The term “financial planner” evokes images of wealthy families in elegant mansions, supported by the passive income of a professionally managed fortune. In fact, most clients of financial planning services are far from wealthy. A survey conducted by the Certified Financial Planner Board of Standards indicates that 53% of Americans have used financial planning services at some point.
A financial planner doesn’t just help you navigate the stock market. They can guide you through an interconnected labyrinth of personal financial issues. Can you handle the job yourself? Perhaps, but whether that is a good idea might be another story.
Key Takeaways
- Financial planning covers a wide range of challenges, from creating a livable budget to choosing the right investments and managing tax strategies.
- Going solo might be a good choice for people with simple investments and low debt.
- Using a professional can ultimately save you money, particularly if you have complex investments.
- You don’t have to hire someone to develop your entire financial plan. You might opt to handle some aspects of it yourself.
What Does a Financial Plan Include?
The first challenge of creating a financial plan lies in deciding what it should cover. What parts of your financial life might you need help with, and how far ahead do you need to plan?
Your Budget
Any type of plan begins with understanding what you have to work with. Identify and tally up all your sources of income, and then compare them to your expenditures and debts. Ideally, your income should exceed your financial obligations. These figures will form the basis of your financial plan.
A financial plan can help mitigate heavy interest payments if you’re carrying a fair bit of debt, either by paying off credit cards or refinancing existing loans. It can also help you optimize your savings by putting them in safe investments or high-yield savings accounts.
This can be important if you have children and you’re saving to put them through college. And don’t overlook the importance of having an emergency fund as a cushion against financial emergencies.
Insurance Protection
You’ll need more than an emergency fund to prepare for a catastrophic emergency or serious healthcare issue. Creating a financial plan should include decisions on health, life, and homeowners insurance or rental insurance.
Your Investments
A solid financial plan is based on when you think you’ll want to access the money you’ve saved and invested. Your retirement timeline is a critical influence on how much you spend and how you want to invest.
People approaching retirement tend to prefer safe investments, while those starting their careers can take a few more risks. A financial planner can help balance your portfolio to find an acceptable level of risk.
Tax Considerations
Tax planning goes beyond making payments to the Internal Revenue Service, and many investments have complex tax rules. A financial planner can help navigate the intricacies of capital gains taxes and taking required minimum distributions from your retirement accounts.
If you have a large and active portfolio, your plan might also include mitigating your tax obligations through strategies like tax-loss harvesting. This entails selling off investments that are doing poorly and using the losses to offset capital gains income. The rules for this are not simple, so it may be worth hiring a professional unless you are already an expert.
Note
Financial advisors aren’t necessarily the same as financial planners. They’re typically investment professionals who charge a percentage of assets under management.
Estate Planning
Financial planning doesn’t end when you retire. You’ll want to include provisions for passing your estate on to others, and you might also receive bequests from your own family.
There are several documents you’ll need to prepare for your passing, as well as other circumstances such as illness or incapacitation. These include a last will or a living trust, where you specify how your assets should be passed on to your heirs. Or you may want to engage in lifetime gifting instead. This can be incorporated into a financial plan as well.
Advantages of DIY Financial Planning vs. Hiring a Professional
Do-it-yourself financial planning comes with some advantages.
“It’s low (or no) cost,” explains Trevor Ausen, CFP and RICP of Authentic Life Financial Planning. “It gives you full control over your finances. It’s great for people who enjoy managing money and have the time to do it.”
But this approach might not be well-suited to those with no background in managing financial issues. You might not know about all the investment options available or the best ways to mitigate their tax burdens.
“DIY planning can work well if your finances are fairly simple, such as one income, low debt, and basic investments,” says Michael Rodriguez, CFP and an advice-only financial planner with Equanimity Wealth. “There’s no shame in doing it yourself, especially if your situation is simple and you have the time and the interest.”
Going solo can mean a significant time investment, requiring ongoing hours to monitor and adjust your plan after it has been created. You may not have this luxury if you’re juggling the responsibilities of working and raising a family.
“It takes a lot of time, especially for more complex areas like taxes or estate planning,” Rodriguez adds.
Tip
Prudential Financial recommends weighing what using the services of a financial planning professional would cost you versus the cost of any mistakes and missed opportunities if you try to go it on your own and you’re not up to the task.
On the other hand, a financial planner can help with decisions that you may not feel qualified to handle yourself. A professional can gauge your risk tolerance and match you with the best investments to meet your goals.
You’ll probably pay between $120 and $300 per hour for a professional financial planner or a flat fee from $1,000 to $3,000, according to Prudential Financial.
That could be worthwhile if you have many assets or a large income. If you make a mistake in your financial planning, it could cost much more than professional planning fees.
“Using a professional saves time and stress,” Rodriguez says. “You get accountability and peace of mind. An advisor helps you stay disciplined and avoid costly mistakes.”
Advantages of Handling Your Own Financial Planning vs. Hiring a Professional
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Can save you money—up to $300 per hour or $3,000 for flat-rate financial planners.
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Good choice for people who enjoy managing money.
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Suitable for simple financial situations, such as single incomes with low debt.
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Professionals can find the most suitable assets for your timeline and risk tolerance.
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Financial planners may be more familiar with complex tax situations.
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A professional will remain disciplined during downturns, saving you time and stress.
When to Hire a Financial Planner
The risks of making a costly mistake go up as your financial situation becomes more complex.
“When should you consider hiring an advisor?” Ausen asks. “When your finances start to feel overwhelming, when you’re no longer confident managing them yourself, or when you simply don’t want to do it anymore.”
A financial planner might waive the cost of developing your plan if you also hire them to manage your investment portfolio. Such assistance can be invaluable when the market is turbulent. A professional with experience in tax matters can help you with strategies such as tax-loss harvesting and dodging penalties.
Choosing the Right Professional
The wide array of financial professionals can be another challenge. “Financial advice has become more specialized in recent years,” says Ausen. “That’s a good thing. It means you can find someone who truly understands your situation.”
You also have the option of using several professionals, one for each of your planning concerns. Another alternative is handling certain aspects of your plan by yourself and hiring someone else to deal with other aspects.
The Bottom Line
The decision between using a professional financial planner and handling your own finances is ultimately based on personal factors. There’s no right or wrong answer: It depends on your needs, your goals, your abilities, and your limitations.
It also doesn’t have to be all or nothing. You can hire a professional to handle issues that fall in your weak areas, or you can outsource the job for a few years while you learn to handle finances yourself.