Not just retire at a certain age, but some of those softer goals as well. What do I want my life to be like? Can you afford to live a life that’s in alignment with your values, that kind of thing. That’s all part of that big financial planning umbrella.

Tom Gardner: Let’s arbitrarily take a couple, let’s say in their late 30s or early 40s, maybe two children. They’re both bringing in an income throughout the year, and they realize they don’t quite have the plan that they’d like to have. In fact, in many cases, if you look at the data, there’s almost a dark valley that we travel through as adults from the day we graduated high school and don’t realize that we’re the CEO of our financial lives forever more, all the way through to when we have children and start to realize, wow, it’s not just me, I’ve got responsibilities and I need to have a plan. In many cases from the age of 18 until the birth of a child, there’s a lot of planless behavior going on financially. Of course, we want to pre-empt that. But in this scenario, we’re going to jump forward to a couple that has one or two children, let’s say late 30s, and they are now realizing they don’t have a sufficient plans. What’s starts to sound like one or two good goals in a generic way for that couple?

Amanda Kish: There’s a couple of things that those folks might want to do. Some of the investment-related things are looking at your portfolio allocation, for example, to see if it’s in line with that couple’s individual risk tolerance and with their time horizon. They could be investing in a manner that is completely different than how someone might typically advise them. Taking a look at that, looking at their investments through that financial planning lens. You may have a portfolio that you think is great, and it may be great, but it may not be a great portfolio for that couple or for someone else. That’s one thing that a small movement there can really reap some big rewards down the road. Then also, if you’re a couple who has two children, for example, if you haven’t done any state planning, that’s something that you’d really want to look into. If you’ve got will, advance medical directive, guardian shipped for the two kids, should anything happen to both of you, if you have nothing like that, that’s very common at that age, that folks haven’t done that estate planning. There’s something that would really help out a lot, would be contacting estate planning attorney and putting those documents together. Those are two things all within that financial planning umbrella that would really help move forward that overall financial plan.

Tom Gardner: Even though we’re less than 10 minutes into this conversation, I’m going to pause this now and just say, I think I probably speak for a lot of listeners today that when I start to hear of the attorneys that I need to contact and the boxes that I need to check to make sure I have just this one piece of a comprehensive plan put together, I start to hit some blockers and think, you know what? I think I’ll do that next week. I actually don’t have time this month, but maybe next month I will. What are one or two steps that you’d like all of us to take coming out of our time together today?

Amanda Kish: If you don’t have time or that seems intimidating of actually getting professionals involved, one thing on that front that you may want to do would be to simply have all of your passwords and user ID somewhere where your spouse can access them. That falls under the estate planning umbrella, but that’s something that you can do very easily on your own, just have something centralized. If something were to happen to you tomorrow, what would your spouse need? If you just disappeared, what would they need to continue on to access your records, access your accounts, bank accounts, investment accounts, and so on? That’s one easy thing in that same line that you don’t need to contact a professional for.

Then beyond that, taking a look at your overall allocation could help. We talked about that before. Then also, just getting an idea, especially if you’re a couple, is your portfolio aligned? Most couples have very different risk tolerances from each other. The total portfolio line, one member of the couple may be investing in a very different, more cautious manner, and the other half of the couple maybe investing in a much more aggressive manner. Is that overall total portfolio in line with where you want to go as a couple with the goals that you want to achieve. Getting together and talking about your long-term financial goals as a couple. That’s one thing that you can definitely do on your own very easily just to make sure that you are on the right track.

Tom Gardner: You begin the conversation by letting us know that only one in three adults has a financial plan set up. We’re obviously delighted for that 33 percent than we’re spending as much time as we can talk into the remaining 67 percent about the importance of doing this and the first few steps would be to make sure that you have a goal set up and then to take that early step of just organizing your passwords, your accounts, just having it all in one location. Then the third step is to really look at the allocation to make sure there’s a good team, if it’s a couple make sure there’s a good team understanding of what’s trying to be achieved because we all have different risk tolerances.

Nobody is right on top of the other person with the exact same background in history in their financial lives from their parents and all that they learned growing up to how they’d like to invest and what their future goals are. We’re trying to unify a team effort and that obviously brings some complexity into it. Amanda, in your work with couples, how have you bridged that gap? When there seem to be, let’s say, some meaningful differences in how much volatility in a portfolio or what sort of growth dynamics or how much to have in the stock market versus satisfied in cash, etc. How do you help people unify around a plan?

Amanda Kish: In that case, generally, we would want to look at the portfolio as a whole. That’s when you were talking about allocation risk-tolerant, you’ll always want to look at that from the top-down portfolio level. There can certainly be subaccounts within that overall portfolio allocation, where someone can be a little bit more aggressive if they want to play that way and maybe some more safety assets that more conservative member of the couple might have. It definitely helps if you can break that down show each of them that we’re doing something that is in line with their particular tolerance.

