Financial Planning: Identifying and Addressing Financial Gaps

In today's complex financial landscape, having a comprehensive plan is essential for achieving both short and long-term goals. As a financial advisor, I work with clients to simplify their financial lives and identify potential issues that may be hindering their progress toward financial freedom.

What is a Financial Plan?

A financial plan is a visual representation of your cash flow that illustrates what your financial life ideally looks like in a given year. It provides a comprehensive breakdown of your income, expenses, savings, and investments, offering a holistic perspective of your financial situation. The beauty of a financial plan is that it alleviates the need to keep all your financial details in your head—instead, they're organized in one adaptable document that evolves as your life changes.

Case Study: High-Income Earners in Their Mid-30s to Early 40s

Let me share an example of a couple I worked with recently. They had just completed their residency (presumably in medicine) and were adjusting to their new financial reality.

Key Issues Identified:

1. Tax Challenges: As high-income earners, they faced significant tax burdens that needed mitigation strategies.
2. Debt Management: Their annual spending included approximately $3,000 in living expenses, but a substantial portion of their outflow was dedicated to debt payments—in some cases, nearly three times what they should have been paying. They recognized debt as a major obstacle but were committed to tackling it aggressively.
3. Insufficient Savings: Despite their impressive income, they weren't saving enough. Their focus on debt repayment, while commendable, was diverting funds that could have been allocated to building wealth.

The good news is that this couple was still positioned to have a comfortable retirement. However, with some adjustments to their financial plan, they could achieve financial freedom much earlier.

Case Study: Married Couple in Their Late 50s

Another example involves a couple approaching retirement with a different set of challenges.

Their Financial Situation:

- Approximately $700,000 in retirement savings—a commendable achievement

- Multiple financial accounts scattered across various institutions, including bank accounts, CDs, and investment accounts

- Nearly seven 1099s annually, creating unnecessary complexity in tax reporting

- No insurance coverage (particularly concerning for their age group)

- Estate planning was complete (one area they had addressed properly)

Key Issues Identified:

1. Disorganized Finances: The scattered accounts created inefficiencies and complicated their financial management.
2. Lack of Insurance: At their age, long-term care insurance should be a consideration.
3. No Centralized Plan: Despite having accumulated significant assets, they lacked a roadmap for retirement and beyond.
4. Inefficient Use of Capital: Some of their money was sitting in low-yield vehicles when it could have been working harder for them.

Their self-assessment was telling: "I don't have a plan; I'm kind of flying by the seat of my pants."

The KISS Principle: Keep It Stupid Simple

For both of these couples—and indeed, for most clients—the guiding principle is to "Keep it stupid simple." Financial planning doesn't need to be overwhelming. By creating a clear plan that addresses risks and fills financial gaps, anyone can achieve greater financial efficiency regardless of their starting point.

For younger clients, the approach often involves a "crawl, walk, run" strategy. We don't try to implement everything at once—getting insurance, creating estate plans, and investing significant sums simultaneously. Instead, we take a measured approach over 2-3 years, systematically implementing the elements needed for financial efficiency, maximized investments, and effective tax mitigation.

The goal is to help clients understand what their finances could look like, identify the gaps in their current strategy, and develop a plan to address these issues methodically and effectively.