A few years ago I met with a financial planner who was probably the same age, or a few years older, as me. We chatted a little, discussed some of my future plans, and basically he tried to sell me on some products. It was all in all not exactly a valuable meeting but part of that was my fault, I didn’t really have future plans. I had just graduated college, started getting my first few paychecks, and I had no plans for anything. I was just living life as best I could now that I had some real money. If I met with a financial planner now, it’d probably work out a little differently.

This guy lost $6M overnight. David Shorr had been a long time employee of Lehman and amassed quite a little collection of shares, all of which were rendered worthless on Monday. David Shorr works as a “wealth adviser,” a senior VP, at Morgan Stanley now and it made me wonder if I’d actually want the guy being my adviser (not that I’d be able to afford him!).

What if you found out that your financial planner was bad about his or her own finances? Or a financial advisor or broker whose investment portfolio was a mess? Would that change your perception of his or her advice? Would you drop them if you discovered they were bad?

I probably would.

I agree with the argument that being a good financial planner has nothing to do with executing a financial plan. A good financial planner needs strong organizational skills, good analytical skills, and a whole host of other skills that have nothing to do with sticking with a plan. A good planner can establish a savings plan that can set you up nicely to meet your future needs, given some assumptions, but it’s ultimately up to you to save. The financial planner with bad finances could simply be bad at that last part, the saving part. I agree with all that.

But would you hire a landscaper if his front yard looked like it hadn’t even been mowed in a year?

When it comes to long term financial planning, my wife and I don’t really have one. We have some long term goals but we don’t have any dates pegged for those goals (which include starting a family, going back to school, buying a new home, etc.), which is about as useful as having no goals at all. That being said, it was about time we sat down and put pen to paper so we would stop committing the fourth deadly sin of personal finance - failing to plan.

The process for developing this plan has its roots in one of my MBA classes, one about financial management and analyzing new projects. Each of our future goals has a fixed cost and a recurring annual cost. When businesses analyze future investments, they go through very much the same exercise (though our plan is much simpler). For us, we will only need to consider how we’ll find the funds for each “investment” and how the various “investments” affect one another.

Step #1. Rough Draft

The first step in establishing your basic financial plan is to write a rough draft (some drafts are rougher than others). Draw out a timeline from now until you retire starting with this year. If it helps, you can separate them in five year increments starting in 2010 but the idea is you want a timeline to draw your plan on.

Next, write down every major expense you’ll have from now until retirement. Major expense is up to you but for our plan we put major as any expense above $5,000. It was entirely arbitrary, so you can make major be $500+ or $1,000. Mark down the date in which you’ll need those funds on your timeline. Example major expenses include buying a house, moving to a new house, buying a car, buying a new computer, major vacation, having children, paying for their education, subsidizing your parent’s retirement, your own retirement, etc.

Remember that this is a rough draft and not a final draft, so don’t obsess over getting every last detail right.

Step #2. Calculate Saving Needs

Now that you have each expense listed, you’re going to work backwards to establish a plan to help save for those expenses. This puts you in the mindset that you’ll be saving for thing before you buy them, rather than opening a loan or tapping a line of credit. In the case of some purchases, such as a house or car, you’ll be saving for a down-payment rather than the whole purchase. As a base, set the down payment at 20% and use that as the “purchase price.”

How do you work backwards and establish a savings plan for each expense? The easiest way is to use an online calculator, DinkyTown.net has a simple Java savings calculator you can use to figure out how much you need to save each year on that expense (the calculator does not take into account inflation, but we have in using a conservative 5% figure). Repeat for all your expenses and you’ll have an amount for each year.

I like to use an annual rate of appreciation of 5% for the plan. Some experts will tell you to use 10-11% because that’s the average rate of return of the S&P 500, I think that’s a mistake because 10-11% is far too aggressive for funds you may need in just a few years. I arrived at 5% because I took the average return for US Treasuries (~4%) and the S&P 500 (~11%) and took off a few points for inflation. By including inflation in the rate of appreciation, we won’t have to worry about how $5,000 for a car down payment in 10 years isn’t the same as $5,000 today.

You may wish to exclude the retirement “expense.” For the purposes of your plan, you may want to exclude the cost of retirement and “assume” that your 401(k) and IRA contributions will satisfy that need. Establishing a retirement number is itself a difficult task and that figure could dominate the planning for your other expenses, to the point that you lose the whole point of establishing this plan. Ultimately you will want to revisit retirement separately (since it includes pre-tax and post-tax contributions, adding a wrinkle to the plan) because it’s not something you want to ignore.

Step #3. Adjust Your Plan

Now you how much you’ll need to save each year - is it a realistic number? If you find that your annual savings requirement is more than 50% of your take home pay (this is not your salary, this is how much you get deposited into your account after tax withholding, medical, and other deductions are taken), you will want to adjust your plan.

How do you adjust it? You can adjust your plan by pushing some events further out, such as having children one year later or driving your current car one year longer. You can adjust how much those expenses are by opting to buy a cheaper car or putting down a smaller down payment. And, if all else fails, you might have to scratch an expense.

Whatever you decide to do, this is where the value of the plan truly comes through. By seeing it all in one place, you can make these decisions now, years ahead of time, rather than at the breaking point. Wouldn’t you rather learn today, five years in advance, that you’ll have to drive your car an additional year or two in order to meet all of your obligations and get the car you want. It’s certainly better than when you’re sitting in the showroom floor working numbers with a salesperson.