But then overall, here’s how it works for what is best for them and typically with couples who are far apart on that spectrum, the overall answer lies somewhere in between. It’s bridging that gap and saying, well, when we combine all of these accounts, all of these approaches, here’s what the overall effect is and here’s why it’s right for you. Taking these two different people with these two different styles of investing, looking as a single unit. Here’s what it averages out to and equally important here’s why that works. Here’s why that’s appropriate for each of you. That may change down the road. A big part of financial planning is adjusting and coming back to revisit that plan. Having that plan is definitely not a one-and-done type of approach. As your plan evolves, you come back for check-ins. You have important life changes, you’re going to want to come back and revisit that plan.

Tom Gardner: I think we’ve got a great foundation now for the second half of our conversation. Where I want to turn to in a second is about the risk and the opportunities that emerge, the surprises that hit us along the way, and how to prepare for them, and how to react to them. But before we go there, I just like you to tick down from a priority standpoint. What do you think when it comes to allocation or some of the most important factors? I’ll drop a couple of examples out there, but you can do your best for us to prioritize, rank order, the significance of them. One of them would be, how much cash are we going to have? Another is how much are we going to put in the equities markets?

I know there would be how reliable is our income? Another is how we budgeted like what expenditures to we expect over the next three months or a year or year plus. What emergency fund do we want to have set aside in case something comes? There obviously other factors like stocks versus bonds and, should we be in ETFs? How much should we have managed for us versus we’ve decided to manage ourselves? Those are some factors and now you can give us maybe a rank order of what you see as the top 3-5 items that you’d suggest that every one of us make sure we thought about when it comes to making allocation decisions.

Amanda Kish: I think the biggest and most important decision is really that equity versus cash bond allocation is people don’t want to think about cash or bonds. They see that as a sunk cost because bonds aren’t returning anything, cash isn’t returning anything. But that’s really the primary mechanism we have for managing risk. Deciding what that appropriate mix is, equities or where you’re going to take your risk, where you’re going to have your volatility. Then you’ve got the safety assets to balance that out, and that mix is obviously going to be different for everyone, someone who is younger, more risk-tolerant, will have a lot more in the stock market versus someone who is retired may have a little bit more on the safety side.

That’s really the primary lever for managing risks. Getting that split right. Once you know that you have your emergency fund, that you have cash bonds, or maybe a secondary income stream, a pension, whatever waiting for you, you know how risky you can be on the stock side. When you’re investing in your stock and they decline by 30, 40 percent, you’re OK with that and you know you can hold tight through that because you’ve got your safety assets elsewhere. Probably, secondarily in the allocation countdown, I would say the second thing that I would rank as important is the idea of diversification. Within that equity component of your portfolio, are you appropriately diversified there? If you have 85 percent allocation in one particular sector, let’s say volatile small-caps, that may not be a particularly well-diversified portfolio.

This answer will be right depending on what type of investor you are and what your risk tolerance is. But making sure you have coverage across the market cap spectrum. Large, mid, small-caps, international stocks, and also some variety across sectors and industry. It’s important when we go through cyclical periods where certain styles of investing go out favor in the market. You’ve got something else there to back you up that is maybe zigging when everything else is zagging. I would rank that as the second item. Then for a third thing, I would say to just remember that allocation is something that is flexible and changes over time. We’ve hit on this a little bit before, but what’s the right allocation for you is early in your investing journey is not going to be most likely appropriate for you later in your investing journey. Again, it’s not a set it and forget it type of thing, but something you continually revisit. Understand that your allocation is going to change over time and you’re going to need to make adjustments in your portfolio to account for that.

Tom Gardner: It’s quite funny because when we decide whether to do this ourselves or work with a professional in helping us to make these decisions, the fee structure associated with it can sometimes be a challenge to a family that wants to move forward. We actually run the numbers on how much that’s going to cost over time if you’re giving a half percent or percent at the size of your account for financial planning and oversight. I have a friend who has done pretty well in their life financially, and what they do is they have a financial plan and they say, I’d like to update my allocation overall game plan every three years, so I will pay $5,000 to do it and if you don’t want it, that’s OK. The planner says, yes, every time, because I’ll take another 5,000, but it’s all open for discovery right now in the world, but so many tools online, so much information. Amanda, how would you help this couple decide whether to go with their own way with their financial planning, decision-making, or to work with an individual or a firm?

Amanda Kish: That would really vary based on the complexity of that couple’s case. If there are a lot of extenuating circumstances. One of them owns a business, then that’s a case where you may potentially want to get some more professional help involved. If they have a little bit more subject matter expertise, then they may feel more comfortable doing that themselves. Cost will, of course, play an issue but I do want to highlight that financial planning, is not something that has to exclusively be done by a professional in total. There are a lot of elements of the financial planning process that anyone can do, even if they’re not experts.

