What Is Financial Planning and Why Does It Matter in a Crisis?
Financial planning begins with a thorough analysis of your short- and long-term financial situation, including all sources of income, your current spending patterns and debt, and your plans for the future. Then it guides how to fulfill your obligations and meet your goals.
Financial planning is essential for everyone, especially families with significant wealth. While your opportunities may be greater, the challenges can also be magnified. Unexpected events can derail your progress toward your goals and even your financial security if you don’t have a plan for managing them.
Financial planning should ideally involve every area of your financial life because they are all interrelated. Investments, estate planning, philanthropic planning, retirement planning, savings plans, and business planning are all part of a whole, and problems in one area can domino into other areas. However, you can also set up your financial plan to use your resources effectively across disciplines to help you stay on track if a crisis occurs.
Key Components of a Financial Plan for Crisis Resilience
To help you manage and recover from unsettling disruptions, a financial plan for crisis resilience should include key components like:
- A robust emergency fund covering 6–12 months of expenses in case your income stream is disrupted
- Enough liquidity to meet unexpected expenses or take advantage of unexpected opportunities
- Regular monitoring of income and expenses
- Diversified income sources through investment, business ventures, passive income
- Effective debt management to help keep costs down
- Insurance coverage for potential crisis-related losses
- Risk assessment and mitigation
- Contingency plans
Identifying Financial Risks and How to Mitigate Them
Many kinds of crises are easy to understand and can affect anyone, like job loss, natural disasters, health emergencies, accidents, loss of a breadwinner, business setbacks, etc. To prepare for these events, you must have enough assets—or access to enough assets—to survive, recover, and move on.
In addition to these universal crises, ultra-high net worth (UHNW) individuals may face unique financial risks that can affect their overall net worth and the value of their investment portfolios and/or businesses.
Types of Financial Risks for UHNW Individuals
The risks you may face as an wealthy individual include:
- Market risk: Risks related to financial and capital markets, such as volatility, equity risk, credit risk, inflation risk, and currency risk
- Interest rate risk: The risk of interest rate fluctuations and economic slowdown that can affect both debt and income sides of the ledger
- Political risk: The risk that a change in government can affect business dealings and investments in the U.S. and other countries
- Tax risk: The risk of selling an asset at an inopportune time that triggers a high tax bill or being forced to borrow due to large tax bills
- Cybersecurity risk: The fast-growing risk that cybercriminals will access electronic transactions to steal money
- Safety risk: This includes kidnap and ransom risks for UHNW individuals and/or their family members
- Liability risk: An increased risk of liability lawsuits brought against those with major assets; these may involve auto or personal injury accidents as well as other sources of liability
- Risks associated with unique assets: Assets such as art pieces or vintage cars have unpredictable markets that can affect their liquidity and value
Strategies and Tools for Risk Mitigation
While risk will always exist, careful financial planning can help lessen the sting. Your risks may be more complex than the average investor’s, but some strategies can help you mitigate them.
- Diversification. This is one of the fundamental principles of investment risk management. By spreading your investments across different asset classes—stocks, bonds, real estate, and alternative investments—you can help minimize the impact of market volatility. Losses in one asset class may be balanced out by gains in another. Diversification also offers a broader range of opportunities for positive returns.
- Insurance. Insurance can be a safety net against many types of losses, shielding your assets from unexpected events and liabilities. In addition to common types of insurance such as auto, property, and life insurance, you might consider kidnap and ransom insurance, insurance for luxury items, customized liability coverage that can extend coverage limits for other policies, business and succession planning insurance, etc. Mass-market insurance may not fit all your needs, so working with an insurance professional who understands the UHNW market is essential.
- Tax planning. Utilizing tax-efficient investment strategies, such as municipal bonds and tax-managed ETFs, may help minimize tax liabilities. Charitable giving and philanthropic activities can also provide tax benefits while supporting causes you care about.
- Estate planning. If your goals include providing opportunities for the next generation, estate planning is vital. Effective estate planning can involve the use of wills, insurance, gift tax exclusions, and various types of trusts.
Building Financial Resilience: Key Steps to Take Now
It’s never the wrong time to plan for the unexpected. What can you do right now to be ready? Start with building or strengthening a resilient financial plan. Here are steps to get started:
- Set financial goals. Knowing what you want is step one, and it’s very personal. Where do you want your money to take you? What does success look like to you?
- Set up systems to monitor your cash flow. Know what’s coming in and what’s going out. Does your cash management make sense, given your goals? Are there opportunities for improvement?
- Budget for emergencies. It’s important to have some amount of liquid cash for emergency expenses. How much you need can depend on your monthly expenses and how long it could take to liquidate other assets.
- Make sure your debt is serving you, not impeding you. Keep high-interest debt and interest expense to a minimum while cultivating efficient credit sources that you can rely on in emergencies or to take advantage of unexpected opportunities.
- Make informed investment decisions. Determine investment and insurance strategies that can help anchor your security and grow your wealth.
- Tax planning is crucial. Since your tax liabilities may be complex, it’s good to get help from a professional who is familiar with tax credits and deductions for UHNW individuals and who keeps up with the year-to-year changes in the tax code.
- Plan for retirement. Maximize your use of tax-advantaged accounts. Make sure you’re planning for the type of lifestyle you want to lead in the future. Don’t neglect to account for unpredictable expenses like health emergencies or long-term care.
- Create an estate plan. If your goals include providing for beneficiaries, you’ll need careful planning to help ensure that they receive the maximum amount with the most convenience.
The Role of Professional Financial Advisors in Crisis Management
Consulting with a financial advisor who specializes in serving high-net-worth clients is a good step toward securing your future. Staying informed and prepared can aid you in adapting to changing market conditions and personal circumstances. Together, you and your advisor should regularly review your financial plan and investment portfolio to help identify potential risks and be ready for the unexpected.
By diversifying investments, leveraging professional advice, and implementing effective risk management strategies, you can help safeguard your assets and your quality of life.
To be custom-matched with a financial advisor you can trust to support your goals with customized planning and put your interests above theirs, take advantage of Carson’s advisor matching program today.
A diversified portfolio does not ensure a profit or protect against loss in a declining market.
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