Finance 101: February 2024
In February the financial advisors at Ruedi Wealth Management wrote four more columns for The News-Gazette’s business extra section. Make sure to look for them every Saturday in the weekend edition of the paper, but in case you missed any in February all four are below.
What is a CERTIFIED FINANCIAL PLANNER™ Professional?
Paul R. Ruedi, CFP®
If you have been a longtime reader of these columns, you will notice the younger generation of advisors always have their names followed by a few letters: CFP®. Created in 1972, the CERTIFIED FINANCIAL PLANNER™ designation is the gold standard in the financial planning industry. But what does a person have to do to have this designation? What makes working with a CERTIFIED FINANCIAL PLANNER™ professional different?
The process to receive this designation usually takes a couple years. To qualify for this designation, a person must have a 4-year degree. He or she must then complete the necessary coursework through a program approved by the CFP board. This coursework covers all areas of financial planning including investment planning, tax planning, estate planning, retirement accounts, risk management, regulations, psychology, and professional conduct. The coursework also includes a capstone course where a student actually develops and presents a financial plan.
Once a person has completed the coursework he or she can take the exam. Once the exam is passed, a person must either complete or submit their required hours of experience. Generally speaking, this requires a person either have 6,000 hours of experience working in financial planning, or 4,000 hours of working in financial planning under the supervision of a CERTIFIED FINANCIAL PLANNER™ Professional.
Once a person completes all the necessary educational and work requirements, that person can then begin to use the CFP® marks. But they must be careful, as the CFP board are very particular about exactly how a CERTIFIED FINANCIAL PLANNER™ professional is described – which is why you may have noticed when I reference the designation or a designee I always write it in all caps along with and include a ® or ™ followed by the word professional.
After initial certification, CFP® professionals need to complete 30 hours of continuing education every two years to ensure they stay up-to-date on relevant financial planning issues and regulatory changes. A CERTIFIED FINANCIAL PLANNER™ professional will have to commit to certain ethical standards as well. This includes being a “fiduciary” at all times – a fancy way of saying they must always put clients’ interests before their own.
You do not need a CFP® designation to engage in financial planning; it is not a license to practice financial planning. It is a professional designation that shows someone is committed to maintaining a deep understanding of financial planning and a higher ethical standard. If you are looking for someone to build a comprehensive financial plan for you, I would highly recommend working with a CERTIFIED FINANCIAL PLANNER™ professional.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
When The Stock Market Rises, So Does Spending
Paul Ruedi
Though there have been many studies on the impact of the stock market on consumer spending, one of the best studies on the subject was published by JP Morgan Chase in 2021 as it drew from a sample of nearly 12 million credit card users. Their research suggested that a 10% rise in the stock market results in an increase in credit card spending of just under 1%.
The study also found that spending increases of double or triple a person’s typical rate are more likely after stock market gains. Moral of the story, when stocks rise, people spend more, and sometimes a lot more. But should they?
I think many people struggle with this after such a rapid rise in the stock market, like we have seen lately. It is only natural that when people see their account balances rise, they feel wealthier and more secure about their economic future. This often emboldens them to spend more as a result.
My experience suggests this behavior is particularly pronounced in retirees, as they are often living at least partially off their investment portfolio and are generally more in touch with their investment account balances as a result. But is the extra spending a good idea, or are investors counting chickens before they hatch?
Though it generally isn’t a good idea to spend as if your investment account balance is money in the bank after such a rapid rise in the stock market, at some point you do have to enjoy the fruits of your faith, patience, and discipline as an investor and start treating yourself. This is where a financial plan can be extremely helpful.
Once you have established baseline financial goals, you can make adjustments to your financial plan based on the stock returns you end up receiving. If those returns are good, the plan can often be adjusted upward, with higher spending or perhaps a one-time lump sum purchase.
The key is to make sure that if you treat yourself to some extra spending your goals will still be funded for your lifetime - even if a perfectly normal bear market comes along and drops your account balance significantly. That second part is particularly important. If you have seen your account balance rise over the past year and are wondering if you could spend more without costing yourself in the future, I’d highly encourage you to talk to a financial planner today.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
Acts of Love: Providing for Family
Paul Ruedi
Though we should show them constantly, Valentine’s Day often causes us to focus on the important people in our lives and think about how we can express our love for them. Perhaps the most common way we see clients express love through their financial plans is by planning to use their money to spend more time with their families.
If your family lives far away, you can plan to make more frequent trips to visit them. Alternatively, you could help your family visit you by paying for travel expenses. Those who are fortunate enough to have their family nearby could take their family on fun day trips or excursions that strengthen family bonds.
Some people will even fund a full family vacation where everyone can be together. This could be something as simple as paying for multiple hotel rooms, taking the entire family on a cruise, or renting a large house for everyone to stay in. The destination and the lodging are really just the details, the true and lasting gift is the family memories made.
Another very important way to show love is by ensuring that your spouse and family will be taken care of financially should you pass away prematurely. For some people, this means having sufficient assets saved up that can be used to pay for living expenses and any debt that may have accrued due to credit cards, car or home loans, or education.
For older adults who are in retirement, or nearing retirement, this is usually the time when you have more assets than you ever had in your life and are able often able to “self-insure.” However, if you don’t have enough assets built up, or you are younger, then life insurance may be a necessary component for ensuring the financial health of your family.
Many people should consider term insurance, which provides a stated amount of insurance for as long as you pay the annual premium. In the event of your untimely death, the life insurance proceeds can be used to pay off debt and provide for day-to-day living expenses. It is never pleasant to talk about dying early, but I can think of nothing more selfless or loving than ensuring that your family is financially secure in your absence.
If you are unsure whether you can provide your family with some fun things now, or necessary things after you are no longer around, you may want to talk to a financial advisor.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
The 7 Financial Planning Steps
Paul R. Ruedi, CFP®
Although there is no “one-size-fits-all” best approach with respect to financial planning, there are several essential features of a financial planning engagement that really must be included for a process to be considered truly comprehensive financial planning. The CFP Board (the oversight body for the CERTIFIED FINANCIAL PLANNER™ Designation) breaks this process down into seven essential steps.
The first step requires a financial planner to understand your personal financial situation. This includes not just the financial aspects like assets and income, but other factors that may be at play like health status, number of dependents, attitudes about risk, and other more qualitive factors.
With this background information on a client, a financial planner and client can move on to the second step: establishing goals. These will include typical goals like when to retire and how much you can spend, but also the unique one-off financial planning items like redoing a kitchen or purchasing a boat.
With specific goals in mind, a financial planner can then move on to the third step: analyzing the client’s current course of action as well as other potential courses of action. In this phase a financial planner will actually build a plan, do the math, and see where you end up relative to your goals. The planner will then test alternative courses of action to see if there is perhaps a better route to those goals.
With the current course of action and alternatives well understood, a planner can move on to the fourth step: developing the financial planning recommendations. In this phase a financial planner may look at the results of various courses of action and determine which one he or she thinks is the appropriate route for the clients to take.
Once those recommendations are created the financial planner can move on to step 5 and present the recommendations to the client. This can be a written document or a presentation that explains the key elements (assumptions, goals, investment portfolio) in a manner that a typical person can understand.
Once the clients and financial planner have agreed on a course of action, they can move on to step 6 and implement those recommendations. In this phase the planner will emphasize who is responsible for the various implementation responsibilities. The planner and client will then implement the various recommendations and everyone can finally move on to step 7: monitoring progress towards goals and updating as necessary. If you need help creating a comprehensive financial plan that includes all of the steps above, you may want to talk to a financial planner.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.