When we were talking about things like sitting down and revisiting your goals, looking at your overall portfolio, assessing whether or not you’re on track. There are a lot of tools available to anyone that they can really go in and do some of that planning themselves. My view is when it comes to planning, any steps you can take in that direction is good. Even if you’re not ready to take that jump to getting a professional on your side to do some of that, there are definitely things that you can do. You can calculate your own portfolio’s allocation. You can take an inventory of all your assets and liabilities. You can calculate your cash flow to see what it is now and what it would be in retirement. Those are actually a lot of the things that a professional would have you do anyway, they’re going to be asking these questions, to gather that information, to do an inventory of what you have, what you’re going to have in the future.

Even if you don’t want to have, or hypothetical couple doesn’t want to get somewhat involved, there’s still a ton they can do to really move the needle on their overall readiness just on their own. Then tackling some of those specific tasks, including things like looking at their insurance coverage, if this is a couple with two kids that doesn’t have any life insurance. Just understanding that, hey, that’s something we need to talk about. We may need to call someone and get some quotes. Just understanding that it’s an area they need to focus on if you’ve never thought about it before, that’s still a win, understanding that there’s a gap there that you need to bridge whether that’s done now or in the future and anything you can do to move along that spectrum, in my opinion, is a win.

Tom Gardner: I want to hear a little bit about timeline and how this couple or anyone should be thinking about how long their plan will last before it has to be adjusted. You made that comment I gave the example of the individual goes back every three years, makes a flat fee payment, and has the plan refreshed. How frequently should we be thinking my plan needs to be updated?

Amanda Kish: I would say barring any major life changes, that’s probably something you can target on an annual basis. In most cases, your big-time investment on doing a financial plan is going to be upfront where it involves gathering all that information, taking an inventory of everything, performing the calculations. Beyond that, when you come back to revisit, it’s more of just a check-in to see if you’re still on track and doing that as part of your annual revisiting of a lot of your financial situation. That’s usually a good timeline to follow. When folks do some perhaps end of the year tax planning or some rebalancing, that’s a good time to look at the plan as well. Just do some updates to your projections and head-on into the New Year.

Tom Gardner: Okay, so we’ve got our family up in the mountains now. They’re hiking and camping and they actually have a plan. They have a map, they have a tent, they’ve got bear spray, they’ve got some food, they’re prepared, and yet, any trip that we take into the mountains and any journey we take in our financial lives, we should expect that some surprises will pop up. So we’re going to play the hypothetical surprise game and say that this couple has just found that one of the two of them has worked at a private company that has just been acquired, and based on some shadow equity grants or bonus package rewards they have, they’ve just brought in a one-time lump sum $73,000 into their overall approach. Their approach is working. Now, they have got $73,000 that just showed up unexpected. What should they do with that? How should they think about that money?

Amanda Kish: The main way that you’re going to look at that is really what are your priorities and how are you approaching your plan. Where can you put that money best to work? So for example, if they had a lot of high-interest credit card debt, that would probably be one of the first places I might recommend that go-to. Because you’re going to be most likely having, if it’s credit card debt, a higher interest rate potentially than you would earn in the market. So getting that paid down is probably more of a priority. The family is perhaps looking in a good place, and there’s a goal that they can achieve. Maybe they wanted to put a down payment on a vacation home and everything else is on target.

Maybe they can accelerate that and do that a little bit sooner. If they’re maybe a little bit behind where they just want retirement savings or they just want to feel more secure in what they have for their retirement cushion, maybe that is where it would go. Could go into the market and be invested for the long run with the target of it funding their retirement. Really, you have to look at where that cash is going to earn the best return. We can think of it in the market of which investment might have the highest return, but in the context of a financial plan, it’s here are the various pieces of my financial life. How do I best deploy that cash to really get me the farthest ahead or to really continue to advance my plan along the timeline than it’s on?

Tom Gardner: In our first-class, we had co-founder of The Motley Fool, David Gardner with us and he has said frequently that the stock market rises more than it falls but falls faster than it rises. Let’s say that the $73,000 went into this families accounts and much of it went toward the market investments. Now, the second surprise pops up, and that is that the Nasdaq falls 26 percent. They have a fair amount of their investments are geared toward longer-term growth companies. So they’re now looking at a portfolio that pretty rapidly over about a six-month period has fallen in total all in the equity portion of their portfolio, their growth investments, their value, etc. Large-cap, small-cap, their portfolio is down 27 percent in six months, and one member of the couple is having trouble sleeping thinking about this. What steps should they take to deal with this surprise?

