When you hear the term “financial planning,” do you only think about your investments, like stocks, bonds, and mutual funds? While investments are important to your overall financial health, they’re just one part of the picture.
If you want to achieve financial wellbeing and enjoy the peace of mind that comes from setting a foundation for a secure future, that typically involves both investment planning and financial planning.
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How Financial Planning and Investment Planning Differ
If you were to set out on a month-long cross-country road trip, you probably wouldn’t leave without a plan—and this would be based on your goals for the trip. Are you trying to get across country as quickly as possible? Or are there places you’d like to explore along the way?
Once you have a framework laid out, you’ll need to plan specific aspects of the trip. For instance, when it comes to eating: Will you take the time to dine at sit-down restaurants, get takeout to eat on the go, pack food from home—or maybe a combination of all three?
A financial plan is akin to your overall roadmap for the trip, while having an investment plan is like mapping out how to handle eating while you’re on the road. Typically, people should have both—but for different reasons.
- A financial plan is a framework that covers every aspect of your financial life, including cash flow, investments, taxes, insurance, and estate planning. It’s a big picture view of how to reach your goals, both in the short term and further down the road.
- An investment plan is more granular and narrowly focused on just one aspect of your financial life: your investments. It lays out how you’ll allocate, diversify, and manage those investments in line with your broader financial plan and your goals.
Why They Go Hand-in-Hand
Decades ago, it wasn’t unusual for someone to contact an investment broker to execute a stock trade (often based on a tip from a friend or family member). It’s unlikely the broker knew anything about your financial situation or whether you were investing for goals like buying a home, funding a child’s education, or saving for retirement.
But your investments don’t exist in a vacuum; they’re one of many intertwined aspects of your financial life. That’s why it’s increasingly common for people at all stages of life to develop personalized financial plans to help them achieve their short- and long-term goals.
Creating a plan that covers all the interrelated aspects of your financial life—including your investments—can help you realize the life you envision. This plan should be based on your goals, what’s happening in your life today, and where you see your life tomorrow.
Let’s look at three of the many aspects of your financial life in addition to your investments to see just how interrelated all these elements are—and why a holistic financial plan is the ideal way to make sense of it all.
#1: Cash Flow and Your Investments
Your cash flow has an impact on how you invest your money. For those in the accumulation phase:
- If you earn a high income from a financially stable employer, have low debt, and live below your means, then you likely have good cash flow. You will have plenty to cover living expenses and to steadily build your investments. That means you can invest for the long term without having to liquidate holdings for spending needs. A longer time horizon gives you the flexibility to be more aggressive with your investments; likewise, a strong cash flow and savings rate would also allow you to be more conservative and still meet your goals. It all depends on your risk tolerance and goals.
- If, instead, you work for an employer that isn’t financially sound or is likely to be impacted by a recession, have high debts, and typically spend more than you earn, then your cash flow situation probably isn’t as solid. This could mean you will need to dip into your investments from time to time, calling for a more conservative investment strategy until you reduce your debt and shore up your finances. On the other hand, without a high savings rate, you may need a more aggressive strategy to reach your long-term goals (like retirement). An advisor can help you work through these concerns.
This concept also tends to hold true once you’re retired. If you have solid income from Social Security, a pension, and/or retirement plan distributions, and your living expenses are modest, you probably have the cash flow to be more flexible with your investment risk depending on your goals and tolerance.
#2: Taxes and Your Investments
As the saying goes, paying taxes is one thing you can count on in life. When you realize gains on an investment—whether through dividends, distributions, or a sale after it appreciates in value—you’ll owe tax. If you’re in a high-income bracket, taxes from your investments can take a big bite out of your returns. [1]
That’s why it’s wise to think about investments and taxes in a more holistic way. Selling stock is a prime example of an investment decision with big tax implications. If you buy and sell stocks frequently and don’t hold them for at least a year, the gains will be taxed at your ordinary income tax rate (as opposed to the long-term capital gains rate, which is often lower). High turnover strategies like this tend to be highly tax-inefficient; a more long-term strategy can help your after-tax bottom line.
Another strategy that may help you manage investments in a tax-efficient way is tax loss harvesting. This disciplined approach involves selling an investment that is currently valued at a loss and using the proceeds to buy a different investment of a similar type. The loss can be used to offset gains elsewhere and up to $3,000 of ordinary income per year, with any excess carried forward. Many Team Hewins clients found tax loss harvesting especially effective when the stock market took a steep, brief drop in the spring of 2020, during the first few months of the pandemic.
#3: Insurance and Estate Planning and Your Investments
After years of accumulating wealth to fund your future, you’ll want to take steps to protect it. There are risk factors that are beyond market risk such as incapacity, early death, and catastrophic risk. If you look at your investments in a vacuum, you’re missing the opportunity to help shield your assets from these risks and to help pass them to your heirs smoothly according to your wishes.
That’s why insurance planning and estate planning go hand in hand with investments.
- A professional financial planner can identify gaps in your insurance needs such as umbrella/excess liability insurance, life insurance, and long-term care insurance. Without long-term care insurance, you may put your portfolio at serious risk. [2]
- A professional financial planner and estate planning attorney can advise you on strategies for transferring wealth to your heirs effectively—from simple steps like correctly titling and designating beneficiaries on your accounts, to more complex issues like whether you should set up a trust.
A Holistic Approach to Financial Planning
The interconnectedness of your entire financial life illustrates the importance of a comprehensive, holistic approach to financial planning. And that’s what the team of CERTIFIED FINANCIAL PLANNER™ professionals at Team Hewins does!
We look beyond all the individual aspects of your finances, using a holistic approach to develop a personalized financial plan that reflects who you are and where you want to go.
Schedule an introductory call with a Team Hewins advisor to talk about your goals and how a comprehensive, customized financial plan can help you achieve them.
[1] Peters, Katelyn. “How Financial Advice Can Boost Your Returns.” Investopedia, Investopedia, 13 Sept. 2021, https://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp.
[2] Fox, Michelle. “Not having long-term care insurance can be ‘the single biggest devastator’ of your financial plan.” CNBC, CNBC, 15 Oct. 2019, https://www.cnbc.com/2019/10/14/lack-of-long-term-care-insurance-can-devastate-your-financial-plan.html.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Certain information contained in this letter constitutes “forward-looking statements” which are based on Team Hewins’ beliefs, as well as on a number of assumptions concerning future events. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
