Basics for Solid Financial Planning

On this episode:

Understanding the basics of financial planning can be the difference between achieving all your goals, or none of them. On this episode we will examine the basics of solid financial planning.


[01:12] Understanding Basic Financial Terms and Concepts

[02:27] Basic Financial Concept #1: Asset Allocation

[05:49] Basic Financial Concept #2: Understanding Investment Funds

[12:06] Basic Financial Concept #3: Letting Pride Foolishly Blind You


Episode Transcript:

Read Full Transcript

[00:00:01] Michael Jordan, perhaps the greatest basketball player who ever lived. One said winners don't just learn the fundamentals, they master them. You have to monitor your fundamentals constantly because the only thing that changes will be your attention to them. But fundamentals aren't just about succeeding on the court or in sports. They're actually crucial to your financial success. To understanding the basics of financial planning can be the difference between achieving all of your financial goals or none of them. So on this episode, we're going to be sharing the basics for a solid financial planning. Welcome, the money moves. I'm your host of Julio Sylvia. My goal is to share practical insights about business worth and money so you can design your financial future and enjoy life on your terms. Now let's get moving. In survey after survey, it's clear many Americans are sorely lacking in knowledge when it comes to basic financial terms. A recent study of over a thousand Americans over the age of 30 found that less than half of participants could comfortably explain what they're for. A 1 K is only 48 percent could define a term like interest and 34 percent could explain what bankruptcy was or how inflation works. Without a basic understanding of financial terms and concepts, it's almost impossible to be able to create a really solid financial plan for the long term, let alone the short term. Now, our goal isn't to solve all the financial education problems in just one episode, but is to empower you, the listener, with some basics so that you can take the first steps in having a solid financial plan for the long term for your financial future. So we're going to introduce three basics with different terms and concepts so that you have solid footing and a basic understanding for a really good financial plan. [00:02:24][143.4]
[00:02:27] Basic financial concept number one, asset allocation. When it comes to investing, there's a lot of terminology and jargon you might see being about by financial professionals in the media. And most these terms are not hard to understand, but they may seem baffling at first glance. Understanding some basic investing terms is helpful because it can help transform investing from some arcane art into a simple process. You can follow, and the more you see investing as a process based on rules and logic rather than something based on emotions, the more likely you're going to find success. One important term that everyone should understand is asset allocation. Improper asset allocation is one of the most common mistakes at an investor or someone trying to save for a better future can make. So why is asset allocation so important? I'll look into this. What if you were to eat only one food every day for your entire life? Your body could be very unhealthy if you were to exercise only one group of muscles for your entire life. Your body as a whole would be very weak. And when you invest all your money in the same way, the same is true of your finances. Asset allocation is basically a strategy that spreads your investments across different asset classes. All right. Let's talk about them. The three main asset classes are equities or stocks, fixed income or bonds and cash. There are other classes, of course, like commodities and real estate, and there are subclasses as well. But for example, stocks can be divided up into many different classes, like international stocks, small cap, mid-cap and large cap stocks, etc. The thinking behind asset allocation is that by mixing your investment within these different classes, you take on less risk. [00:04:22][115.2]
[00:04:23] That's because if one class goes down in value, the other classes you've invested in can compensate for that. Here's an example of why asset allocation is so important. Let's say that in year one the stock market goes through the roof and so you put all of your money into stocks. But in year two, the stock market performs poorly as possible. You could end up losing a lot of money. Now, let's say that instead of putting all your money into stocks, you put 50 percent into the bond market. When the stock market went down, investors started pouring their money into bonds, causing bond prices to go up. That means that even though your stock holdings decrease in value, your bond holdings may have increased, meaning you could still break even or possibly come out ahead. Of course, this is very general, very simplified examples, and I am certainly not recommending you do anything like that. I would never recommend any particular investment or strategy to anyone without first sitting down and learning more about their goals, needs, challenges and fears. But hopefully it illustrates the point that putting all your eggs in one basket is rarely a good idea. So the concept of asset allocation and asset classes is the first basic of a solid plan. Basic financial concept. Number two, understanding. Investment funds. While it's possible to invest in individual stocks and bonds and other securities. Many investors actually prefer to use investment funds now an investment fund when a group of investors pooled their money together to collectively invest in a certain way. This makes it simple and easy for individuals to be able to invest in a wide range of securities at the same time. There are several types of these types of funds and as you can imagine, each one has different pros and cons. [00:06:23][119.2]