Amanda Kish: Significant market decline is actually a pretty good period and a good time where you can actually do a gut check to see if your risk tolerance actually is what you thought it was. Everyone thinks that they have a high-risk tolerance and that they can roll with the ups and downs until those downs actually happen. I’d say that’s one of the first things that you could see that as an opportunity is to see, well, maybe one of the members of the couple or as a unit, is our risk tolerance actually as high as we thought it was. If not, maybe we can adjust that and adjust the equity allocation. But if the couple has a financial plan and they have this amount invested in growth investments, theoretically, they should have enough safety assets elsewhere.

If we put that 73,000 into those higher volatility growth stocks, they should have enough cash elsewhere where they don’t need that money for anything in the next, let’s say, three years. So if they’re taking that long-term focus and they know that their plan is built around this concept that money, it’s painful to see it down, to see those growth stocks down. But if they know that they’ve got a long-term outlook on that specific account on that $73,000, they know that they can hold that and ride that out because they’ve got all their near-term spending needs taken care of. For example, if they were retired, they’ve got cash elsewhere. Or if they have, they’re working, they’ve got their income to take care of that and they don’t need to touch those assets. That should all be part of deciding where that money is directed, so it shouldn’t be as big of a impediment to their plan if there are short-term declines in the market, as painful as we know but that is see.

Tom Gardner: The purpose of this second class was to get together and make sure that we’re all entertaining the idea of a plan. Of course, we’d love it if you have a plan in place and you’re thinking of refining it, and we also love it if you don’t have a plan in place, but now you realize I want to get a plan. But even if we just opened the door and shone a little bit of the light on the idea of thinking through the longer-term approach, your goals, the actions you want to take against those goals, the priorities that are going to drive those actions, and how you’re going to prepare to respond to the unpredictable, to the uncertain, so that you can act with conviction in difficult times, and so that you can steer away from the euphoria of an upmarket and the devastating feelings of agony when things don’t go your way over a given year, let’s say.

To have that plan in place can help us all guide our way through because I think one of the primary aim, so The Motley Fool since inception in the summer of 1993, was to make sure we can get as many people investing for the rest of their lives as possible. We’re going to close this conversation, Amanda, with you, just highlighting a few tools and solutions that are available online at The Motley Fool and anywhere else that you think can get people that next step on their plan. Because it really is true that somewhat to your plan can be built now with tools online, and if you do want to go to a professional, you can do so having prepared in advance and go for that single select area where you want to focus like estate planning rather than going for the all you can eat plan which sometimes carry fees that are too high for the solutions that you need. What’s available online to help us take those next steps?

Amanda Kish: One thing I would direct people to, the Fool does have a full suite of financial calculators available, and this would be at fool.com/calculators, and I think we’re going to have that linked here for you as well. Here, you’re going to see dozens of calculators that you can use to help you in a more of a do-it-yourself financial plan approach that I talked about. There’s tools here that can help you with assessing retirement readiness, calculating potential college insurance needs as well as I think there’s some debt savings calculators as well. Please checkout that resource.

A lot of those calculators are basically what the financial planners are using a more sophisticated version of, so you can definitely get a lot of those same planning benefits by starting there at least. I would remind members that there is a wealth of financial planning-related information available for everyone on fool.com. In addition to our regular stock coverage, we also cover a lot of topics related to retirement, retirement planning allocation, and so on. If there was a topic that we touched on today that you want to learn more about, definitely head over to fool.com. You can look under the personal finance headers or do a search to learn more about any of these topics and how to get started learning a little bit more about the process of creating a financial plan.

Tom Gardner: Well, thank you everyone for giving us 30 minutes of your life to think through a financial plan to match up with the first classroom experience we had answering the questions, why invest, and how to invest. Now, we’re layering in making sure you’ve got a game plan, starting to think that through. Really, if you’re 16 years old, listening right now, starting to organize your plan, your goals. We’ve had teenage investors come into The Motley Fool and set the goal of being able to retire by the age of 40, and they’ve gotten there actually in their mid-30s, and then they chose not to retire. They just chose to do what they really love to do professionally all the time, and only that professionally, and that’s truly wonderful place to be. Thank you for thinking through financial plans with us in our second classroom. Thank you, Amanda Kish, for all the work you’re doing at fool.com and for being here to guide us through this class today.

Amanda Kish: My pleasure.

Tom Gardner: We’re excited for our class next Saturday where we will discuss market data, investment data, the numbers, the money ball of investing, and thinking through how to gain an advantage based on what the numbers have been telling us over the last 100 years, over the last 25 years, and over the last five years and all that we can learn from it with Ayal Cusner. Looking forward to that class next week. Thank you so much for being here in class number 2, we’ll see you all week on Motley Fool Money and back here in the Classroom next Saturday. Fool on.

Chris Hill: That’s all for today, but coming up tomorrow, a closer look at e-commerce with Wall Street Journal columnist Christopher Mims. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Amanda Kish, CFA, CFP has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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