In light of James 4:13-14, some Christians feel uneasy about engaging in long-term financial planning: “Come now, you who say, ‘Today or tomorrow we will go to such and such a city, and spend a year there and engage in business and make a profit.’ Yet you do not know what your life will be like tomorrow. You are just a vapor that appears for a little while and then vanishes away.”

Obviously, these verses teach that we shouldn’t have an arrogant or overly self-reliant attitude toward planning and provision. Still, Scripture provides ample support for the idea that we should take responsible steps to plan for our financial future. (See, for example, Genesis 2:15, Proverbs 6:6-8, and Luke 16:11.)

As is often the case, a mature Scriptural approach involves a balance. Too little attention to planning can lead to not having enough money to live on in our later years, or to taking too much investment risk later in life in an attempt to make up for lost time. But too much of a focus on long-term wealth goals can lead to a neglect of immediate priorities, such as giving.

We believe being a faithful steward involves (1) managing the resources you have as effectively as possible while (2) trusting God for the outcome. A wise management step to take here at the beginning of a new year is to create a written long-term financial plan. Without a written plan, your ongoing financial decisions likely will be driven by the emotions of the moment — hardly a formula for long-term success.

Here are six key elements that should inform your written plan.

  1. Understand the Big Picture
    At SMI, we refer to this as being an “inside-out” investor. Most investors’ choices are motivated by outside considerations — current events, magazine articles, broker recommendations, and so on. That’s the wrong approach. Instead, focus on your own financial needs and build an investment strategy designed to meet those needs. Sounds simple, but few people actually operate this way.
     
  2. Budget
    Any financial plan you create — whether modest or ambitious — will be only as effective as your ability to manage your income and expenses. In other words, you can plan perfectly and yet it won’t do a bit of good if you don’t execute the plan! For most people, executing the plan requires a budget to help track and control spending in real-time. Thankfully, there are great tools available today to help you with this process, including various smartphone and web-based apps.
     
  3. Know What You Need
    A key element of financial planning is projecting what your future needs will be. Without that knowledge, you’ll have a tough time making appropriate decisions. If you don’t have a specific target at which to aim, you’re only guessing when it comes to deciding which investment choices and asset allocation are best for you.

    How do you figure out how much you’ll need? MoneyGuidePro®, the financial software available to SMI Premium-level members, is an invaluable aid — especially as you draw within 10-to-15 years of retirement. Investors at that stage face the dual need of growing their portfolios and protecting the assets they’ve already accumulated. Good planning can help you cross the “finish line” without taking on outsized risk that could put your resources in jeopardy.

    Because life doesn’t stand still (and neither do the markets!), assessing your future needs isn’t a one-time thing. You should revisit this step from time-to-time.
     
  4. Allocate Appropriately
    Your asset allocation (i.e., stocks vs. bonds) will determine the performance of your portfolio more than any other single factor. The “Start Here” section at SoundMindInvesting.com provides details on how to gauge your risk tolerance and combine it with your season of life to determine an appropriate stock/bond allocation. (Note: Asset allocation is “ built in” to SMI’s Dynamic Asset Allocation strategy, therefore this step is not required if using DAA.)

    Revisit this process regularly as well. If your periodic “needs assessment” (step 3 above) ever indicates you can reduce your risk level and still meet your goals, it is wise to do so. (This month’s Level 3 article has more on asset allocation.)
     
  5. Make Good Investment Decisions
    Easier said than done, right? No one is going to make all the “right” investment decisions. But you can improve your odds of success by taking certain steps. At SMI, we’re big believers in using mechanical strategies that eliminate emotional decision-making. Most people’s emotions tell them exactly the wrong thing when it comes to investing (e.g., that sick feeling you get when the market drops is not a good reason to sell!).
     
  6. Monitor and Adjust
    Your budget won’t likely be the same at age 45 as at age 25, and neither will your asset allocation. Life happens — an illness, job change, unexpected blessings that cry and need diapers changed. These and many other factors mean you need to review and adjust your plan as you age. That’s okay. Just don’t abandon the old plan without putting a new plan in place.

    And don’t act from fear. One of the most counterproductive things investors do is change their whole strategy when they are overtaken by fear during market declines. If your strategy dictates that you change specific investments, that’s fine. But wholesale changes in strategy should never be made under duress.

    This kind of “stay committed, but be flexible” approach is reflected in the changes we’re making in our Upgrading strategy, as detailed in this month’s cover article. Committed flexibility also is at the heart of our Dynamic Asset Allocation strategy that moves in and out of asset classes as market trends change.

Please note that the six steps listed above aren’t comprehensive in terms of taxes, estate planning, insurance, and so forth. They simply offer a suitable guide for most people to gauge their basic investing needs and get started. There’s time to fine-tune things once you’re underway.

Remember, the major obstacle that keeps people from getting on the road to financial freedom is inertia — i.e., “a tendency to do nothing.” Don’t let that describe you. It’s a new year. Get going.