[00:06:24] Funds are very popular. In my experience, most people really don't know how they work or which type is right for them. Now, I can't answer the second question, of course, but I can at least give you a breakdown on how some of the main types work. Quick disclaimer before we go any further. Each type of investment comes with risk and nothing you're about to hear should be taken as an endorsement or recommendation. Okay. All right. Let's start with mutual funds. Now here's how the S.E.C., the Securities and Exchange Commission defines a mutual fund, a mutual fund as a company that pulls money from many investors and invest the money in securities such as stocks, bonds and short term debt. The combined holdings of the mutual fund aren't known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor as part ownership in the fund and the income it generates. So there are two main types of mutual funds actively manage and passively manage. We'll share more about passively manage in a moment. Let's focus on actively managed and actively managed. Mutual fund means that the fund employs one or more managers to perform investment research. Select the individual investments in the fund and monitor the performance. Now a lot of investors they really like and they flock to mutual funds because they offer several potential benefits. Here's a couple I want to point point out to you first, the possibility of outperforming the market. If a manager picks the right investments at the right time, it's possible the fund could bring a higher return than the overall market. Number two, diversification. Mutual funds often invest in a wide range of companies and industries in order to lower your overall risk. This means that if one company or industry does poorly, you may not experience the same kind of loss that you would if all of your money was invested in that company or industry. [00:08:25][121.0]
[00:08:26] Now, as we talked about, when discovering asset allocations in our first basics, there are potential issues with mutual funds. However, you know, statistically, most funds do not outperform the market, or at least not for very long. Mutual funds often come with more expenses than other funds, including management fees, and these expenses can't eat into your returns, thereby lowering neuro overall profit. And for this reason, some people prefer to invest in what's called index funds. I remember how I said there were two types of mutual funds, active and passive. Passive means the fund does not have a manager actively choosing investments. Instead, the fund tracks a specific index like the S&P 500. So an index fund would be a passively managed fund. I understand it's not possible to invest in the actual index. Right. What an index fund does is invest in the same companies that make up a particular index. Now, some funds will invest in all the companies in an index, while others will rely on a representative sample with an index fund. You're essentially tying your fortunes to what that target index does. If the index goes up, so does the fund and vise versa. And the downside is that this makes investors particularly vulnerable to overall market volatility. During a bear market, for example, an index fund could suffer heavily. The upside is that the markets generally go up over the long term. Another benefit index funds often have far lower expenses than mutual funds and sometimes more favorable tax consequences. Next at exchange traded funds ETF, as they're often more popularly known, can be similar to either mutual funds or index funds, and some ETF are actively managed. Most, however, tracked the companies in a specific index are more passive, but ETF differ from other types of funds in a few key ways. [00:10:30][124.4]
[00:10:31] Well, let's let's talk about that right now. One thing the shares. Each investor has an ETF. Well, they can be traded on the open market. What that means is that you can buy or sell your shares in an ETF just like you would an individual stock. You can't necessarily do that with regular mutual or index funds. That's a big advantage for investors who value flexibility and liquidity. In other words, control and access to the money that they have invested. Most ETF also come with lower expenses than some mutual funds, but of course nothing's perfect while ETF can be traded like common stock. If you trade too often, you might find yourself paying more than you anticipated. In the end, the trading fees then to some ETF are what they call thinly traded, meaning that there's just not a lot of activity between buyers and sellers. This can make it difficult to sell your shares. Now, this is not a comprehensive, full listing of what these funds are or what investment funds exist. There are different types of versions and twist and they all have their pros and cons, as we mentioned before. But this is a great basics so that you genuinely can categorize different funds or the discussions that different people have about mutual funds, index funds and exchange traded funds so that you can begin Bill. Basic financial concept number three, important. Estate planning documents for you to have a solid financial plan, particularly one that will have you on solid footing for the long term. You need to understand how to plan for your estate for future generations. And the documents and structure that are critical to laying a basic solid foundation for that. See, many people, young and old, simply don't have a will, let alone a broader estate plan. [00:12:35][124.8]
[00:12:36] Yet an estate plan is important even for families who aren't wealthy. See, an estate plan serves for major purposes. Number one, it directs who will receive your property when you die. Number two, it minimizes probate costs in any estate taxes that might be owed on that property. If the estate tax that people tend to think about when they think of an estate plan, and because many of you believe they don't have an estate large enough to be taxed, they don't bother drawing one up. Number three, it provides care of minors. Otherwise, the state will become their guardian. Number four, it provides for your care. If you're unable to provide for yourself. A proper plan ensures that you get to pick the caregivers, not the state. This is critical for for a young person or a single as much as it is for an older person. Now you may be thinking, hey, yeah, listen, I gotta well, you know, I got one of these legal documents online for free. I'm all set. And while having a will is a very important part of your estate plan, it's not the only part. A will doesn't specify how you want to be treated. Should your health fail. It doesn't dictate who will carry out your wishes or handle your financial affairs should you be ever become incapacitated. It doesn't help your heirs limit their tax burden. In other words, it doesn't cover all the purposes of an estate plan, as we've just mentioned, to ensure that both you and your loved ones will be cared for. Here's a list of some key documents that should be an every estate plan and that create your solid financial plan. First, the will I mentioned creating your wills and important aspects of an estate plan. [00:14:13][97.0]
