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5 Key Ingredients to a Good Financial Recipe

by | Feb 13, 2020

In my experience, a good dish usually begins with good ingredients and a good recipe. The right amount of those ingredients, mixed together in the proper order, and cooked for a designated amount of time, can turn into something special.

The same goes for getting positive financial outcomes. Similar to my experience in the kitchen, it’s rare to see strong outcomes happening as a result of “winging it.” You need a good plan, or recipe, and it doesn’t hurt to have a trained eye to watch things along the way.

But what is the perfect financial recipe? Because everyone has a unique situation, there is not one right answer to that question. However, there are themes and concepts that everyone should consider and try to implement into their financial situations. Here are 5 key ingredients to a good financial recipe:

 

1. Preparation

When cooking, the thing I am worst at is prepping. I usually get into a rush and jump right in without reading through the entire recipe. This, inevitably, throws off my timing and hinders my ability to execute in a proficient manner.

Preparation is key in financial planning. If you take some time up front, and every so often, to think about where you want to be financially, and develop steps to get there, it will enhance your ability to accomplish your financial goals.

When I fail to prepare in the kitchen, my family is forced to eat a sub-par meal (or we order pizza). When people fail to prepare for their financial lives, it’s a much bigger deal. It can cause some to work longer, others to retire with less, and others to make decisions that cost them thousands of dollars or more.

 

2. Flexibility

Building flexibility into your financial plan is extremely important. It will allow you to adapt and change course as your life or goals change. Financial flexibility can come in the form of multiple investment options, liquidity options, withdrawal options, etc. In other words, you should try and avoid financial products, accounts, or investments that limit your flexibility in these areas.

For example, an irrevocable investment that offers little to no liquidity for a long period of time does not provide much flexibility. Some examples of investments with limited flexibility could include certain annuities, thinly traded stocks, real estate investment trusts (REITs), or even whole life insurance, which is often sold as an investment vehicle to consumers.

Withdrawal flexibility at retirement is also important and can provide options regarding how your distributions will be taxed. For example, distributions from a Traditional IRA are fully taxable, but qualified distributions from a Roth IRA are tax free. If you have both Traditional and Roth retirement accounts, you have the flexibility to choose which type of account to withdraw from, giving you more control over your tax situation.

In certain scenarios, less flexible investments, account types, or products could be appropriate, as long as you’ve built ample flexibility into the rest of your plan or portfolio.

 

3. Balance

Most of us have heard to not put all of your “eggs” in one basket, but it’s a phrase and lesson that cannot be overlooked. Just like a good diet is one that is well-balanced, so is a good portfolio. The purpose of balance in a portfolio is to protect against the risks of concentrating too much in a single investment or investment type. I once heard that concentrating a large amount of money in a one stock is the way to potentially make a lot of money, but it’s also the way to lose a lot of money. A more prudent approach would be to reduce that risk by investing in a diversified manner.

Balance doesn’t always mean having a balanced stock vs. bond ratio. There are some scenarios that would suggest an individual be heavily weighted to one or the other. However, balance should be evident when evaluating other portfolio factors, like sectors, company size, geographic region, etc.)

 

4. Protection

As investors and as people, we all face risks. Some risks are associated with the stock market, but many types of risk are not. A good financial plan should identify the risks you face and should address those risks.

Some common examples of financial risks outside of market risk are: the risk of a premature death, the risk of becoming disabled, the risk of needing long-term care, the risk of losing your job, the risk of an unexpected expense or medical event, and the list goes on. While a financial plan won’t remove these risks, it should assess whether or not you should take action to help protect against them. For example, we all have the potential of a premature death, but some may not have a spouse or dependents that count on them financially. Therefore, that is a risk that those individuals don’t necessarily need to address.

On the other hand, most everyone has the risk of a significant and unexpected expense, so an emergency fund is something that is good for most people to have.

 

5. Execution

There are many ideas and action items floating around regarding financial planning. There may even be some that you’ve heard and believe to be a good idea for you. For example, perhaps you do not have a will or a power of attorney, but you think you should get both. A good financial plan should not only have evidence of good ideas, but execution of good ideas.

Perhaps you know it’s a good idea to increase your 401(k) contribution 1% every year, but you haven’t logged in and actually made the change.

Maybe your accountant mentioned that you should consider doing a Roth conversion, but you never actually executed on that idea.
Or lastly, maybe you’ve been thinking about retiring and have considered seeking help from an advisor to see if you can finally make the leap into retirement.

Executing ideas and concepts that you know are in your best interest can have a significant positive impact on your financial plan. Usually, executing strategies like these is not terribly difficult. Strategies like these, save for retirement, are fairly straightforward to execute, especially with the help of a qualified professional. But, they all require that we are intentional about our finances and we invest a little of our time to plan and implement.

 

Bottom Line

Everyone’s financial situation is different. Because of that, we all have a slightly different set of ingredients that make our unique, ideal financial recipe. However, these are five concepts and themes that you should consider and at every stage of your financial life, as these things can help you avoid major pitfalls that so many people encounter.

If you are unsure about how to implement these five things into to your financial plan, you should consider talking with a CERTIFIED FINANCIAL PLANNER™ professional to get more individualized advice.

Joe Allaria is a Partner and Wealth Advisor with CarsonAllaria Wealth Management. For his numerous articles, Joe has been featured in the Wall Street Journal, USA Today.com, Yahoo Finance, Nasdaq.com, CNBC.com, and Investopedia. Joe is also a CERTIFIED FINANCIAL PLANNER™ professional, which identifies those individuals who have met the rigorous experience and ethical requirements of the CFP Board, have successfully completed financial planning coursework and have passed the CFP® Certification Examination.

CarsonAllaria Wealth Management does not provide tax or legal advice. All articles and posts are provided by CarsonAllaria Wealth Management (CAWM or firm) for informational purposes only. By accessing or otherwise using this Article, you agree to be bound by the terms and conditions set forth below. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. In addition, this Article shall not constitute the provision of personalized investment, tax or legal advice, and investors shall not assume this Article serves as a substitute for personalized individual advice. Information contained in this Article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Links or references to third-party websites are provided as a convenience and do not constitute an endorsement by CAWM, and the Firm is not responsible for the content of any such websites. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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All material provided by CarsonAllaria Wealth Management (CAWM or firm) is for informational purposes only. By accessing or otherwise using this website, you agree to be bound by the terms and conditions set forth below.

Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced on the website, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s).

No portion of the website shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. In addition, this website shall not constitute the provision of personalized investment, tax or legal advice, and investors shall not assume this website serves as a substitute for personalized individual advice. Information contained on this website may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Links or references to third-party websites are provided as a convenience and do not constitute an endorsement by CAWM, and the Firm is not responsible for the content of any such websites.

Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

*73% of financial advisors do not have a succession plan. Study conducted by the Financial Planning Association and Janus Henderson Investors. Statistic was cited in the CNBC.com article at https://www.cnbc.com/2019/04/29/a-majority-of-financial-advisors-lack-a-succession-plan.html

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