Motley Fool Money - How to Start a Financial Plan, with Tom Gardner and Amanda Kish

Episode Date: January 15, 2022

While many wouldn’t go on vacation without a plan, that’s exactly how most people begin their investing journey. Amanda Kish, Financial Planner Specialist, 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 times you may want professional financial planning advice, and the parts you can do yourself. If you're looking to start a financial plan, we can help. Visit www.fool.com/StarterKit for a free copy of our investing "Starter Kit" and we’ll email it to you. Host: Tom Gardner Guest: Amanda Kish Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert. Who knows your industry understands your business write-offs and gives you the personalized advice your business deserves. upload your documents right in the app, hand everything off, and still feel like you're in the loop the whole way through. You can even get real-time updates on your expert's progress right in the app, which makes it so much easier to stay on track.

And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. 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 forevermore 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. I'm Chris Hill and that was Motley Fool 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. Imagine that you've decided to go camping with your family or a couple friends. Let's suppose you've chosen Grand Teton National Park in Jackson Way. 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. And you make your way up Taggert 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've got a couple 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. So you probably wouldn't want to take that trip. But unfortunately, that's how many people begin their investment journey without a plan. And that's why in our second Saturday class, We've invited the financial planning team lead of all fools universally, Amanda Kish. Amanda, welcome.

Thank you very much. I'm thrilled to be here. How prepared are most people today to make smart investments for the long term? 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 have a written financial plan. So that's really not what we would like to see.

And 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. 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, hey, this Saturday, we're all going to clean out the entire basement. 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. And so how can you persuade us, Amanda, that this can actually be enjoyable and fun along with being

necessary? 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 plan. So 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. So that's really moving you along on those lines. It's one of the easiest things that. that you can do to really increase your odds of success. So 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. So 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. I'd offer out there for all of us Motley full stock investors that we probably wouldn't want to invest in a company that didn't have a good plan. I mean, there's a certain amount of spontaneity and innovation and discovery, but when you're talking about capital allocation, all of the recruiting, all of the talent development, new product development, customer service, a 401k plan for your, you wouldn't want to invest in a company that didn't have a plan. And therefore, the Mali 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. So maybe we all know that a plan could be, 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? So 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. So here I'm talking about getting an idea of what your goals are. So we're investing, sure, but we really need to know what's the point behind the investing. And planning, when we think of

it through a financial planning lens, investing is only a small part of that. There's a whole other slew of things that really this financial planning concept encompasses. So we need to get those in place as well. And 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. So that's all part of that big financial planning umbrella. 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. And 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 graduate high school and don't realize that we're the CEO of our financial lives forevermore, 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. So 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 preempt 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're now realizing

they don't have a sufficient plan. So what starts to sound like one or two good goals in a generic work way for that couple. So there's a couple 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. So they could be investing in a manner that is completely different than how someone might typically advise them.

So 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. So that's one thing that, you know, a small movement there can really reap some big rewards down the road. And then also, if you're a couple who has two children, for example, if you haven't done any estate planning, that's something that you'd really want to look into. If you've got, you know, you've got, you know, will advance medical directive guardianship for the two kids, should anything happen to both of you. If you have nothing like that, and 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 an estate planning attorney and putting those documents together. So those are two things all within that financial planning umbrella that would really kind of help move forward that overall financial plan. 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, and I think I'll do that next week. I actually don't have time this month, but maybe next month,

I will. So what are one or two steps that you'd like all of us to take coming out of our time together today? So if you don't have time or that seems kind of 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. So if something were to happen to you tomorrow, what would your spouse need if you disappeared? What would they need to kind of continue on to access your records, access your accounts, bank accounts, investment accounts, and so on. So that's one easy thing

in that same line that you don't need to contact a professional for. And then beyond that, Taking a look at your overall allocation could help. We talked about that before. And then also just getting an idea, especially if you're in a couple, is your portfolio aligned? Most couples have very different risk tolerances from each other. So is the total portfolio line, one member of a couple may be investing in a very different, more cautious manner, and the other half of the couple may be investing in a much more aggressive manner.

And is that overall total portfolio in line with where you want to go as a couple with the goals that you want to achieve? So kind of getting together and talking about your goals, 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're on the right track. So you began 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% and we're spending as much time as we can talking to the

remaining 67% 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. And then the third step is to really look at the allocation and 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, we all have different risk tolerances. right on top of the other person with the exact same background in history and 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. So we're trying to unify a team effort and that obviously

brings some complexity into it. And Amanda, in your work with couples, how have you bridge 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 set aside in cash, et cetera. How do you help people unify around a plan? So in that case, generally, we would want to look at the portfolio as a whole. When you're talking about allocation, risk tolerance, you'll always want to look at that from the top-down portfolio level. So there can certainly be sub-accounts 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.

sets that a more conservative member of the couple might have. So it definitely helps if you can kind of break that down, show that each of them that there is, 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. So it's kind of bridging that gap and saying, well, when we combine all of the these accounts, all of these approaches, here's what the overall effect is, and here's why it's right for you. So taking these two different people with these two different styles of investing,

kind of 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. So having that plan is definitely not a one-and-done type of approach. So 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. Okay, 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 risks 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'd just like you to tick down from a priority standpoint. point, what you think when it comes to allocation are some of the most important factors. So I'll drop a couple examples out there, but you can do your best for us to prioritize rank order, the significance of them. So, you know, 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? Another would be, how reliable is our income? Another is, have we budgeted? What sort of expenditures do we expect over the next three months or year or year plus. And what sort of emergency fund do we want to have set aside in case something comes?