[00:14:13] So let's cover that first. A will states how you want your belongings divvied up amongst your loved ones after you pass away. Otherwise, the government determines how to distribute your property, which may even end up belonging to the estate if you don't have an appropriate will stating otherwise. Next power of attorney. A crucial document is your power of attorney, which allows you to appoint someone to act on your behalf to make legal decisions about your property and your finances. That person, usually referred to as an agent, can be a trusted friend, a family member, or an experienced reputable professional power of attorney is crucial. Should you ever become ill or disabled to the point where you can no longer make important decisions yourself? Keep in mind, however, that granting someone power of attorney is a huge decision in and of itself. Give careful thought before making your choice. Whomever you select should be trustworthy, reliable and mature enough to handle that responsibility. Next, an advance medical directive. The third document is the Advance Medical Directive. This catch all term refers to health care directives, living wills, health care, powers of attorney and other personalized directives. All of these documents apply to legally express your preference for continued health care should you become ill. A word of advice as you finalize your advanced medical directive. Make sure you have completed your hip a release form as well. By having this special form completed, you enabled the individuals named in your advance health care directive to have access to your health care information. This way they can deal with insurance matters on your behalf at a time when you can't. More importantly, they can help make decisions for your care when you can't, whether at a hospital, at a clinic or otherwise. [00:15:58][105.0]
[00:16:00] Next letter of instructions. Last but not least is a letter of instruction. This document gives your survivors information about important financial and personal matters to attend to after your passing. You don't need an attorney to prepare. Although it doesn't carry the legal weight of a will and is in no way a substitute, your letter of instructions will clarify any special request you want carried out after death. It may include your funeral preferences, people to notify account passwords, directions regarding certain possessions or anything else you'd want your survivors and family to know. The four documents we've just discussed are all very important. Every adult should have them in their estate plan. Having each of these important documents prepared ahead of time can relieve your family of needless worry, speculation and most importantly, expenses. Keep in mind, however, that while it's a good overview of some important estate planning documents and certainly we're not covering everything when it comes to planning for your financial future and those of your loved ones, remember, there are many factors that consider. Few having yet completed any of the documents we've just discussed, or if in your circumstance things have changed and you haven't updated your estate plan accordingly. It's the time to do that because when it comes to planning, there's no such thing as starting too early. And that is a basic. There should be an every solid financial plan. There is a lot more information that I could share. On this episode. But the goal here is to give you some basics, terms, concepts and necessary documents that all make up a solid financial plan. And keep in mind, there are many ways to save, invest and grow your money. Each candidate's own advantages and disadvantages. Now, different professionals may say that one is better than the other. [00:17:56][115.8]
[00:17:56] But what's important is choosing what's right for you. That's why it pays to take a little time to educate yourself on how different things work and what they are and what they work for. That's why we've covered the basics of a solid financial plan. But, you know, you don't have to try and implement and learn and figure all of this out by yourself. That's why we're here. That's why financial professionals like myself, my father in law, my family, have dedicated ourselves to spending time with individuals and carving out a solid financial future. So if you'd like our help, we're more than happy to guide you. Make recommendations and make sure that you have a great long term financial plan. Simply visit financial security group dot com and contact us there. So you got the basics. You have the fundamentals. And now I don't think that you end up like Michael Jordan and being the best investor ever. Like he might have been one of the greatest basketball players ever. But these fundamentals start the building blocks for what can be a very successful and goal oriented financial future. Thanks for listening. I hope you enjoyed this episode if it provided you value and got you charged up to make some new money moves. Do me a favor and share it with others on social media. Use the hashtag money moves and you never know what kind of swag we'll send your way. If you're looking for the show, notes, links to resources and more visit. Money Moves. Podcast dot com. When you subscribe, I'll give you a free copy of my latest guide. The three key money moves to create wealth. Now as my way of saying thank you, that's w w w dot. Money moves podcast dot com. [00:19:59][123.0]
[00:20:00] Wherever you may be listening or however you may be listening. Thanks for making money moves part of your day. And remember, if you make the right money moves today, you'll be able to navigate your financial life without sacrificing your lifestyle so you can enjoy a prosperous future. [00:20:00][0.0]

About the Author

Evelio Silvera is a business development and financial services professional. Evelio is an best-selling author and acclaimed speaker and speechwriter with numerous national and international awards who has appeared on national radio and television programs and been featured in several publications.