Every beautiful building starts with a blueprint.

So it is with managing your personal financial affairs.

Too often, investors will jump in and start buying stocks or mutual funds because a friend told them it was a good idea. They do this because they want to become financially sound someday, but are generally unprepared and set themselves up for major disappointment and monetary loss. 

The worst part of the monetary loss is not the loss of money, but a reinforcement of the idea that “investing is too risky,” causing the novice investor to run from the markets altogether, which is the greatest loss of all.

If you are serious about helping your clients become a more intelligent investor, and help them create and keep more wealth, they must start with a blueprint. A written plan. And as you may already know, plans aren’t real until you write them down. Now, that’s not news. You’ve probably heard it a thousand times, and intuitively you know it’s the right thing to do. But how do you get started?

The initial steps of intelligent investing are helping your clients establish and define their specific goals. Buying a home, retirement, children’s’ higher education, starting a small business. Once you’ve collaborated on establishing the goals, you need to forecast how much each will cost (the price tag)  and when your client wants to achieve them (the deadline). Then you need to draw up some good road maps, using price tags and deadlines.

Jumping into the financial markets without a blueprint is simply the wrong way to pursue financial wellness, and simply not smart. As in building a house, the intelligent way to invest requires that you first spend time sharpening the saw, as Stephen Covey puts it.

And that means creating several documents that collectively memorialize your goals and serve as the foundation of your financial house, a combination of targeted, interrelated written documents, each having their own role to play throughout the construction process. Some focus on today’s issues, some on tomorrow’s.

Your documented life:

  • Net Worth Statement (Balance Sheet)
  • Income and Expense Statement
  • Daily Spending Notebook
  • Monthly Budget and Ledger
  • Annual Budget
  • Statement of Long Term SMART Goals with price tags and time frames 
  • Objectives-based Financial Plan
  • Investment Policy Statement
  • Estate documents: Wills, trusts, powers of attorney

Yes, that’s a lot of documents, and you don’t need to prepare them all at once. It’s a process, but they don’t take as long to prepare as you may think, so let’s examine a brief description of each and the reasoning behind each of them.

Net Worth Statement (Balance Sheet). A balance sheet is simply a declaration of what you own and what you owe. In other words, your bottom line, your net worth, is the product of all the assets you own minus all the debts you owe.

Income and Expense Statement is a snapshot of what’s coming in and what’s going out. This document is important to help you understand your sources of income and your total living expenses.

Daily Spending Notebook. A small notebook to jot down what you spend. And yes, you can use your fancy smartphone, but there is something about paper that seems to be a better reference tool. That’s just my opinion, I may be wrong.  Anyway, jot or keystroke every penny you spend for thirty days to get a handle on where your money goes. This is a precursor to establishing a formal budget.

Monthly Budget and Ledger. These are our bills, our fixed and variable expenses each month, but a budget is much more than that. Click here to read What? Me on a Budget?

Annual Budget. This is your overarching look at the year ahead. An overall forecast of where you intend your money to go throughout the coming year. Click here to read What? Me on a Budget?

Statement of Goals. You must anticipate what you want or need to accomplish financially in your life, meaning you need to simply plan ahead. That means establishing SMART* Goal Plans with price tags and time frames for each of your goals. For instance, if one of your goals is to save for the higher education of your child, first determine the time frame (18 years away for a newborn) and the price tag ($200,000). Knowing the time and price variables, along with expected rates of return, you can calculate what you need to save on a monthly or annual basis to achieve the goal.

Objectives-based Financial Plan. A formal, written financial plan is generally not a DIY endeavor. A competent, experienced Certified Financial Planner or Money Coach can develop a comprehensive written plan for clients and their families that addresses the key areas of life, including, daily money management, goals-based investing, retirement planning, estate planning, risk management and insurance and tax planning. Click here to read What is Holistic Financial planning?

Investment Policy Statement. An investment policy statement (IPS) is a document that an individual investor can use privately, or with her planner or adviser that spells out the ground rules regarding the way your portfolio is to be handled. It spells out, among other things, your specific investment objectives, the risks you are willing to accept, the types of investments, time frames, liquidity needs, the decision making process that you and your advisor mutually agree to and any discretionary power you wish to give your adviser. Very generally speaking, it is a brief document that is sort of a mini-plan that focuses solely on your investment portfolio.

Estate documents: Wills, trusts, physicians directives and powers of attorney. Someday you won’t be here, then what? An estate plan essentially gives you control from the grave. Okay, that’s a bit morbid, but this sobering thought only reinforces the necessity of these documents that ensure your last wishes will be carried out so you can leave a lasting legacy. This post is part of a series to introduce you to the necessary components of becoming a prepared, well-informed and intelligent investor. And a necessary part of the prep is sharpening that saw, by developing well-defined documents that inform and guide your daily money decisions.

Follow a few of the embedded links to read more, and check back often for updates.

*SMART GOALS are Specific, Measurable, Attainable, Relevant and Timely.

Never. Lose. Money.