We get a lot of questions on what is involved in creating a client’s financial plan, and the one clarification we always have to make is that a financial plan is not a budget. While it is true that cash flow is an integral part of any person’s overall financial well-being, that is not an area where we can add value, nor can we really analyze what an appropriate amount is for someone to spend in any particular category.
To clarify, a budget is when someone goes through their monthly expenses, categorizes their fixed expenses (such as mortgage or rent), their variable expenses (such as utilities), and their discretionary spending (like dining out or vacations), to evaluate their overall income and expenses over a period of time. Once the historical trends have been established, a monthly amount is set which is to be used as a guide going forward. That guide is the budget and the goal is to stay under budget in each category. If you have income left over after setting aside some savings, you’re on the right track. If not, it is time to prioritize your spending and cut back as needed.
At the very best, the budget provides a realistic picture of how much money someone is spending and helps them adjusts accordingly, cutting back as needed to reach a larger goal. However, more often than not, we find that people aren’t as willing as they thought they were to cut back on expenses to fund a larger goal, like retirement.
A financial plan, on the other hand, is much more robust. Aside from developing a savings and investment plan to help clients reach their retirement, it also includes a review of insurance policies (life, disability, home, auto, etc.), tax returns, investment accounts, retirement accounts, estate planning documents, and any other piece of the financial puzzle. We encourage our clients to ask any financial related questions and send us any financial documents they would like incorporated into their overall financial plan. From our point of view, everything is interconnected and the entirety of a person’s financial life should be taken into consideration when developing recommendations.
The reason a budget is not a financial plan (but is important to financial health), is because the larger financial plan requires diligent and consistent savings as well as other tweaks to make you the most financially sound. If cash flow is a known issue, then the recommendations proposed to help you reach retirement and mitigate any other financial risks may be out of reach for the time being.
Matt Crisafulli, EA, CFP® is a Partner at ACap Advisors & Accountants, as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER™ practitioner and an Enrolled Agent licensed by the IRS.
ACap Advisors & Accountants is a “Fee-Only” wealth management and full-service accounting firm headquartered in Los Angeles, specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap at info@acapam.com or 818-272-8511.