Also, this plan focuses entirely on the expense side of the equation, one potential “adjustment” is that you add income. Maybe the plan tells you that you need to take on a second job (or a non-working spouse returns to work) to generate a little more cash flow to fund your expenses. Whatever the case may be, adding income is an option and the plan will tell you whether it’s necessary (and how much income you’ll need).

Step #4. Consult With A Friend

Time for a sanity check and a chat with a friend. If you have a spouse or a partner, they should have been part of the planning process from day one so this isn’t what I mean. I recommend that you speak with a third party, be it a friend or financial professional to see if your plan makes sense. It’s more important that the person understands you than it is for them to understand financial planning. This plan will only work if you follow it. Your friend could point out things you’re missing, things you’re being too optimistic or pessimistic about, or things that simply don’t make any sense (maybe you hit the wrong button on the calculator?).

Step #5. Revisit Annually

Now that you’ve gone over the plan, had it sanity checked, it’s time to implement it and revisit it annually (or more). My recommendation for implementation is to put savings for anything in the next five years into a high yield savings account or laddered into CDs (something safe) and then the rest into a mix of brokerage accounts based on the time horizon (target retirement funds might be a good option).

The revisiting annually, or more, is something you should do whenever you do your annual financial checkup. Check to see that you’re on track because if you slip a little (save less than you planned) or achieve a little more (save more than you planned), it’s important to integrate that into your plans. If you have any major changes (surprise!), then you’ll want to adjust your plan to cover the new information as well. Setting the plan once and then never looking at it again won’t be terribly helpful, you’ll want to revisit it annually.

Now start saving, a good place to put it is a high yield savings account!

(Photo: Palace Hotel in Lisbon by antoniovi, Calculator by mamchenkov, Friends Chatting by mojo74, Calendar by raedeke)

I had a lackluster experience with an alleged financial planner and I’ve read many articles detailing how you should find a financial planner, what you should ask him or her, and everything else you need to do to make sure you don’t a raw deal in the process. I’m sure many of you have read those same articles warning you about how you need to find fee-only financial planners or sleep on their advice. Well, I wanted to highlight a columnist at CNNMoney called “the Mole.” The Mole is an actual practicing financial planner who gives you the full skinny on what you should do to get the right financial planner.

Here are the one’s I felt were valuable reads:

• When you should dump your adviser - some red flags that your financial adviser isn’t up to snuff.
• Are investment newsletters worth it? - “You’d be much better off just throwing the money in the nearest dumpster than buying these newsletters and risking a big chunk of your nest egg in following the newsletters’ advice.” (he’s very honest)
• What a good financial adviser should be doing for you - Discussion on the various aspects financial advisers should help you with.
• Four good questions to ask your adviser
• What your adviser doesn’t know might hurt you

You can find all of The Mole’s articles here.

Back in March I met with a financial planner and found the entire experience a little underwhelming. I thought I’d be meeting with a professional, someone who could give me some good solid advice for the way forward, but I got little more than a few pitches for insurance and some high cost mutual funds I wouldn’t touch with a ten foot pole. That post garnered twenty-seven posts with people chipping in on their experiences and I was curious if there was something more to financial planning than selling insurance and mutual funds?

Was I talking to the wrong type of financial planner? There are so many certifications for people in the financial world that it’s hard to keep them straight. I knew about Certified Financial Planners but there are Chartered Financial Consultants, Chartered Investment Counselors, Certified Public Accountants and Personal Financial Specialists. Each one focuses on a different niche in the personal finance world and I start to wonder if I talked to the wrong person… or did I?

What’s your take on financial planners? Any advice on what I should do?

So my friend Perry met with a financial planner named Andrew, as a favor because Andrew was his father’s friend’s son I think, and sold me out to him when the planner asked for some names of his friends who were interested (don’t worry, when it was my turn I didn’t give out any names). Anyway, I met with this financial planner (really, he was like a trainee or something, I met with this other guy Brian) the other day in a Baja Fresh and we got to talking about what it was he could do for me. He wasn’t an independent, he was part of some larger company that I hadn’t heard of until that day, and so he gave me his usual financial planner talk and we got to discussing my particular financial situation and what he could do for me.

Our talk first began with a look at my retirement assets and his eyes basically bugged out of his head when I told him how much I had saved in my 401K and Roth’s (A mixture of fortuitous emerging market fund performances, diligent saving, and starting a Roth [thanks Dad] when Ito meet face to was in college resulted in a larger than average for my demographic amount in my retirement savings, heavy emphasis on emerging market fund performances) and he told me I was probably doing okay and didn’t need much help there. I’m not anecdotally telling you this because I want you all to think I’m this wonderful retirement planner and I’m super responsible and awesome, I was just surprised that the guy didn’t have much to offer short of “save for retirement” and “save for retirement, here are a few funds you might want.” (none of which were offered by his firm, they were American Century funds) You would think that a financial planner would have something else to tell you outside what mainstream media already tells you, but I suppose a person telling you is better than a newspaper article.

The second part revolved around insurance policies, he told me that getting disability insurance was crucial because you never know what’s going to happen. He did offer one good nugget of information, that you should get your disability insurance from someone other than your employer in the event that you leave your job because then you won’t have to change insurers. I listened attentively but, like all brash twenty somethings, I pretty much dismissed the idea of disability insurance or life insurance because I didn’t see it as really necessary for someone as young as me. Is it foolish? Perhaps. Is it irresponsible? I don’t believe so.

So, that was my first experience meeting with a financial planner who didn’t even buy me lunch and it’s probably the last time I’ll meet with a financial planner unless something drastic happens.