And there are 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? So those are some factors. And now you can give us maybe a rank order of what you see is the top three to five items that you'd suggest that every one of us make sure we've thought about when it comes to making allocation decisions? So I think the biggest and most important decision is really that equity versus cash bond

allocations. 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. So deciding what that appropriate mix is, equities are where you're going to take your risk, where you're going to have your volatility. And 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.

So that's really the primary lever for managing risk. So getting that split right, and once you know that you have your emergency fund, that you have cash bonds or maybe, you know, the secondary income stream, a pension, whatever, waiting for you, you know how risky you can be on the stock side. So when you're investing in your stocks and they decline by 30, 40 percent, you're okay 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. So within that equity component of your portfolio, are you appropriately diversified there? If you have an 85% allocation in one particular

sector, in let's say volatile small caps, that may not be a particularly well-diversified portfolio. And 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. So large, mid-small caps, international stocks and also some variety across sectors and industries. So it's important when we go through cyclical periods where certain styles of investing go out of favor in the market, you've got something else there to back you up that is maybe zinging when everything else is zagging. So I would rank that as the second item. And then for a third thing, I would say to just remember that allocation is something that is flexible and changes over time.

So, you know, we've hit on this a little bit before, but what 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. So, again, it's not a set it and forget it type of thing, but something you continually revisit. So 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. 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 a percent of the size of your account for kind of financial planning and oversight. And I have a friend who has done pretty well in their life financially. And what they do is they contact, they have a financial planner, and they say, I like to update my allocation overall game plan every three years. So I'll pay $5,000 dollars to do it. And if you don't want it, that's okay. And the planner says, yes, every time, because I'll take another 5,000, but it's kind of all open for a discovery right now in the world with so many tools online, so much information. And 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? 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. So when we're 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. So, and in my view is, when it comes to planning, any step you can take in that direction is good. So even if there are, 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.

it is now and what it would be in retirement. And those are actually a lot of the things that a professional would have you do anyways. They're going to be asking you these questions to gather that information, to do an inventory of what you have, what you're going to have in the future. So even if you don't want to have, and our hypothetical couple doesn't want to get someone involved,

there is still a ton they can do to really move the needle on their overall readiness just on their own and in tackling some of those specific tasks. including things like, you know, looking at their insurance coverage. If this is a couple with two kids that doesn't have any kind of 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, anything you can do to move a lot. that spectrum, in my opinion, is a win. 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 who 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? I would say, barring any major life changes, that's probably a very important. something you can target on an annual basis. So in most cases, your big-time investment on doing a financial plan is going to be up front where it involves gathering all that information, taking an inventory of everything, performing the calculations. So 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 kind of look at the plan as well. Just do some updates to your projections and, you know, head on into the new year. 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've got $73,000 that just showed up unexpected. What should they do with that? How should they think about that money? So 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 one of the first places, I might recommend that go-to because you're going to be most likely having a, if it's credit card debt, a higher interest rate potentially, then, you know, you would

earn in the market. So getting that paid down is probably more of a priority. If 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 can accelerate that and do that a little bit sooner. If they're maybe a little bit behind where they just want on retirement savings or they just want to feel more secure in what they have for their retirement cushion, maybe that's what 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. So it's really you have to look at where that cash is going to earn the best return. And you 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 furthest ahead or to really continue to advance my plan along the timeline that it's on? 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. And let's say that the $73,000 went into this family's accounts, and much of it went towards the market investments. And now the second surprise pops up, and that is that the NASDAQ falls 26%. They have a fair amount of their investments are geared towards a 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 in their portfolio, their growth investments, their value, et cetera. Large-cap, small-cap, their portfolio is down 27 percent in six months. And one member of the couples having trouble sleeping, thinking about this, what steps should they take to deal with this surprise? A 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 the downs until those downs actually happen. So I'd say that's one of the first things that you could see that as an opportunity

is to see, well, maybe is my 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 kind of 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 cash elsewhere, or if they have their working, they've got their income to take care of that and they don't need to touch those assets. So 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 that that is to see. 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 shown a little bit of a 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. And to have that plan in place, can help us all guide our way through because I think one of the primary aims of the Motley Fool since inception in the summer of 1993 was to make sure we could 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 so much 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 can carry fees that are too high for the solutions that you need. So what's available online to help us take those next steps? So 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 forward slash calculators. And I think we're going to have that linked here for you as well. And here you're going to see dozens of calculators that you can use

to kind of help you in more of a do-it-yourself financial plan approach that I talked about. So 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. So please check out 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 benefit, those same planning benefits by starting there at least. And I would remind members that there is a wealth of financial planning related information available for everyone on Fool.com.

So in addition to our regular stock coverage, we also cover a lot of topics related to retirement, retirement planning, allocation, and so on. So 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 retirement personal or 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. 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. And now we're layering in making sure you've got a game plan, starting to think that through.

And 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 a truly wonderful place to be. So thank you for thinking through financial plans with us in our second classroom. and 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. My pleasure. 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 I.L. Kusner. Looking forward to that class next week. Thank you so much for being here in class number two.

We'll see you all week on Motley Fool Money. And back here in the classroom next Saturday, full on. 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 ourselves stocks based solely on what you hear.

I'm Chris Hill. Thanks for listening. We'll see you tomorrow.