Off the Charts

Top 10 List

There are 10 key components of financial planning that, if tackled over time, can give you peace of mind and a solid future. In order to succeed in its economic development mission, LEDA strives to have board members with a wide variety of professional backgrounds. We each bring our own work experience and perspectives to create a well-rounded board in hopes of ensuring that LEDA can offer the best possible service and resources to all of Lafayette Parish and to any business considering relocating here. Because I am a financial adviser, LEDA President and CEO Gregg Gothreaux asked me to give insight on the benefits of financial planning for this month’s issue.

While the concept of financial planning may seem daunting, you cannot ignore that without planning, your likelihood of achieving financial security and success is remote. The planning process provides a road map to your goals through various action steps and reviews, allowing you to know where you are in relation to where you wish to be. I often hear people say, “Because I can’t do everything a plan might call for I will do nothing.” I encourage you to adjust that phrase to, “Because I can’t do everything a plan might call for, I will still do _______.”

We all would consider it foolish to go to the airport and board the next plane without knowing where the plane was going. You certainly would arrive at a destination. The problem is that this destination would have a remote possibility of actually being your preferred destination.

Each of us has dreams of what we want for our life and what we want for others when we have passed away. Living a life of financial activities without regard to planning and goals is exactly like going to the airport and boarding the next plane. As I tell friends and clients, you have a plan based on the summation of your choices and acts. The question is, “Is this going to get you to your preferred destination or not?” With conscious, competent planning and guiding you are more likely to achieve your desired destination, and also better able to make adjustments and corrections along the way.

The primary reason people do not make a comprehensive plan despite its benefits is two-fold. First, it can be complex — a complete plan requires a good bit of time and thought. Second, it is not a “must do” activity, so it is easy to avoid and delay.

We have found, given these real obstacles, for many the most feasible approach is to divide the elements of their lives into components and deal systematically with each over an extended period of time. There are 10 key areas which we have identified. When all 10 areas are successfully addressed, you have a perfect plan.

  1. Tax issues. Financial planning by definition focuses on your things (your stuff). All of your “stuff” will one day be on a tax return. It is important to develop a relationship with your CPA so your CPA can help coordinate your financial choices, because most of them will affect your taxes.

  2. Business issues are important for those who own businesses or are decision makers for businesses. Being conscious of available options and the consequences of them are critical to efficient success.

  3. Taxable investments. If your goal is to live off your assets’ income rather than your personal labor (i.e. retire) then this piece must be successful. There are five key assets suitable for investment other than owning your own business. These are: fixed income such as bonds, CDs, money markets and savings; U.S. equities; non U.S. equities; real estate; and commodities. In order to be successfully diversified you need a combination of these five building blocks.

  4. Retirement investments. The government gives all of us tax incentives — tax deduction and tax deferred growth — to motivate us to place a portion of our earnings into retirement investments. You must consider throughout your working years the appropriate balance and contributions to taxable investments and retirement investments. Each has important places in a good plan and its success.

  5. Insurance such as life insurance and annuities. Insurance, because of its tax deferral and possibly tax free status, becomes very attractive as personal wealth increases. Insurance also works to protect assets. For those just starting out, insurance helps create an estate, should you die prematurely. Later on, as you become more financially successful, it helps preserve an estate. Annuities transfer risk to a third party (the insurance company) and offer tax deferral. These types of contracts allow a guaranteed income stream you cannot outlive, regardless of the performance of the investment within the annuity. They also can guarantee a rate of accumulation, a guarantee return of principal should the investments underperform, among other benefits.

  6. Other insurance issues are critical as well. While working, for most people their biggest asset is their income stream from their employment. Disability insurance helps to protect this income stream should it be interrupted because of an accident or an illness. As one advances in age, one of the greatest financial risks switches from securing your earned income to paying for the unreimbursed health care costs associated with long term care. Long Term Care insurance addresses this issue by transferring all or a part of this financial liability to an insurance company.

  7. Debt management. The ideal objective here is to encourage our clients to be debt free, at least by retirement. This is one of the planning areas we feel strongly about, less from an analytic perspective than from the vantage point of not having debt. Life will inevitably have its ebbs and flows. When life has challenges and you have no debt, you are inherently more powerful in your ability to respond than if you have debt obligations.

  8. Estate management. The objective here is not just to avoid or minimize estate taxes, but to make sure your assets are utilized in the way you wish after death. It is easy to think that only the rich have this issue. This isn’t true. Anyone who passes away with “stuff,” regardless of whether there are estate taxes, has an estate.

  9. Education and the cost involved is an expense of such a size that we treat this as a true planning issue. For parents, a child’s future educational expenses are unfunded liabilities that must be addressed or ignored. Ignoring them does not mean they go away. It just means the future liability is ignored and will grow each year. Grandparents can plan for their grandchildren’s education as well.

  10. The last issue has to do with special situations. As much as we would like to pigeon hole everything, from time to time there is a unique issue that comes up and must be addressed on an individual basis for the plan to work best.

By now, you may think financial planning is a paralyzing experience, so involved and complex that many avoid it. Yet, each of the components is not overly complex when taken one-by-one. This is why we almost never recommend a complete plan from the start. We go through the key issues and we let the client guide us to which one, two or three areas are of the highest concern to him or her at that moment, and we address those issues. We continue to address other issues as time progresses, eventually tackling each area. Over time, a formal plan takes shape.

Rome was not built in a day. But it was built — one brick at a time.

I would encourage you to secure a few more bricks to your plan, or to start one, and your Rome will be here not only more quickly than you might think, but it also will be built more efficiently than you can imagine.

David Strother is a financial adviser with DSF Wealth Management and has more than two decades of financial planning experience in the Lafayette market. He was recently honored as one of the top 50 financial planners in the country by BusinessWeek and the Paladin Registry.