Is Your Financial Plan Driving Your Investment Plan?

By Bradley Miller

Do you have clarity on how your investment plan fits into you overall financial plan and life plan? Over the years of serving our clients, we have observed that no financial decision is independent of other financial decisions. Therefore, wise holistic financial planning needs to touch every possible pillar of one’s financial life – ranging from investment planning, retirement/cash flow planning, income tax planning, insurance planning, and estate planning to name a few. Each of the pillars can impact one another and in turn change the planning strategy for one or more of these pillars. When we work with a client, we explain that we are similar to financial doctors – the more the “patient” can share with us about their situation, the better we can help to diagnose and come up with a course of action to help them work towards meeting their financial goals. Today, we’re exploring the connection between financial planning and investment planning. Understanding this relationship can significantly enhance your ability to build and maintain wealth over time.

What Is Financial Planning and Investment Planning?

Financial planning is a comprehensive process that involves evaluating your current financial situation, setting short-term and long-term financial goals, and developing strategies to achieve those goals. As mentioned above, it encompasses a range of financial pillars from budgeting to estate planning. Essentially, financial planning serves as the roadmap for your overall financial health, guiding your decisions and actions.

Investment planning, on the other hand, focuses specifically on how to grow your wealth through investments. This includes selecting the right mix of assets, such as stocks and bonds, based on your risk tolerance, time horizon, and financial goals. Investment planning aims to optimize your returns while managing risk, making it a critical piece of the financial planning puzzle.

The Relationship Between the Two

1. Goal Alignment: Financial planning and investment planning are deeply interconnected through the concept of goal alignment. Your financial goals—whether it’s saving for a down payment on a house, funding your child’s education, or ensuring a comfortable retirement—should directly influence your investment strategy. For example, if you’re saving for a long-term goal like retirement, you might choose more aggressive investments with higher potential returns. Conversely, for short-term goals, more conservative investments might be appropriate.
2. Risk Management: A comprehensive financial plan considers your overall risk tolerance and time horizon, which in turn guides your investment choices. Financial planning helps you understand how much risk you can afford to take based on your financial situation and future needs. Investment planning then uses this information to craft a portfolio that aligns with your risk tolerance and objectives.
3. Cash Flow and Liquidity: Effective financial planning ensures that you have adequate cash flow and liquidity for daily expenses and emergency needs. This directly impacts investment planning, because it determines how much you can afford to invest and how much liquidity you need to maintain. Balancing investments with sufficient cash reserves is crucial for managing both unexpected expenses and investment opportunities.

In isolation, investment planning may be based upon certain rules of thumb. Let’s take a look at an example – if a client is into their later years of retirement and are concerned about preserving their principal – the goal of their investment portfolio may be to invest in a predominantly fixed income (bond) portfolio. However, when we build out a client’s financial plan, we learn about their family, their goals, their expenses and other important information that directly impacts their financial plan.

Perhaps for this client, we learn that their annual expenses are so low that in reality they will never touch the principal from their investment portfolio. Thus, a general rule of thumb based on their age may simply state to invest conservatively – however, after learning about their various goals and spending habits, we would have a conversation about increasing the stock/growth allocation of their portfolio to try and seek higher returns. Given that this client will not be needing the money, we can in turn speak about inheritance goals or charitable giving as examples. This conversation completely changes the “time horizon” for these specific assets. If we just looked at this clients age and stage of life and made investment recommendations based upon that, we would be doing that client a disservice by not fully understanding their holistic financial plan.

Steps We Take to Integrate Financial and Investment Planning

1. Assess Your Financial Situation: We begin with a thorough assessment of your current financial status. This includes evaluating your income, expenses, net worth, and savings. A clear picture of your financial situation will provide a solid foundation for effective investment planning.
2. Define Your Goals: We strive to clearly outline your financial goals and timeline. This will help tailor your investment strategy to meet these objectives. We want to assist in setting both short-term and long-term goals to guide your planning process.
3. Develop a Strategy: After analyzing your goals, we will help to create a comprehensive financial plan that provides steps to take to help you move towards achieving your financial goals. Based on this plan, we develop an investment strategy that aligns with your goals, risk tolerance, and time horizon. We present this to our clients and begin to take steps forward to implement the plan.
4. Monitor and Adjust: We regularly review your financial and investment plans to ensure they remain aligned with your goals and any changes in your personal circumstances. Adjustments may be necessary to adapt to life changes, market conditions, or shifts in your financial objectives. We use a client’s financial plan to help answer “what if” scenarios, such as what if I retire at age 60? What if I donate a specific dollar amount to a charity? We then view these scenarios and illustrate the overall impact it has on their financial plan and ensure that the decision they are considering making does not have a detrimental impact on their overall financial plan/goals.

In closing, the relationship between financial planning and investment planning is crucial for achieving long-term financial success. A well-rounded approach to financial planning ensures that your investments are working in harmony with your overall financial goals. This is why we constantly seek to update and keep current client financial plans to ensure their investment strategy aligns with their overall goals.